# UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K/AAMENDMENT NO. 1

(Mark One)

(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

# For the fiscal year ended December 31, 2005

OR

(  ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______.

Commission File No. 001-11155

WESTMORELAND COAL COMPANY(Exact name of registrant as specified in its charter)

|Delaware                                                      | 23-1128670                         
|------------------------------------------------------------- | -----------------------------------
|(State or other jurisdiction ofincorporation or organization) | (I.R.S. EmployerIdentification No.)

2 North Cascade Avenue    14th Floor    Colorado Springs, CO        80903(Address of principal executive offices)(Zip Code)

Registrant's telephone number, including area code:(719) 442-2600

# Securities registered pursuant to Section 12(b) of the Act:

|TITLE OF EACH CLASS                                                                                                          | NAME OF STOCK EXCHANGEON WHICH REGISTERED
|---------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------
|Common Stock, par value $2.50 per share                                                                                      | American Stock Exchange                  
|Depositary Shares, each representing
      one-quarter of a share of Series A Convertible
      Exchangeable Preferred Stock |                                          
|Preferred Stock Purchase Rights                                                                                              |                                          

# Securities registered pursuant to Section 12(g) of the Act:

|Series A Convertible Exchangeable Preferred Stock, par value $1.00 per share
|----------------------------------------------------------------------------



Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Amendment No. 1 to Form 10-K or
any amendment to this Form 10-K/A.

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one)

|Large accelerated filer _____ | Accelerated Filer X | Non-accelerated filer _____
|----------------------------- | ------------------- | ---------------------------

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).

The aggregate market value of voting common stock held by non-affiliates as of
June 30, 2005 was $147,054,000.

There were 8,425,323 shares outstanding of the registrant's Common Stock, $2.50
Par Value per share (the registrant's only class of common stock), as of March
1, 2006.

The definitive proxy statement filed April 17, 2006  is incorporated by reference into Part III.



# WESTMORELAND COAL COMPANY
FORM 10-K/A
ANNUAL REPORT
TABLE OF CONTENTS

---

|Item |  | Page
|---- |  | ----

# PART I

|Explanatory Note | 4                                                  
|---------------- | ---------------------------------------------------
|                 |                                                    
|1                | Business                                           
|1A               | Risk Factors                                       
|1B               | Unresolved Staff Comments                          
|2                | Properties                                         
|3                | Legal Proceedings                                  
|4                | Submission of Matters to a Vote of Security Holders

# PART II

|5  | Market for Registrant's Common Equity, Related Stockholder Matters
       and Issuer Purchases of Equity Securities | 53 
|-- | ------------------------------------------------------------------------------------------------------------------- | ---
|6  | Selected Financial Data                                                                                             | 55 
|7  | Management's Discussion and Analysis of Financial Condition and
       Results of Operations                        | 56 
|7A | Quantitative and Qualitative Disclosures About Market Risk                                                          | 82 
|8  | Financial Statements and Supplementary Data                                                                         | 83 
|9  | Changes in and Disagreements with Accountants on Accounting and
       Financial Disclosure                         | 142
|9A | Controls and Procedures                                                                                             | 142
|9B | Other Information                                                                                                   | 148

# PART III

|10 | Directors and Executive Officers of the Registrant                                                    | 149
|-- | ----------------------------------------------------------------------------------------------------- | ---
|11 | Executive Compensation                                                                                | 149
|12 | Security Ownership of Certain Beneficial Owners and Management and
       Related Stockholder Matters | 149
|13 | Certain Relationships and Related Transactions                                                        | 149
|14 | Principal Accountant Fees and Services                                                                | 149

# PART IV

|15         | Exhibits, Financial Statement Schedule | 150
|---------- | -------------------------------------- | ---
|           |                                        |    
|Signatures |                                        | 151



# Explanatory Note

The
Company is filing herein an amendment to its 2005 Annual Report on Form 10-K to restate
its consolidated financial statements as of December 31, 2005 and 2004 and for the years
ended December 31, 2005, 2004 and 2003, and selected financial information for the years
2001 to 2005. The consolidated balance sheets and statements of operations have been
restated to correct errors in the Companys accounting for income taxes, its
accounting for asset retirement obligations, and the classification of restricted cash.
The restatement adjustments had no effect on the cash flows of the Company for any of the
periods presented.

# State Income Tax Expense

During
the process of preparing financial statements for the first quarter of 2006, the Company
reviewed its accounting practices with respect to income taxes and determined that its
accounting for income taxes was not in compliance with Financial Accounting Standards
Board Standard No. 109, Accounting for Income Taxes. We discovered an
error in our tax provision for 2005 relating to a $2.1 million provision for a North
Carolina state income tax assessment, which had originally been recorded in the third
quarter of 2005. The provision was inadvertently omitted from the calculation of the
full-year 2005 income tax expense. The error resulted in an understatement of income tax
expense and net loss for the year ended December 31, 2005 of $2.1 million.

# Valuation Allowance for
Deferred Tax Assets

As
a result of the identification of this state income tax error, the Company, in conjunction
with its external tax advisors, completed a review of its accounting for income taxes for
2005 and prior years. This included a review of the calculations and assumptions
originally used in estimating the amount of benefit expected to be derived from the
utilization of its net operating loss carryforwards, alternative minimum tax
(AMT) credit carryforwards, and net deductible temporary differences.

In
connection with this review, the Company has determined that such tax benefits should have
been evaluated for utilization assuming the Company will be subject to the alternative
minimum tax system, rather than the regular income tax system, for the foreseeable future.
The Company believes it will be taxed under the alternative minimum tax system for the
foreseeable future due to significant statutory tax depletion in excess of book depletion
expected to be generated by its mining operations. As a result, the Company has determined
that a valuation allowance should have been recorded for all of its regular net operating
loss carryforwards, since they are not available to reduce alternative minimum taxable
income in the future. The Company has also determined that a full valuation
allowance should have been recorded for all its alternative minimum tax credit
carryforwards, since they are only available to offset future regular income taxes
payable. In addition, the Company has determined that since its net deductible temporary
differences will not reverse for the foreseeable future, a full valuation allowance should
have been recorded for these deferred tax assets. These errors resulted in an
overstatement of income tax benefit and an understatement of net loss of $12.4 million,
$7.8 million and $9.7 million for the years ended December 31, 2005, 2004 and 2003,
respectively, including the income tax expense attributable to the cumulative effect of
changes in accounting principles recorded in 2005 and 2003 of $1.1 million and $0.1
million, respectively.



The
purchase price allocation prepared in connection with the 2001 acquisition of Westmoreland
Mining LLC (WML) included an allocation for the benefits expected to be
derived from the Companys existing deferred income tax assets, including the
Companys net operating loss carryforwards, using regular income tax rates. As
a result of the Companys determination that it should have evaluated utilization of
such tax benefits assuming the Company will be subject to the alternative minimum tax for
the foreseeable future, the Company retroactively adjusted the purchase price allocation
for the WML acquisition.

This
adjustment resulted in the elimination of the $55.6 million net deferred income tax asset
recognized as part of the purchase price allocation for the acquisition in 2001, with a
corresponding increase in property, plant and equipment. The additional amount allocated
to property, plant and equipment is being amortized over the life of the mines acquired,
resulting in adjustments to previously reported depreciation, depletion and amortization
expense in each period since the date of the acquisition. The error resulted in an
understatement of depreciation, depletion and amortization expense and net loss of $3.7
million for each of the years ended December 31, 2005, 2004 and 2003.

# Asset Retirement
Obligations

During
2005, the Company identified an error in the calculation of the asset retirement
obligation for one of the Companys mines. The error resulted in an overstatement of
the asset retirement obligation, the related asset retirement asset, and the related
contractual third party reclamation receivable. The error affected the amount of
amortization recorded for the asset retirement asset in 2003, 2004 and 2005 and the amount
of accretion of the asset retirement liability recorded in those years. Adjustments were
recorded to correct the asset retirement liability at December 31, 2004, and the amount of
amortization and accretion recorded in the fourth quarter of the year ended December 31,
2005, with a corresponding adjustment to the asset retirement assets for this mine. The
financial statements are also being restated to reflect the known error in the amount of
amortization and accretion expense recorded in the first three quarters of 2005 and in
2004 and 2003, which had not previously been recorded in the financial statements for
those years. The error resulted in an overstatement (understatement) of amortization
expense of ($0.2) million, $0.3 million, and $0.1 million, an overstatement of accretion
expense of $1.3 million, $0.2 million and $0.1 million, and an overstatement of the net
loss of $1.1 million, $0.5 million and $0.2 million, for the years ended December 31,
2005, 2004, and 2003, respectively.

# Revenue Recognition

In
connection with the restatement process, the Company also identified an error in the
accounting treatment afforded certain payments received from one of its customers under an
amendment to their coal supply agreement. The original agreement provided that the
customer was responsible for its share of the final reclamation costs of the area of the
mine from which the coal it purchased was produced. The amendment to the coal supply
agreement entered into in 2003 provided that the customer was to pay the Company its share
of these costs on a per ton basis as the coal was delivered. A portion of the payments
received in 2005 and 2004 and subsequent to the amendment in 2003, were inadvertently
recorded as revenue, with a corresponding increase in the associated asset retirement
asset. The error resulted in an overstatement of revenue and an understatement of net loss
of $0.9 million, $0.6 million, and $0.1 million for the years ended December 31, 2005,
2004 and 2003, respectively.

# Classification of
Restricted Cash

Also
in connection with the restatement process, the Company determined that restricted cash
held in a debt service fund should have been classified as a non-current asset. The error
resulted in an overstatement of restricted cash classified as a current asset and total
current assets at December 31, 2005 and 2004 of $10.0 million and $9.8 million,
respectively, with a corresponding understatement of restricted cash classified as a
non-current asset.



# 10-K Amendments

This Amendment No. 1 to Form 10-K
also includes Article 3.05 financial statements for Westmoreland-LG&E Partners. Except
as required to reflect the effects of the restatement, this Amendment No 1 to Form 10-K
does not amend, update or change the financial statements or financial disclosures in the
original Form10-K. This Amendment No. 1 to Form 10-K does not reflect events occurring
after the filing of the original Form 10-K or modify or update disclosures, including any
exhibits to the original Form 10-K, affected by subsequent events.

# Internal Controls

As
part of our review, we also identified three additional material weaknesses, as described
in Item 9A  Controls and Procedures. The first material weakness
relates to the Company lacking personnel with adequate expertise in accounting for income
taxes. The second material weakness relates to the Company not having a sufficiently
detailed management review at one of its mines of the accounting for payments received
under its coal sales contracts. The third material weakness relates to the Company not
having sufficiently detailed review over financial reporting.

# Forward-Looking
Disclaimer

Throughout
this Amendment No. 1 to Form 10-K, we make 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; health care cost trends; the cost and capacity of the
surety bond market; the Companys ability to manage growth and significantly expanded
operations; the ability of the Company to implement its growth and development strategy;
the Companys ability to pay the preferred stock dividends that are accumulated but
unpaid; the Companys ability to retain key senior management; the Companys
access to financing; the Companys ability to maintain compliance with debt covenant
requirements; 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 income tax
net operating losses; 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 the ROVA Project and the
structure of the ROVA Projects contracts with its lenders and Dominion Virginia
Power; the Companys ability to complete the acquisition of the portion of the ROVA
project that it does not currently own; the effect of regulatory and legal proceedings;
environmental issues, including the cost of compliance with existing and future
environmental requirements; the contingencies of the Company discussed in Note 21 to the
Consolidated Financial Statements; the risk factors set forth below; and the other factors
discussed in Items 1, 2, 3 and 7. As a result of the foregoing and other factors, no
assurance can be given as to the future results and achievement of the Companys
goals. The Company disclaims any duty to update these statements, even if subsequent
events cause its views to change.



References
in this document to www.westmoreland.com, any variations of the foregoing, or any other
uniform resource locator, or URL, are inactive textual references only. The information on
our Web site or any other Web site is not incorporated by reference into this document and
should not be considered to be a part of this document.



---

The words we,
our, or the Company as used in this report refer to Westmoreland
Coal Company and its applicable subsidiary or subsidiaries.

# ITEM 1  BUSINESS

We
are an energy company. We are the oldest independent coal company in the United States
with our origin in 1854. We mine coal that is used to produce electric power and we own
interests in power-generating plants.

# Coal Operations

We
were the 8th largest coal producer in the United States, ranked by tons of coal mined in
2005. In 2005, we increased our coal production to 30.0 million tons, about 3% of all the
coal produced in the United States.

Mines

We
own five mines; all except the Jewett Mine are located in the northern tier, a coal market
extending from Montana through Minnesota and other upper Midwestern states. The mines are:

| |  |  |  | the
Absaloka Mine,
| |  | - |  | ------------------

| |  |  |  | the
Rosebud Mine,
| |  | - |  | -----------------

| |  |  |  | the
Jewett Mine,
| |  | - |  | ----------------

| |  |  |  | the
Beulah Mine, and
| |  | - |  | --------------------

| |  |  |  | the
Savage Mine.
| |  | - |  | ----------------

The
Absaloka Mine is owned by our subsidiary, Westmoreland Resources, Inc. The Beulah, Jewett,
Rosebud, and Savage Mines are owned by our separate subsidiary, Westmoreland Mining LLC.

All
of these mines are surface mines. At large surface mines like ours, coal is frequently
mined from more than one area or pit at any given time. Surface mining involves extracting
coal that lies close to the surface. Where the surface layer contains rock, overburden
drills are used to drill holes in the rock, explosives are inserted, and the blast loosens
the layer of rock. Earth-moving equipment removes the overburden  the layer of dirt
and rock that lies between the surface and the coal. A machine called a dragline is
typically used to remove a substantial portion of the overburden. Draglines are very large
 our largest dragline weighs approximately 7,000 tons and has a bucket capacity of
128 cubic yards. Smaller pieces of equipment, including bulldozers, front-end loaders,
scrapers, and dump trucks move the remainder of the overburden. Once the coal has been
exposed, front-end loaders, backhoes, or electric shovels load the coal in dump trucks.
After the coal has been extracted, it is processed (typically by crushing), sampled (or
assayed), and then shipped to customers.



The
Absaloka Mine is located on approximately 15,000 acres in Big Horn County, Montana, near
the town of Hardin. Coal was first extracted from the Absaloka Mine in 1974. Westmoreland
Resources owns the Absaloka Mine. We own 80% of the stock of Westmoreland Resources.
Washington Group International, Inc. owns the remaining 20% and operates the mine. We own
100% of each of our other subsidiaries, unless otherwise indicated.

The
Rosebud Mine is located on approximately 25,000 acres in Rosebud and Treasure Counties,
Montana, near the town of Colstrip, about 130 miles east of Billings. Coal was first mined
near Colstrip in 1924, and production from the existing mine complex began in 1968.
Westmoreland Minings subsidiary, Western Energy Company, owns and operates the
Rosebud Mine. Westmoreland Mining acquired the stock of Western Energy from Entech, Inc.,
a subsidiary of the Montana Power Company, in April 2001.

The
Jewett Mine is located on approximately 35,000 acres in Freestone, Leon, and Limestone
Counties, Texas, near the town of Jewett, about half way between Dallas and Houston. The
Jewett Mine produces lignite, a type of coal with a lower Btu value per ton than
sub-bituminous or bituminous coal. Btu is a measure of heat energy. The higher
the Btu value, the more energy is produced when the coal is burned. Lignite was first
extracted from the Jewett Mine in 1985. Westmoreland Minings subsidiary, Texas
Westmoreland Coal Company (formerly Northwestern Resources Co.), owns and operates the
Jewett Mine. Westmoreland Mining acquired the stock of Northwestern Resources from Entech,
Inc. in April 2001.

The
Beulah Mine is located on approximately 9,300 acres in Mercer and Oliver Counties, North
Dakota, near the town of Beulah. The Beulah Mine also produces lignite. Lignite was first
extracted from the Beulah Mine in 1963. Westmoreland Minings subsidiary, Dakota
Westmoreland Corporation, owns and operates the Beulah Mine. Westmoreland Mining acquired
the Beulah Mine in May 2001 from Knife River Corporation, a subsidiary of MDU Resources
Group, Inc.

The
Savage Mine is located on approximately 1,600 acres in Richland County, Montana, near the
town of Sidney. The Savage Mine produces lignite. Production began at the Savage Mine in
1958. Westmoreland Minings subsidiary, Westmoreland Savage Corporation, owns and
operates the Savage Mine. Westmoreland Mining acquired the Savage Mine in May 2001 from
Knife River Corporation.

The
following table presents the sales from our mines in the last three years (in thousands of
tons):

|Year | Absaloka | Rosebud | Jewett | Beulah | Savage | Total 
|---- | -------- | ------- | ------ | ------ | ------ | ------
|2005 | 6,463    | 13,377  | 6,951  | 2,873  | 326    | 29,990
|2004 | 6,488    | 12,655  | 6,453  | 3,053  | 375    | 29,024
|2003 | 6,016    | 11,003  | 7,462  | 2,816  | 379    | 27,676



Coal
and the Production of Electricity

Over
the last fifty years, coal has played a significant role in generating electricity in the
United States. The following table, derived from the U.S. Energy Information
Administration (EIA), shows coals share in the production of all
electricity in the United States:

|Year     |  | Electricity generatedby all sources(billions of kilowatthours) (1) |  | Electricitygenerated by coal(billions ofkilowatt hours) |  | Coal-generatedelectricity as apercentage of allelectricity
|-------- |  | ------------------------------------------------------------------ |  | ------------------------------------------------------- |  | ----------------------------------------------------------
|         |  |                                                                    |  |                                                         |  |                                                           
|1950     |  | 334                                                                |  | 154                                                     |  | 46%                                                       
|1960     |  | 759                                                                |  | 403                                                     |  | 53%                                                       
|1970     |  | 1,535                                                              |  | 704                                                     |  | 46%                                                       
|1980     |  | 2,290                                                              |  | 1,162                                                   |  | 51%                                                       
|1990     |  | 3,027                                                              |  | 1,594                                                   |  | 53%                                                       
|2000     |  | 3,789                                                              |  | 1,966                                                   |  | 52%                                                       
|2004 (2) |  | 3,941                                                              |  | 1,976                                                   |  | 50%                                                       

_________________

|(1) |  | All
sources include all fossil fuels, nuclear electric power, hydroelectric           pumped
storage, renewable energy (including conventional hydroelectric power),           and
other.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Preliminary.
|--- |  | ------------

The
EIA projects that the output of coal-fired plants used to generate electricity will
increase from 1,976 billion kilowatt hours in 2004 to 2,754 billion kilowatt hours in 2025
and that the demand for coal used to generate electricity will increase 1.5% per year from
2004 through 2025.

Customers,
Competition, and Coal Supply Agreements

We
sell almost all of the coal that we produce to plants that generate electricity. In 2005,
for example, we sold about 1% of our coal to industrial and institutional users and the
remainder to power-generating plants. These plants compete with all other producers of
electricity to be dispatched, or called upon to generate power. We compete
with many other suppliers of coal to provide fuel to these plants.

We
believe that the competitive advantage of our mines derives from two facts:

| |  |  |  | all
of our mines are the lowest-cost suppliers to each of their respective principal
customers; and
| |  | - |  | ---------------------------------------------------------------------------------------------------

| |  |  |  | nearly
all of the power plants we supply were specifically designed to use our coal.
| |  | - |  | ------------------------------------------------------------------------------------

The
plants we supply are among the lower cost producers of electric power in their respective
regions and are among the cleaner producers of power from fossil fuels. As a result, we
believe that the power-generating plants that we supply are more likely to be dispatched,
and that our mines will be supplying the coal that powers these generating units. All of
the power-generating plants we supply are baseloaded. The baseload is the part of the
total demand for energy that does not vary over a given period of time, and a baseload or
baseloaded power plant is a plant that supplies this relatively consistent demand.



From
the standpoint of a purchaser of coal, two of the principal costs of burning coal are the
cost of the coal and the cost of transporting the coal from the point of extraction to the
purchaser. The principal customers of the Rosebud, Jewett, and Beulah Mines are located
adjacent to the mines, so that the coal for these customers can be delivered by conveyor
belt or off road truck rather than by more expensive means such as on-road truck or rail.
The customers of the Savage Mine are located approximately 20 to 25 miles from the mine,
so that coal can be transported most economically by on-road truck. The Absaloka Mine
enjoys about a 300 mile rail advantage over its principal competitors from the Southern
Powder River Basin (SPRB). We believe that all of our mines are the
lowest-cost suppliers to each of their respective principal customers, and that the next
lowest-cost suppliers to these customers could be other mines of ours. This is the result
of a transportation advantage that our mines have compared to our competitors.

The
Absaloka Mine faces a different competitive situation than our other mines. The Absaloka
Mine sells its coal in the rail market to utilities located in the northern tier of the
United States that are served by the Burlington Northern Santa Fe Railway
(BNSF). These utilities may purchase coal from us or from other producers, and
we compete with other producers on the basis of price and quality, with the purchasers
also taking into account the cost of transporting the coal to their plants. The Absaloka
Mine was developed in part to supply the Sherburne County Station, a three unit power
plant operated by Xcel Energy near Minneapolis, Minnesota, with a generating capacity of
2,292 megawatts, or MW. The Absaloka Mine has a transportation advantage to the Sherburne
County Station because it is located about 300 rail miles closer to that power plant than
other mines competing for that business. The Absaloka Mine has supplied the Sherburne
County Station since 1976, when it commenced commercial operations. The Absaloka Mine has
three separate coal sales contracts to supply the Sherburne County Station.

| |  |  |  | The
Absaloka Mine supplies coal to Xcel Energy under two primary contracts, one covering 3.4
million tons per year that expires at the end of 2007 and one covering 1.0 million tons
per year that expires at the end of 2006. We receive prices under these contracts that
are adjusted by specified inflation indices.
| |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | The
Absaloka Mine also supplies coal to Western Fuels Association, the fuel buyer for
Southern Minnesota Municipal Power Agency or SMMPA, covering almost all of SMMPAs
fuel requirements for Unit 3 at the Sherburne County Station, or approximately 1.5
million tons per year. This contract expires at the end of 2009. The price we receive
under this contract was increased beginning in 2006 and is also adjusted by specified
inflation indices.
| |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Absaloka Mine also sells coal to Xcel Energys A.S. King Station, which is located in
Bayport, Minnesota, and to Consumers Energy Company through Midwest Energy Resources
Company for Consumers Cobb and Weadock stations, which are located in Muskegon and
Essexville, Michigan, under contracts expiring at the end of 2007. The Absaloka Mine
produces coal from land leased from the Crow Tribe of Indians. In February 2004, we
reached agreement with the Crow Tribe for exploration of new coal reserves in order to
continue serving customers beyond exhaustion of the reserves in our existing lease.



The
Rosebud Mines primary customers are the owners of the four-unit Colstrip Station,
which has a generating capacity of approximately 2,200 MW, and is located adjacent to the
mine. The Rosebud Mine has supplied the Colstrip Station since 1975 and 1976, when
Colstrip Units 1&2 commenced commercial operations. Western Energy sells this coal
under long-term contracts expiring in 2009 for Colstrip Units 1&2 and in 2019 for
Colstrip Units 3&4. The contract with Colstrip Units 1&2 specifies a base price
per ton that is subject to adjustment for certain indices and changes in our costs, and we
are also entitled to receive a reasonable profit. Western Energys coal supply
agreement with the owners of Colstrip Units 3&4 is a cost-plus arrangement that
provides a return on investment on mine assets as well as certain set fees. The owners of
Colstrip Units 3&4 also compensate Western Energy under a separate contract for
transporting the coal to them on a conveyor belt that Western Energy owns. With some
exceptions, the contracts with the owners of the Colstrip Station are full requirements
contracts; that is, the Colstrip Units are required to purchase all their coal
requirements from or through the Rosebud Mine. The Rosebud Mine also supplies coal to
Minnesota Power under a coal supply agreement that expires in 2008 and contains two
one-year extensions at the customers option. Under this contract, Minnesota Power
pays a base price per ton, which will increase in the future by a fixed percentage.

The
Jewett Mines sole customer is the two-unit Limestone Electric Generating Station,
which has a generating capacity of approximately 1,710 MW and is located adjacent to the
mine. The Limestone Station is currently owned by NRG Texas, LLC (NRGT), a
wholly owned subsidiary of NRG Energy, Inc. NRG acquired Texas Genco, LLC on February 2,
2006. The Jewett Mine has supplied the Limestone Station since 1985, when it commenced
commercial operations. The Jewett Mine sells lignite to NRGT pursuant to an Amended
Lignite Supply Agreement (ALSA) that expires in 2015. The ALSA provides for
the annual determination of volumes and pricing, with pricing based on an equivalent value
of coal from Wyomings SPRB, as delivered to and used at the Limestone Station. Texas
Westmoreland and NRGTs predecessor have disputed the proper interpretation of some
elements of the ALSA from time to time. In January of 2004, Texas Westmoreland and
NRGTs predecessor settled certain of the disputes between them. Among other things,
Texas Genco, LLC committed to purchase approximately 6.5 million tons of lignite from the
Jewett Mine per year during the years 2004 through 2007, and, for that same period, the
parties agreed to the price for that lignite. A new interim agreement was reached in
September 2005 that enhanced the economics of the Jewett Mine over previous interim
pricing arrangements, provides capital to support mine development, improves the mechanics
for determining equivalent market pricing pursuant to the parties underlying
contract after 2007, and has returned Texas Westmoreland to a stable and satisfactory
level of financial performance through the end of 2007, when the price will be determined
annually based on equivalent market value or until the current long-term supply agreement
is modified further or restructured.

The
Beulah Mine supplies the Coyote Station, which has a generating capacity of approximately
420 MW and is located adjacent to the mine, and the Heskett Station, which has a
generating capacity of approximately 100 MW and is located in Mandan, North Dakota,
approximately 74 miles from the mine. Coal is shipped to the Heskett Station on the BNSF.
The Beulah Mine has supplied the Coyote Station since 1981, when it commenced commercial
operations, and the Heskett Station since 1963. The contract with the Coyote Station
expires in 2016. The contract with the Heskett Station expired at the end of 2005, but we
have continued shipments at new pricing levels pending execution of a new agreement. The
price of the coal under these contracts is adjusted for certain indices and mine costs,
and for the Coyote Station is supplemented by a provision setting forth guaranteed minimum
and maximum net income levels. The Beulah Mines contracts with the Coyote Station
and, with a minor exception, the Heskett Station, are each full requirements contracts.



The
Savage Mine supplies coal to the Lewis & Clark Station, which has a generating
capacity of approximately 49 MW, and the American Crystal Sugars  Sidney Sugars
plant, which uses coal from the Savage Mine to heat its boilers and process sugar beets.
These facilities are located approximately 20 and 25 miles from the mine, respectively, so
that coal can be transported to them economically by on-road truck. The Savage Mine has
supplied the Lewis & Clark Station since 1958, when it commenced commercial
operations. The Savage Mines contracts with the Lewis & Clark Station and the
Sidney Sugars plant run until 2007 and 2008, respectively. These contracts, which involve
smaller volumes than our other coal supply contracts, are with minor exceptions each full
requirements contracts.

The
following table shows, for each of the past five years, our coal revenues, the tons sold
from mines that we owned at the time of production, the percentage of our coal sales made
under long-term contracts, and the weighted average price per ton that we received under
these long-term contracts.

|Year | Coal Revenues in  Dollars (1)  (in 000's) | Coal Sales in  Equivalent Tons  (in 000's) | Percentage of  Coal Sales Under  Long-Term  Contracts | Weighted Average  Price Per Ton  Received under  Long-Term  Contracts(1) (2)
|---- | ----------------------------------------- | ------------------------------------------ | ----------------------------------------------------- | ----------------------------------------------------------------------------
|2005 | $  361,017                                | 29,990                                     | 99%                                                   | $  11.44                                                                    
|2004 | 319,648                                   | 29,024                                     | 98%                                                   | 11.38                                                                       
|2003 | 294,892                                   | 27,762                                     | 99%                                                   | 10.45                                                                       
|2002 | 301,235                                   | 26,062                                     | 100%                                                  | 11.29                                                                       
|2001 | 231,048                                   | 20,503                                     | 99%                                                   | 11.05                                                                       

| |  | (1) |  | In
2004, we concluded an arbitration with the owners of Colstrip Units 1&2.
               The arbitration determined the price we received for coal that we
delivered to                Colstrip Units 1&2 from July 2001. Our coal revenues for
2004, and the                weighted average price per ton received under long-term
contracts in 2004,                include the entire amount we received pursuant to this
arbitration. Excluding                the portion of the arbitration award that covered
coal that we had previously                delivered to Colstrip Units 1&2, we earned
coal revenues of $302,753,000 and                received a weighted average price of
$10.78 per ton under long term contracts in                2004.
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (2) |  | The
weighted average price per ton that we received declined from 2002 to 2003
               principally because the Jewett Mine transitioned from cost-plus-fees
pricing to                a market-based pricing mechanism, effective July 1, 2002. That
mechanism was, in                turn, replaced by a fixed price agreement in January
2004 and then a modified                cost plus agreement in September 2005.
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
coal revenues include amounts earned by our coal sales company from sales of coal produced
by mines other than ours. In 2005, 2004 and 2003, such amounts were $9.8 million, $5.8
million and $5.5 million, respectively.



We
consider a contract that calls for deliveries to be made over a period longer than one
year a long-term contract. In 2005, our three largest contracts, with the owners of
Colstrip Units 1&2, Colstrip Units 3&4 and Limestone Generating Station, accounted
for 11%, 21% and 31%, respectively, of our coal revenues. No other contract accounted for
as much as 10% of our coal revenues in 2005.

As
part of our strategy, we seek long-term coal sales contracts. These contracts typically
contain price escalation and adjustment provisions, pursuant to which the price for our
coal may be periodically revised. The price may be adjusted in accordance with changes in
broad economic indicators, such as the consumer price index; commodity-specific indices,
such as the PPI-light fuel oils index; and/or changes in our actual costs. Contracts may
also contain periodic price reopeners, like the Colstrip Units 1&2 reopener discussed
above, or renewal provisions, which give us the opportunity to adjust the price of our
coal to reflect developments in the marketplace.

The
following table presents our estimate of the sales under our existing long-term contracts
for the next five years. The prices for all of these tons are subject to revision and
adjustments based upon market prices, certain indices, and/or cost recovery. We also
expect to continue to supply customers whose contracts expire before the end of 2010, but
have not included those tonnages in this projection.

|                                                  |     
|------------------------------------------------- | ----
|Projected Sales Tonnage Under                    
|Existing Long-Term Contracts(in millions of tons)
|                                                  |     
|2006                                              | 28.5
|2007                                              | 28.1
|2008                                              | 24.5
|2009                                              | 20.8
|2010                                              | 16.6

This
table reflects existing contracts only and takes into account the scheduled outages at our
customers plants, where known. We anticipate replacing sales as contracts expire
with extensions, new contracts, or spot sales over the life of our coal reserves. The
pending Heskett contract is not included in the table.

Protecting
the Environment

We
consider ourselves stewards of the environment. We reclaim the areas that we mine, and we
believe that our activities have been in compliance with all federal, state, and local
laws and regulations.

Our
reclamation activities consist of filling the voids created during coal removal, replacing
sub-soils and top-soils and then re-establishing the vegetative cover. At the conclusion
of our reclamation activities the area disturbed by our mining will look similar to what
it did before we mined. Before we are released from all liability under our permits, we
will have restored the area where we removed coal to a productive state that meets or
exceeds the non-mining use of the land before we mined.

We
address the impacts our mining operations have on wildlife habitat and on sites with
cultural significance. At the Jewett Mine, we preserve the nesting area of the Interior
Least Tern, a bird threatened in the region. The Rosebud Mine has altered its mining plan
to preserve Native American petroglyphs on rock formations. Similar culturally significant
sites have been excavated by trained archeologists. Historic buildings on mine property
have been moved to preserve them. We endeavor to operate as good environmental stewards,
citizens, and neighbors.



Safety

Safety
is our first priority. We maintain active safety programs involving all employees at all
of our mines. Our mines focus on 100% compliance with safe practices, safety rules, and
regulations.

In
2005, we achieved a new record for safety performance. Our four Company-operated mines had
no lost-time accidents and the Absaloka mine, which is operated by our contractor, had
only one lost-time accident. Based on data from the Mine Safety and Health Administration
(MSHA), an agency of the U.S. Department of Labor, our five mines had a
lost-time incident rate of 0.10 in 2005, compared to the national average of 1.61
(preliminary) for surface mines.

# Independent Power
Operations

Through
Westmoreland Energy LLC and its direct and indirect subsidiaries, we own interests in
three power-generating plants:

| |  |  |  | a
50% interest in the Roanoke Valley I Project, a 180 MW coal-fired plant located in
Weldon, North Carolina;
| |  | - |  | ------------------------------------------------------------------------------------------------------------

| |  |  |  | a
50% interest in the Roanoke Valley II Project, a 50 MW coal-fired plant also located in
Weldon, North Carolina; and
| |  | - |  | ---------------------------------------------------------------------------------------------------------------------

| |  |  |  | a
4.49% interest in the Fort Lupton Project, a 290 MW natural gas-fired plant located in
Fort Lupton, Colorado.
| |  | - |  | ---------------------------------------------------------------------------------------------------------------

We
call the Roanoke Valley units ROVA I and ROVA II, and we refer to both units together as
the ROVA Project. As described below, we have agreed to purchase the 50% interest in the
ROVA Project that we do not currently own.

The
ROVA Project and the Fort Lupton Project are each independent power projects. Independent
power projects are power-generating plants that were not built by the regulated utility
that purchases the plants output.



The
ROVA Project has a long-term contract with a fuel supplier and all three have a long-term
contract with a steam host, a business that uses the steam that is generated
in the production of power. These projects also have long-term contracts with electric
utilities, which purchase the power that the projects generate. The table below presents
information about each of our projects.

|Project                                                     | RoanokeValley I         | RoanokeValley II        | Fort Lupton               
|----------------------------------------------------------- | ----------------------- | ----------------------- | --------------------------
|Location                                                    | Weldon,North  Carolina  | Weldon,North  Carolina  | Fort Lupton,Colorado      
|Gross Megawatt Capacity                                     | 180 MW                  | 50 MW                   | 290 MW                    
|Our Equity Ownership                                        | 50.0%                   | 50.0%                   | 4.49%                     
|Electricity Purchaser                                       | Dominion Virginia Power | Dominion Virginia Power | Xcel Energy               
|Steam Host                                                  | Patch Rubber Company    | Patch Rubber Company    | Rocky Mtn. Produce, Ltd.  
|Fuel Type                                                   | Coal                    | Coal                    | Natural Gas               
|Fuel Supplier                                               | TECO Coal/ CONSOL       | TECO Coal/ CONSOL       | N/A                       
|Contracts with fuel supplier  expire
in                     | 2014                    | 2014                    | N/A                       
|Commercial Operation Commencement Date                      | 1994                    | 1995                    | 1994                      
|Contracts with steam host & electricity purchaser expire in | 2019 (1)                | 2020 (1)                | Unit 1 - 2019Unit 2 - 2009

|(1) |  | The
ROVA Project and Dominion Virginia Power can extend these contracts by           mutual
consent for five-year terms.
|--- |  | ------------------------------------------------------------------------------------------------------------------------

Like
the power plants to which we sell coal, these projects compete with all other producers of
electricity. The ROVA Project is baseloaded. In 2005, ROVA I had a capacity factor of 87%
and ROVA II had a capacity factor of 86%. A plants capacity factor is the ratio of
the amount of electricity it produced to the amount of electricity it could produce if it
operated at maximum output. ROVA I produced 1,266,000 megawatt hours (MW) in 2005; ROVA II
produced 334,000 MW during the year. The Fort Lupton Project is a peaking
plant. It provides power only when the demand for electricity exceeds the output of
baseloaded units.

On
August 25, 2004, we signed an Interest Purchase Agreement with a subsidiary of LG&E
Energy LLC to acquire the 50% interest in the ROVA project that we do not currently own.
LG&E Energy LLC is now a subsidiary of E.ON U.S. In November 2004, Dominion Virginia
Power (Dominion), the purchaser of the electricity generated by the ROVA
Project, asserted that the power purchase agreement gives it the right of first refusal
with respect to LG&E Energys 50% interest. On March 24, 2005, Dominion filed a
Petition for Declaratory Judgment in Virginia in the Circuit Court of the City of Richmond
seeking an order validating its alleged right of first refusal under the power purchase
agreement to acquire LG&Es partnership interest in the ROVA Project. On April
29, 2005, the ROVA Project filed a demurrer in the Circuit Court of the City of Richmond
requesting the Petition for Declaratory Judgment be denied.



On
September 2, 2005, the Richmond Circuit Court granted the Partnerships demurrer
motion, effectively denying Dominions claim that it has a right of first refusal
under the structure of the proposed acquisition. Dominion filed a motion for
reconsideration of the courts ruling and their motion was denied. Dominion can now
file a new Motion for Summary Judgment based on amendments to the acquisition agreement or
it can appeal the ruling on the Partnerships demurrer motion.

We
are currently in discussions with Dominion and LG&E in the hope that this dispute can
be resolved on business terms acceptable to all parties.

# Other Activities

As
part of our April 2001 acquisition of the coal business of Montana Power Company, we
obtained the stock of North Central Energy Company (North Central). North
Central owned property and mineral rights in southern Colorado. In 2003, North Central
leased the rights to explore, drill, and produce coalbed methane gas to Petrogulf
Corporation for $0.3 million and a royalty interest on production from wells drilled on
North Centrals properties. Commercial production began in early 2004. In 2003, North
Central sold certain surface and mineral property to local land owners for $1.4 million.
North Central sold its undivided mineral interests including the royalty interest on
coalbed methane production in early 2006 for approximately $5 million.

# Insurance Subsidiary

We
have elected to retain some of the risks associated with operating our company. To do
this, we established a wholly-owned, consolidated insurance subsidiary, Westmoreland Risk
Management Ltd., in 2002 which provides our primary layer of property and casualty
insurance. By using this insurance subsidiary, we have mitigated the effect of escalating
property and casualty insurance premiums and retained some of the economic benefits of our
excellent loss record, which has had minimal claims and none since we established the
subsidiary in 2002. We have paid premiums at market rates into Westmoreland Risk
Management, which as a result has cash reserves of $3.4 million. We reduce our major
exposure by insuring for losses in excess of our retained limits with a number of third
party insurance companies. Westmoreland Risk Management is a Bermuda corporation. We have
elected to report Westmoreland Risk Management as a taxable entity in the United States.

Except
for the assets of Westmoreland Risk Management, all of our assets are located in the
United States. We had no export sales and derived no revenues from outside the United
States during the five-year period ended December 31, 2005, except for de minimis sales to
a Canadian utility.



# Seasonality

Our business is somewhat seasonal:

| |  |  |  | The
owners of the power plants to which we supply coal typically schedule maintenance for
those plants in the spring and fall, when demand for electric power is typically less
than it is during other seasons. For this reason, our coal revenues are usually higher in
the winter and summer.
| |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | The
ROVA Project also typically undergoes scheduled maintenance in the spring and fall, so
our equity in earnings from independent power is also lower in those seasons.
| |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Government Regulation

Numerous
federal, state and local governmental permits and approvals are required for mining and
independent power operations. Both our coal mining business and our independent power
operations are subject to extensive governmental regulation, particularly with regard to
matters such as employee health and safety, and permitting and licensing requirements
which cover all phases of environmental protection. The permitting process encompasses
both federal and state laws, addressing reclamation and restoration of mined land and
protection of hydrologic resources. Federal regulations also protect the benefits for
current and retired coal miners.

We
believe that our operations comply with all applicable laws and regulations, and it is our
policy to operate in compliance with all applicable laws and regulations, including those
involving environmental matters. However, because of extensive and comprehensive
regulatory requirements, violations occur from time to time in the mining and independent
power industries. None of the violations to date or the monetary penalties assessed upon
us has been material.

Environmental
Laws

We
are subject to various federal, state and local environmental laws. Some of these laws,
discussed below, place many requirements on our mines and the independent power plants in
which we own interests.

Surface
Mining Control and Reclamation Act. The Surface Mining Control and Reclamation Act of
1977, or SMCRA, which is administered by the Office of Surface Mining Reclamation and
Enforcement, or OSM, establishes mining, environmental protection and reclamation
standards for all aspects of surface mining. OSM may delegate authority to state
regulatory programs if they meet OSM standards. OSM has approved reclamation programs in
Montana, North Dakota and Texas, and these states regulatory agencies have assumed
primacy in mine environmental protection and compliance. Mine operators must obtain
permits issued by the state regulatory authority. OSM maintains oversight authority on the
permitting and reclamation process. We endeavor to comply with approved state regulations
and those of OSM through contemporaneous reclamation, maintenance and monitoring
activities. Contemporaneous reclamation is reclamation conducted on a reasonably current
basis following the mining of an area.



Each
of our mining operations must obtain all required permits before any activity can occur.
Under the states approved programs, an applicant for a permit must address
requirements for coal prospecting; mine plan development; topsoil removal, storage and
replacement; selective handling of overburden materials; mine pit backfilling and grading;
protection of the hydrologic balance; subsidence control for underground mines; surface
drainage control; mine drainage and mine discharge control and treatment; and
re-vegetation. While there may be some general differences between the states
SMCRA-approved programs, they are all similar. A permit applicant must supply detailed
information regarding its proposed operation including detailed studies of site-conditions
before active mining begins, extensive mine plans that describe mining methods and
impacts, and reclamation plans that provide for restoration of all disturbed areas. The
state regulatory authority reviews the submission for compliance with SMCRA and generally
engages in a process that involves critical comments designed to ensure regulatory
compliance and successful reclamation. When the state is satisfied that the permit
application satisfies the requirements of SMCRA, it will issue a permit. To ensure that
the required final reclamation will be performed, the state requires the permit-applicant
to post a bond that secures the reclamation obligation. The bond will remain in place
until all reclamation has been completed.

SMCRA
requires compliance with many other major environmental programs. These programs include
the Clean Air Act; Clean Water Act; Resource Conservation and Recovery Act or RCRA; and
Comprehensive Environmental Response, Compensation, and Liability Acts or CERCLA. Besides
OSM, other Federal regulatory agencies are involved in monitoring or permitting specific
aspects of mining operations. The EPA is the lead agency for states or Indian Tribes with
no authorized programs under the Clean Water Act, RCRA and CERCLA. The U.S. Bureau of
Alcohol, Tobacco and Firearms, or ATF, regulates the storage, handling and use of
explosives.

Clean
Air Act. The Clean Air Act, the 1990 amendments to the Clean Air Act, which we call
the Clean Air Act Amendments, and the corresponding state laws that regulate air emissions
affect our independent power interests and our mines both directly and indirectly. Direct
impacts on coal mining and processing operations may occur through the Clean Air
Acts permitting requirements and/or emission control requirements. The Clean Air Act
directly affects the ROVA Project and indirectly affects our mines by extensively
regulating the emissions from our customers plants into the air of particulates,
fugitive dust, sulfur dioxide, nitrogen oxides and other compounds emitted by coal-fired
generating plants.

Title
IV of the Clean Air Act Amendments places limits on sulfur dioxide
(SO2) emissions from power-generating plants and sets baseline
emission standards for these facilities. The affected electricity generators have been
able to meet these requirements by, among other ways, switching to lower sulfur fuels,
installing pollution control devices, such as flue gas desulphurization systems, which are
known as scrubbers, reducing electricity generating levels or purchasing
sulfur dioxide emission allowances. Power-generating plants receive sulfur dioxide
emission allowances each year from the EPA, which the plants may use, trade or sell. The
ROVA Project is exempt from the Title IV SO2 program.

The
Clean Air Act Amendments also require power plants that are major sources of nitrogen
oxides in moderate or higher ozone non-attainment areas to install reasonably available
control technology for nitrogen oxides, which are precursors of ozone. In addition, the
EPA promulgated final rules that require coal-burning power plants in 19 eastern states
and Washington, D.C. to make substantial reductions in nitrogen oxide emissions beginning
in May 2004. Installation of additional control measures required under the final rules
will make it more costly to operate coal-fired generating plants. We discuss these rules
below in more detail in the context of the ROVA Project.



Clean
Water Act. The Clean Water Act of 1972 affects coal mining operations by establishing
the National Pollutant Discharge Elimination System, or NPDES, which sets standards for
in-stream water quality and treatment for effluent and/or waste water discharges. Regular
monitoring, reporting requirements and performance standards are requirements of NPDES
permits that govern the discharge of pollutants into water. States are also adopting
anti-degradation regulations in which a state designates certain water bodies or streams
as high quality. These regulations prohibit the diminution of water quality in
these streams. Waters discharged from coal mines to high quality streams will be required
to meet or exceed new high quality standards. The designation of high quality streams at
our coal mines could require more costly water treatment and could aversely affect our
coal production. We believe that all of our mines are in compliance with current discharge
requirements.

Resource
Conservation and Recovery Act. The Resource Conservation and Recovery Act, which was
enacted in 1976, affects coal mining operations by establishing requirements for the
treatment, storage and disposal of hazardous wastes. Coal mine wastes, such as overburden
and coal cleaning wastes, are exempted from hazardous waste management. The EPA has also
exempted coal combustion wastes from hazardous waste management under RCRA. Although coal
combustion wastes disposed in surface impoundments and landfills or used as mine-fill are
subject to regulation as non-hazardous wastes under RCRA, we do not anticipate that the
regulation of coal combustion wastes will have any material effect on the amount of coal
used by electricity generators so long as the EPA continues to exempt coal combustion
wastes from hazardous waste management.

New
Environmental Rules

Environmental
laws and regulations are subject to change. In March 2005, the EPA adopted new rules that
affect airborne emissions. Because different types of coal vary in their chemical
composition and combustion characteristics, the new regulations could alter the relative
competitiveness among coal suppliers and coal types.

Clean
Air Interstate Rule. In the Clean Air Interstate Rule, or CAIR, the EPA required that
28 eastern states and the District of Columbia reduce emissions of sulfur dioxide and
nitrogen oxide. The EPA asserts that, when fully implemented, the CAIR will reduce
SO2 emissions in these states by over 70 percent and nitrogen oxide emissions
in those states by over 60 percent from 2003 levels. The CAIR covers the states in which
the ROVA Project, the principal customers of the Jewett and Absaloka Mines, and one of the
customers of the Rosebud Mine are located. According to the EPA, states will achieve the
required emissions reductions using one of two options for compliance:

| |  |  |  | A
state may require power plants to participate in an EPA-administered interstate cap and
trade system that caps emissions in two stages, or
| |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | A
state may meet an air emission budget specific to it through measures of the states
choosing.
| |  | - |  | ------------------------------------------------------------------------------------------------

The
EPA adopted the CAIR on March 10, 2005. The effect of the rule on the power industry is
still uncertain, and at this time we are unable to determine how it will affect our
business.



Mercury
Rule. The EPA issued regulations pertaining to airborne emissions of mercury from
power plants, known as the Mercury Rule, on March 15, 2005. Some states, including
Montana, are considering laws and/or regulations pertaining to airborne emissions of
mercury. We are unable at this time to determine how the Federal or state regulations
could affect the coal industry and our business.

Health
and Benefits

Mine
Safety and Health.Congress enacted the Coal Mine Health and Safety Act in
1969. The Federal Mine Safety and Health Act of 1977 significantly expanded the
enforcement of safety and health standards and imposed safety and health standards on all
aspects of mining operations. The states in which we operate have programs for mine safety
and health regulation and enforcement. Our safety activities are discussed above.

Black
Lung.Under the Black Lung Benefits Revenue Act of 1977 and the Black Lung
Benefits Reform Act of 1977, as amended in 1981, each coal mine operator must secure
payment of federal black lung benefits to claimants who are current and former employees
and to a trust fund for the payment of benefits and medical expenses to claimants who last
worked in the coal industry prior to July 1, 1973.

Coal
Act.As discussed in more detail below, the Coal Industry Retiree Health
Benefit Act of 1992 imposes substantial liabilities and costs on us.

Workers
Compensation.We are subject to various state laws where we have or previously had
employees to provide workers compensation benefits. We were self-insured prior to
and through December 31, 1995. Beginning in 1996, we purchased third party insurance for
new workers compensation claims.

Independent
Power

Many
of the environmental laws and regulations described above, including the Clean Air Act
Amendments, the Clean Water Act and RCRA, apply to our independent power plants as well as
to our coal mining operations. These laws and regulations require a lengthy and complex
process of obtaining licenses, permits and approvals from federal, state and local
agencies. Meeting the requirements of each jurisdiction with authority over a project can
delay or sometimes prevent the completion of a proposed project, as well as require
extensive modifications to existing projects. The operators of the ROVA and Fort Lupton
Projects are responsible for obtaining the required permits and complying with the
relevant environmental laws.

On
December 17, 1999, the EPA issued regulations under Section 126 of the Clean Air Act,
which we call the Section 126 rule. The Section 126 rule requires combined nitrogen oxide
reductions of 510,000 tons during each annual ozone season (May 1  September 30)
from specified power stations in the eastern United States, including the ROVA Project.
The rule responds to petitions filed by several northeastern states under Section 126 of
the Clean Air Act and seeks to control nitrogen oxide emissions that the petitioning
states allege prevent them from attaining the ambient air quality standards for ozone.
Each source is assigned a nitrogen oxide emissions allocation, and sources can reduce
emissions to meet the allocation or purchase allowances.



North
Carolina adopted regulations that required compliance with the new nitrogen oxide limits
beginning in June 2004.

The
ROVA Project continues to evaluate strategies for complying with the Section 126 rule. In
2000, the ROVA Project installed a neural network in its boilers. The neural network
increases boiler efficiency and reduces nitrogen oxide and carbon monoxide emissions.
While the neural network reduces the level of nitrogen oxide and carbon monoxide emissions
from the ROVA Project, the projects operator is evaluating additional compliance
strategies, including installation of additional pollution control equipment and/or
emissions trading.

# Employees

Including
our subsidiaries, we directly employed 1,052 people on December 31, 2005, compared with
943 people on December 31, 2004. Westmoreland Coal Company is not party to any agreement
with the United Mine Workers of America (UMWA), and its last agreement with
the UMWA expired on August 1, 1998. However, our Western Energy subsidiary is party to an
agreement with Local 400 of the International Union of Operating Engineers
(IUOE). In addition, our Dakota Westmoreland and Westmoreland Savage
subsidiaries assumed agreements with Local 1101 of the UMWA and Local 400 of the IUOE,
respectively, when we purchased Knife Rivers assets.

# Information about
Segments

Please
refer to Note 14 of the Consolidated Financial Statements for additional information about
the segments of our business.

# Available Information

Our
Internet address is www.westmoreland.com. We do not intend for the information on our
website to constitute part of this report. We make available, free of charge on or through
our Internet website, our Annual Report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended (Exchange Act), as soon as reasonably practicable after we file those
materials electronically with, or furnish them to, the Securities and Exchange Commission.

# ITEM 1A  RISK
FACTORS

In
addition to the trends and uncertainties described in Items 1 and 3 of this Amendment No. 1 to Annual Report
on  Form 10-K and elsewhere in Managements Discussion and Analysis
of Financial Condition and Results of Operations, we are subject to the risks set forth
below.

Our coal mining operations are
inherently subject to conditions that could affect levels of production and production
costs at particular mines for varying lengths of time and could reduce our profitability.

Our
coal mining operations are all surface mines. These mines are subject to conditions or
events beyond our control that could disrupt operations, affect production and increase
the cost of mining at particular mines for varying lengths of time and negatively affect
our profitability. These conditions or events include:



| |  |  |  | unplanned
equipment failures, which could interrupt production and require us to expend significant
sums to repair our capital equipment, including our draglines, the large machines we use
to remove the soil that overlies coal deposits;
| |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | geological
conditions, such as variations in the quality of the coal produced from a particular
seam, variations in the thickness of coal seams and variations in the amounts of rock and
other natural materials that overlie the coal that we are mining; and
| |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | weather
conditions.
| |  | - |  | -------------------

Examples of recent conditions or
events of these types include the following:

| |  |  |  | A
dragline at Jewett experienced mechanical failures in July 2005 that took the machine out
of service and reduced production for approximately four weeks.
| |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | In
the second quarter of 2005, our Beulah Mine experienced unusually heavy rainfall
including record rainfall in June that adversely impacted overburden stability and
resulted in highwall and spoil sloughage, a condition in which the side of the pit
partially collapses and must be stabilized before mining can continue. Unstable
conditions in the pits impacted dragline operations at that mine for a period of time.
This resulted in a reduction in coal production during the quarter and caused inventory
to fall which negatively affected third and fourth quarter results.
| |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | In
the second quarter of 2004, our Jewett Mine received approximately 93% more rain than
normal, impeding production.
| |  | - |  | ---------------------------------------------------------------------------------------------------------------------

Our revenues and profitability
could suffer if our customers reduce or suspend their coal purchases.

In
2005, we sold approximately 99% of our coal under long-term contracts and about
three-fourths of our coal under contracts that obligate our customers to purchase all or
almost all of their coal requirements from us, or which give us the right to supply all of
the plants coal, lignite or fuel requirements. Three of our contracts, with the
owners of the Limestone Generating Station, Colstrip Units 3&4 and Colstrip Units
1&2, accounted for 31%, 21% and 11%, respectively, of our coal revenues for 2005.
Interruption in the purchases by or operations of our principal customers could
significantly affect our revenues and profitability. Unscheduled maintenance outages at
our customers power plants and unseasonably moderate weather are examples of
conditions that might cause our customers to reduce their purchases. Four of our five
mines are dedicated to supplying customers located adjacent to or near the mines, and
these mines may have difficulty identifying alternative purchasers of their coal if their
existing customers suspend or terminate their purchases.

Disputes relating to our coal
supply agreements could harm our financial results.

From
time to time, we may have disputes with customers under our coal supply agreements. These
disputes could be associated with claims by our customers that may affect our revenue and
profitability. Any dispute that resulted in litigation could cause us to pay significant
legal fees, which could also affect our profitability.



We are a party to numerous legal
proceedings, some of which, if determined unfavorably to us, could result in significant
monetary damages.

We
are a party to several legal proceedings which are described more fully in Item 3 
Legal Proceedings below, and in Note 21 (Commitments and
Contingencies) to our Consolidated Financial Statements. Adverse outcomes in some or
all of the pending cases could result in substantial damages against us or harm our
business.

We may not be able to manage our
expanding operations effectively, which could impair our profitability.

At
the end of 2000, we owned one mine and employed 31 people.  In the spring of 2001, we
acquired the Rosebud, Jewett, Beulah and Savage Mines from Entech and Knife River
Corporation, and at the end of 2005, we employed 1,052 people, including employees at
subsidiaries.  This growth has placed significant demands on our management as well
as our resources and systems. One of the principal challenges associated with our growth
has been, and we believe will continue to be, our need to attract and retain highly
skilled employees and managers. In the second quarter of 2005, we hired a new Chief
Financial Officer and new General Counsel. Eight of the eleven professional positions in
our corporate-level finance and accounting department and both of the positions in our
legal department are filled by individuals who have joined the Company since the beginning
of 2005.  To manage our financial, accounting and legal matters effectively, these
individuals must absorb considerable, necessary background information on the Company and
we must successfully integrate them into our ongoing activities.  In the second
quarter of 2005, we began to implement a new company-wide computer system.  The
start-up of this new system has imposed increased demands on employees, particularly our
finance and accounting staff.  If we are unable to attract and retain the personnel
we need to manage our increasingly large and complex operations, if we are unable to
integrate successfully our new officers and employees, and if we are unable to complete
successfully the implementation of our new computer system, our ability to manage our
operations effectively and to pursue our business strategy could be compromised.

The implementation of a new
company-wide computer system could disrupt our internal operations.

We
are in the process of implementing a new company-wide computer system to replace the
various systems that have been in place at our corporate offices, at the operations we
owned in 2001, and at the operations we acquired in 2001. Once implemented, we expect this
system to help establish standard, uniform, best practices and reporting in a number of
areas, increase productivity and efficiency, and enhance management of our business.
 Certain aspects of our information technology infrastructure and operational
activities have and may continue to experience difficulties in connection with this
transition and implementation.  Such difficulties can cause delay, be time consuming
and more resource intensive than planned, and cost more than we anticipated.   There
can be no assurance that we will achieve the cost savings and return on investment
intended from this project.



Our growth and development
strategy could require significant resources and may not be successful.

We
regularly seek opportunities to make additional strategic acquisitions, to expand existing
businesses, to develop new operations and to enter related businesses. We may not be able
to identify suitable acquisition candidates or development opportunities, or complete any
acquisition or project, on terms that are favorable to us. Acquisitions, investments and
other growth projects involve risks that could harm our operating results, including
difficulties in integrating acquired and new operations, diversions of management
resources, debt incurred in financing such activities and unanticipated problems and
liabilities. We anticipate that we would finance acquisitions and development activities
by using our existing capital resources, borrowing under existing bank credit facilities,
issuing equity securities or incurring additional indebtedness. We may not have sufficient
available capital resources or access to additional capital to execute potential
acquisitions or take advantage of development opportunities.

Our expenditures for
postretirement medical and life insurance benefits could be materially higher than we have
predicted if our underlying assumptions prove to be incorrect.

We
provide various postretirement medical and life insurance benefits to current and former
employees and their dependents. We estimate the amounts of these obligations based on
assumptions described in Managements Discussion and Analysis of Financial
Condition and Results of Operations  Critical Accounting Estimates and Related
Matters herein and in Note 9 to the Consolidated Financial Statements. We accrue
amounts for these obligations, which are unfunded, and we pay as costs are incurred. If
our assumptions change, the amount of our obligations could increase, and if our
assumptions are inaccurate, we could be required to expend greater amounts than we
anticipate. We regularly revise our estimates, and the amount of our accrued obligations
is subject to change.

We have a significant amount of
debt, which imposes restrictions on us and may limit our flexibility, and a decline in our
operating performance may materially affect our ability to meet our future financial
commitments and liquidity needs.

As
of December 31, 2005, our total gross indebtedness was approximately $112.2 million, which
included Westmoreland Minings obligations under its term loan agreement, including
the add-on facility described in Managements Discussion and Analysis of
Financial Condition and Results of Operations  Liquidity and Capital
Resources. We will assume significant non-recourse debt if we successfully complete
the ROVA acquisition. We may also incur additional indebtedness to finance the ROVA
acquisition and we may incur additional indebtedness in the future, including indebtedness
under our two existing revolving credit facilities.

Westmoreland
Minings term loan agreement restricts its ability to distribute cash to Westmoreland
Coal Company through 2011 and limits the types of transactions that Westmoreland Mining
and its subsidiaries can engage in with Westmoreland Coal Company and our other
subsidiaries. Westmoreland Mining executed the term loan agreement in 2001 and used the
proceeds to finance its acquisition of the Rosebud, Jewett, Beulah and Savage Mines. The
final payment on this indebtedness, which we call Westmoreland Minings acquisition
debt, is in the amount of $30 million and is due on December 31, 2008. After payment of
principal and interest, 25% of Westmoreland Minings surplus cash flow is dedicated
to an account that is expected to fund this final payment. The $35 million add-on facility
is scheduled to be paid-down from 2009 through 2011. Westmoreland Mining has pledged or
mortgaged substantially all of its assets and the assets of the Rosebud, Jewett, Beulah
and Savage Mines, and we have pledged all of our interests in Westmoreland Mining as
security for Westmoreland Minings indebtedness. In addition, Westmoreland Mining
must comply with financial ratios and other covenants specified in the agreements with its
lenders. Failure to comply with these ratios and covenants or to make regular payments of
principal and interest could result in an event of default.



A
substantial portion of our cash flow must be used to pay principal and interest on our
indebtedness and is not available to fund working capital, capital expenditures or other
general corporate uses. In addition, the degree to which we are leveraged could have other
important consequences, including:

| |  |  |  | increasing
our vulnerability to general adverse economic and industry conditions;
| |  | - |  | ---------------------------------------------------------------------------------

| |  |  |  | limiting
our ability to obtain additional financing to fund future working capital, capital
expenditures or other general                corporate requirements; and
| |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | limiting
our flexibility in planning for, or reacting to, changes in our business and in the
industry.
| |  | - |  | ------------------------------------------------------------------------------------------------------

If
our or Westmoreland Minings operating performance declines, or if we or Westmoreland
Mining do not have sufficient cash flows and capital resources to meet our debt service
obligations, we or Westmoreland Mining may be forced to sell assets, seek additional
capital or seek to restructure or refinance our indebtedness. If Westmoreland Mining were
to default on its debt service obligations, a note holder may be able to foreclose on
assets that are important to our business.

At
December 31, 2005, the ROVA Project had total debt of approximately $184 million. The ROVA
Projects credit agreement restricts its ability to distribute cash, contains
financial ratios and other covenants, and is secured by a pledge of the project and
substantially all of the projects assets. If the ROVA Project fails to comply with
these ratios and covenants or fails to make regular payments of principal and interest, an
event of default could occur. A substantial portion of the ROVA Projects cash flow
must be used to pay principal and interest on its indebtedness and is not available to us.
If the ROVA Project were to default on its debt service obligations, a creditor may be
able to foreclose on assets that are important to our business.

If the cost of obtaining new
reclamation bonds and renewing existing reclamation bonds continues to increase, our
profitability could be reduced.

Federal
and state laws require that we provide bonds to secure our obligations to reclaim lands
used for mining. We must post a bond before we obtain a permit to mine any new area. These
bonds are typically renewable on a yearly basis and have become increasingly expensive.
Bonding companies are requiring that applicants collateralize a portion of their
obligations to the bonding company. In 2005, we paid approximately $2.3 million in
premiums for reclamation bonds and posted approximately $24.5 million in collateral, in
addition to the collateral that we had previously posted, for those bonds. As we permit
additional areas for our mines in 2006 and 2007, the bonding requirements are expected to
increase significantly and the collateral posted is expected to increase as well. Any
capital that we provide to collateralize our obligations to our bonding companies is not
available to support our other business activities. If the cost of our reclamation bonds
continues to increase, our profitability could be reduced.



Our financial position could be
adversely affected if we fail to maintain our Coal Act bonds.

The
Coal Act established the 1992 UMWA Benefit Plan, or 1992 Plan. We are required to secure
three years of our obligations to that plan by posting a surety bond or a letter of credit
or collateralizing our obligations with cash. We presently secure these obligations with
two bonds, one in an amount of approximately $21.3 million with XL Specialty Insurance
Company (XL) and an affiliate and one in an amount of approximately $5.0
million. In December 2003, XL indicated a desire to exit the business of bonding Coal Act
obligations. In February 2004, XL renewed our Coal Act bond. Although we believe that XL
must continue to renew the bond so long as we do not default on our obligations to the
1992 Plan, XL filed a Complaint for Declaratory Judgment on May 11, 2005 to force our
payment of $21.3 million and to cancel the bond. If either of the companies that issue our
Coal Act bonds were to cancel or fail to renew our bonds, we may be required to post
another bond or secure our obligations with a letter of credit or cash. At this time, we
are not aware of any other company that would provide a surety bond to secure obligations
under the Coal Act. We do not believe that we could now obtain a letter of credit without
collateralizing that letter of credit in full with cash. The Company does not currently
have $21.3 million in cash available.

We face competition for sales to
new and existing customers, and the loss of sales or a reduction in the prices we receive
under new or renewed contracts would lower our revenues and could reduce our
profitability.

Approximately
one-third of the coal tonnage that we will produce in 2006 will be sold under long-term
contracts to power plants that take delivery of our coal from common carrier railroads.
Most of the Absaloka Mines sales are delivered by rail (with 6% by truck starting in
2006) and about 20% of the Rosebud Mines and Beulah Mines sales are delivered
by rail. Contracts covering 90% of those rail tons are scheduled to expire between
December 2006 and December 2008. As a general matter, plants that take coal by rail can
buy their coal from many different suppliers. We will face significant competition,
primarily from mines in the Southern Powder River Basin of Wyoming, to renew our long-term
contracts with our rail-served customers, and for contracts with new rail-served
customers. Many of our competitors are larger and better capitalized than we are and have
coal with a lower sulfur and ash content than our coal. As a result, our competitors may
be able to adopt more aggressive pricing policies for their coal supply contracts than we
can. If our existing customers fail to renew their existing contracts with us on terms
that are at least equivalent to those in effect today, or if we are unable to replace our
existing contracts with contracts of equal size and profitability from new customers, our
revenues and profitability would be reduced.

Approximately
two-thirds of the coal tonnage that we will sell in 2006 will be delivered under long-term
contracts to power plants located adjacent to our mines. We will face somewhat less
competition to renew these contracts upon their expiration, both because of the
transportation advantage we enjoy by being located adjacent to these customers and because
most of these customers would be required to invest additional capital to obtain rail
access to alternative sources of coal. Our Jewett Mine is an exception because our
customer has already built rail unloading and associated facilities that are being used to
take coal from the Southern Powder River Basin as permitted under our contract with that
customer.



Stricter environmental
regulations, including regulations recently adopted by the EPA, could reduce the demand
for coal as a fuel source and cause the volume of our sales to decline.

Coal
contains impurities, including sulfur, mercury, nitrogen and other elements or compounds,
many of which are released into the air when coal is burned. Stricter environmental
regulation of emissions from coal-fired electric generating plants could increase the
costs of using coal, thereby reducing demand for coal as a fuel source generally, and
could make coal a less attractive fuel alternative in the planning and building of utility
power plants in the future. The U.S. Environmental Protection Agency, or EPA, adopted
regulations in March 2005, that could increase the costs of operating coal-fired power
plants, including the ROVA Project. Congress has considered legislation that would have
this same effect. At this time, we are unable to predict the impact of these new
regulations on our business. However, we expect that the new regulations may alter the
relative competitiveness among coal suppliers and coal types. The new regulations could
also disadvantage some or all of our mines, and notwithstanding our coal supply contracts
we could lose all or a portion of our sales volumes and face increased pressure to reduce
the price for our coal, thereby reducing our revenues, our profitability and the value of
our coal reserves.

In
March 2005, the EPA issued the Clean Air Interstate Rule (CAIR) and Clean Air
Mercury Rule (CAMR). The CAIR will reduce emissions of sulfur dioxide and
nitrogen oxide in 28 eastern States and the District of Columbia. Texas and Minnesota, in
which customers of the Jewett and Absaloka mines are located, and North Carolina, where
the ROVA Project is located, are subject to the CAIR. The CAIR requires these States to
achieve required reductions in emissions from electric generating units, or EGUs, in one
of two ways: (1) through participation in an EPA-administered, interstate cap and
trade system that caps emissions in two stages, or (2) through measures of the
States choice. Under the cap and trade system, the EPA will allocate emission
allowances for nitrogen oxide to each State. The 28 States will distribute
those allowances to EGUs, which can trade them. To control sulfur dioxide, the EPA will
reduce the existing allowance allocations for sulfur dioxide that are currently provided
under the acid rain program established pursuant to Title IV of the Clean Air Act
Amendments.EGUs may choose among compliance alternatives, including installing
pollution control equipment, switching fuels, or buying excess allowances from other EGUs
that have reduced their emissions. Aggregate sulfur dioxide emissions are to be reduced
from 2003 levels in two stages, a 45% reduction by 2010 and a 57% reduction by 2015.
Aggregate nitrogen oxide emissions are also to be reduced from 2003 levels in two stages,
a 53% reduction by 2009 and a 61% reduction by 2015.

The
CAMR applies to all States. The CAMR establishes a two-stage, nationwide cap on mercury
emissions from coal-fired EGUs. Aggregate mercury emissions are to be reduced from 1999
levels in two stages, a 20% reduction by 2010 and a 70% reduction by 2018. The EPA expects
that, in the first stage, emissions of mercury will be reduced in conjunction with the
reductions of sulfur dioxide and nitrogen oxide under the CAIR. The EPA has assigned each
State an emissions budget for mercury, and each state must submit a State Plan
detailing how it will meet its budget for reducing mercury from coal-fired EGUs. Again,
States may participate in an interstate cap and trade system or achieve
reductions through measures of the States choice. The CAMR also establishes mercury
emissions limits for new coal-fired EGUs (new EGUs are power plants for which
construction, modification, or reconstruction commenced after January 30, 2004).



These
new rules are likely to affect the market for coal for at least three reasons:

| |  |  |  | Different
types of coal vary in their chemical composition and combustion characteristics. For
example, the lignite from our Jewett and Beulah mines is inherently higher in mercury
than bituminous and sub-bituminous coal, and sub-bituminous coal from different seams can
differ significantly.
| |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | Different
EGUs have different levels of emissions control technology. For example, the ROVA Project
has state of the art emissions control technology that reduces its emissions
of sulfur dioxide, nitrogen oxide and, collaterally, mercury.
| |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | The
CAIR is likely to affect the existing national market for sulfur dioxide emissions
allowances, thereby indirectly affecting coal producers and consumers that are not
directly subject to the CAIR.
| |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For
all the foregoing reasons, and because it is unclear how States will allocate their
emissions budgets, we are unable to predict at this time how these new rules will affect
the Company.

The
Companys contracts protect our sales positions, including volumes and prices, to
varying degrees. However, we could face disadvantages under the new regulations that could
result in our inability to renew some or all of our contracts as they expire or reach
scheduled price reopeners or that could result in relatively lower prices upon renewal,
thereby reducing our relative revenue, profitability, and/or the value of our coal
reserves.

New legislation or regulations in
the United States aimed at limiting emissions of greenhouse gases could increase the cost
of using coal or restrict the use of coal, which could reduce demand for our coal, cause
our profitability to suffer and reduce the value of our assets.

A
variety of international and domestic environmental initiatives are currently aimed at
reducing emissions of greenhouse gases, such as carbon dioxide, which is emitted when coal
is burned. If these initiatives were to be successful, the cost to our customers of using
coal could increase, or the use of coal could be restricted. This could cause the demand
for our coal to decrease or the price we receive for our coal to fall, and the demand for
coal generally might diminish. Restrictions on the use of coal or increases in the cost of
burning coal could cause us to lose sales and revenues, cause our profitability to decline
or reduce the value of our coal reserves.

Demand for our coal could also be
reduced by environmental regulations at the state level.

Environmental
regulations by the states in which our mines are located, or in which the generating
plants they supply operate, may negatively affect demand for coal in general or for our
coal in particular. For example, Texas passed regulations requiring all fossil fuel-fired
generating facilities in the state to reduce nitrogen oxide emissions beginning in May
2003. In January 2004, we entered into a supplemental settlement agreement with NRGT
pursuant to which the Limestone Station must purchase a specified volume of lignite from
the Jewett Mine. In order to burn this lignite without violating the Texas nitrogen oxide
regulations, the Limestone Station is blending our lignite with coal, produced by others
in the Southern Powder River Basin, and using emissions credits. Considerations involving
the Texas nitrogen oxide regulations might affect the demand for lignite from the Jewett
Mine in the period after 2007, which is the last year covered by the four- year fixed
price agreement. Not withstanding our contractual right to deliver approximately 6.5
million tons per year, NRGT might claim that it is less expensive for the Limestone
Station to comply with the Texas nitrogen oxide regulations by switching to a blend that
contains relatively more coal from the Southern Powder River Basin and relatively less of
our lignite. Other states are evaluating various legislative and regulatory strategies for
improving air quality and reducing emissions from electric generating units. Passage of
other state-specific environmental laws could reduce the demand for our coal.



We have significant reclamation
and mine closure obligations. If the assumptions underlying our accruals are materially
inaccurate, or if we are required to honor reclamation obligations that have been assumed
by our customers or contractors, we could be required to expend greater amounts than we
currently anticipate, which could affect our profitability in future periods.

We
are responsible under federal and state regulations for the ultimate reclamation of the
mines we operate. In some cases, our customers and contractors have assumed these
liabilities by contract and have posted bonds or have funded escrows to secure their
obligations. We estimate our future liabilities for reclamation and other mine-closing
costs from time to time based on a variety of assumptions. If our assumptions are
incorrect, we could be required in future periods to spend more on reclamation and
mine-closing activities than we currently estimate, which could harm our profitability.
Likewise, if our customers or contractors default on the unfunded portion of their
contractual obligations to pay for reclamation, we could be forced to make these
expenditures ourselves and the cost of reclamation could exceed any amount we might
recover in litigation, which would also increase our costs and reduce our profitability.

We
estimate that our gross reclamation and mine-closing liabilities, which are based upon
permit requirements and our experience, were $396.1 million (with a present value of
$158.4 million) at December 31, 2005. Of these liabilities, our customers have assumed a
gross aggregate of $201 million and have secured a portion of these obligations by posting
bonds in the amount of $50 million and funding reclamation escrow accounts that currently
hold approximately $58.8 million, in each case at December 31, 2005. We estimate that our
gross obligation for final reclamation that is not the contractual responsibility of
others was $195 million at December 31, 2005.

Our profitability could be
affected by unscheduled outages at the power plants we supply or own or if the scheduled
maintenance outages at the power plants we supply or own last longer than anticipated.

Scheduled
and unscheduled outages at the power plants that we supply could reduce our coal sales and
revenues, because any such plant would not use coal while it was undergoing maintenance.
We cannot anticipate if or when unscheduled outages may occur.

Our
profitability could be affected by unscheduled outages at the ROVA Project or if scheduled
outages at the ROVA Project last longer than we anticipate.



Increases in the cost of the fuel,
electricity and materials and the availability of tires we use in the operation of our
mines could affect our profitability.

Under
several of our existing coal supply agreements, our mines bear the cost of the diesel
fuel, lubricants and other petroleum products, electricity, and other materials and
supplies necessary to operate their draglines and other mobile equipment. In particular,
the cost of tires for our heavy equipment at the mines has increased drastically in 2005
as the supply has tightened due to world-wide demand, which impacts productivity and could
even reduce production if replacement tires are not available. The prices of many of these
commodities have increased significantly in the last year, and continued escalation of
these costs would hurt our profitability or threaten the financial condition of certain
operations in the absence of corresponding increases in revenue.

If we experience unanticipated
increases in the capital expenditures we expect to make over the next several years, our
liquidity and/or profitability could suffer.

Certain
of our contracts provide for our customers to reimburse us for our capital expenditures on
a depreciation and amortization basis, plus in some instances, a stated
return-on-investment. Certain contracts provide reimbursement of capital expenditures in
full as such expenditures are incurred. Other contracts feature set prices that adjust
only for changes in a general inflation index. When we spend capital at our operations, it
affects our near term liquidity in most instances and if capital is spent where the
customer is not specifically obligated to reimburse us, that capital could be at risk if
market conditions and contract duration do not match up to the investment.

Our ability to operate effectively
and achieve our strategic goals could be impaired if we lose key personnel.

Our
future success is substantially dependent upon the continued service of our key senior
management personnel, particularly Christopher K. Seglem, our Chairman of the Board,
President and Chief Executive Officer. We do not have key-person life insurance policies
on Mr. Seglem or any other employees. The loss of the services of any of our executive
officers or other key employees could make it more difficult for us to pursue our business
goals.

Provisions of our certificate of
incorporation, bylaws and Delaware law, and our stockholder rights plan, may have
anti-takeover effects that could prevent a change of control of our company that you may
consider favorable, and the market price of our common stock may be lower as a result.

Provisions
in our certificate of incorporation and bylaws and Delaware law could make it more
difficult for a third party to acquire us, even if doing so might be beneficial to our
stockholders. Provisions of our bylaws impose various procedural and other requirements
that could make it more difficult for stockholders to bring about some types of corporate
actions. In addition, a change of control of our Company may be delayed or deterred as a
result of our stockholder rights plan, which was initially adopted by our Board of
Directors in early 1993 and amended and restated in February 2003. Our ability to issue
preferred stock in the future may influence the willingness of an investor to seek to
acquire our company. These provisions could limit the price that some investors might be
willing to pay in the future for shares of our common stock and may have the effect of
delaying or preventing a change in control of Westmoreland.



Our ability to operate effectively
and achieve our strategic goals depends on maintaining satisfactory labor relations.

A
significant portion of the workforce at each of the Companys mines, except Jewett,
is represented by labor unions. While we believe that our relationships with our employees
at the mines is very good, the nature of collective bargaining is such that there is a
risk of a disruption in operations when any collective bargaining agreement reaches its
expiration dates unless a renewal or extension has been accepted by the employees who are
covered by the agreement. While labor strikes are generally a force majeure event in
long-term coal supply agreements, thereby exempting the mine from its delivery
obligations, the loss of revenue for even a short period of time could have a material
adverse effect on the Companys financial results.

We have had material weaknesses in
internal control over financial reporting in the past and cannot assure you that
additional material weaknesses will not be identified in the future. Our failure to
maintain effective internal control over financial reporting could result in material
misstatements in our financial statements which could require us to restate financial
statements, cause investors to lose confidence in our reported financial information and
have a negative effect on our stock price.

During
the past year, the Company identified five material weaknesses in internal controls over
financial reporting as defined in the Public Company Accounting Oversight Boards
Auditing Standard No. 2 that, if undetected, could have affected our financial
statements for the year ended December 31, 2005. The material weaknesses in our internal
control over financial reporting during the past year related to ineffective management
review of certain processes. See Item 9A  Controls and Procedures for
more specific details.

We
cannot assure that additional significant deficiencies or material weaknesses in our
internal control over financial reporting will not be identified in the future. Any
failure to maintain or implement new or improved controls, or any difficulties we
encounter in their implementation, could result in additional significant deficiencies or
material weaknesses, and cause us to fail to meet our periodic reporting obligations or
result in material misstatements in our financial statements. Any such failure could also
adversely affect the results of periodic management evaluations and annual auditor
attestation reports regarding the effectiveness of our internal control over financial
reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules
promulgated under Section 404. The existence of a material weakness could result in errors
in our financial statements that could result in a restatement of financial statements,
cause us to fail to meet our reporting obligations and cause investors to lose confidence
in our reported financial information, leading to a decline in our stock price.

We may face risks related to an
SEC investigation and securities litigation in connection with the restatement of our
financial statements.

We
are not aware that the Securities and Exchange Commission (SEC) has begun any
formal or informal investigation in connection with accounting errors requiring
restatement of 2005 and prior years financial statements including 2004 and 2005
quarterly financial statements, or that any laws have been violated. However, if the SEC
makes a determination that the Company has violated Federal securities laws, the Company
may face sanctions, including, but not limited to, monetary penalties and injunctive
relief, which could adversely affect our business. In addition, the Company or its
officers and directors could be named defendants in civil proceedings arising from the
restatement. We are unable to estimate what our liability in either event might be.



# ITEM 1B 
UNRESOLVED STAFF COMMENTS

None



# ITEM 2  PROPERTIES

We
operate mines in Montana, Texas, and North Dakota. All of these mines are surface
(open-pit) mines. These properties contain coal reserves and coal deposits. A coal
reserve is that part of a mineral deposit that could be economically and legally
extracted or produced at the time of the reserve determination. A coal deposit
is a coal bearing body, which has been appropriately sampled and analyzed in trenches,
outcrops, and drilling to support sufficient tonnage and grade to warrant further
exploration work. This coal does not qualify as a coal reserve until, among
other things, we conduct a final comprehensive evaluation based upon unit cost per ton,
recoverability, and other material factors and conclude that it is legally and
economically feasible to mine the coal.

We
include in coal reserves 199.2 million tons that are not fully permitted but
that otherwise meet the definition of coal reserves. Montana, Texas, and North
Dakota each use a permitting process approved by the Office of Surface Mining. We describe
the permitting process above in Item 1, under Governmental Regulation, and we
explain our assessment of that process as applied to these unpermitted tons below.

All
of our final reclamation obligations are secured by bonds as required by the respective
state agencies. Payment of the actual cost of the major portion of final reclamation is
the responsibility of third parties. Contemporaneous reclamation activities are performed
at each mine in the normal course of operations and coal production.



The following table provides
information about our mines as of December 31, 2005.

|                                                                 | AbsalokaMine                                                            | RosebudMine                                               | JewettMine                                 | BeulahMine                                             | SavageMine                     
|---------------------------------------------------------------- | ----------------------------------------------------------------------- | --------------------------------------------------------- | ------------------------------------------ | ------------------------------------------------------ | -------------------------------
|Owned by                                                         | Westmoreland Resources, Inc.                                            | Western Energy Company                                    | Texas Westmoreland Coal Co.                | Dakota Westmoreland Corporation                        | Westmoreland Savage Corporation
|Location                                                         | Big Horn County, MT                                                     | Rosebud and Treasure Counties, MT                         | Leon, Freestone and Limestone Counties, TX | Mercer and Oliver Counties, ND                         | Richland County, MT            
|Coal  Reserves(thousands of tons)   Proven
 (1)(4)  Probable
(3) | 38,212(2)64,800                                                         | 242,818(2)0                                               | 75,2230                                    | 41,411(2)14,672                                        | 8,385(2)0                      
|Permitted Reserves(thousands of tons)                            | 13,465                                                                  | 168,498                                                   | 75,223                                     | 26,588                                                 | 2,570                          
|Coal  Deposits (thousands  of tons)(5)                           | 487,000                                                                 | 186,160                                                   | 0                                          | 0                                                      | 10,095                         
|2005 Production(thousands of tons)                               | 6,463                                                                   | 13,407                                                    | 6,973                                      | 2,876                                                  | 330                            
|Lessor                                                           | Crow Tribe                                                              | Federal Govt;State of MT;Great NorthernProperties         | Private parties;State of Texas             | Private parties;State of ND;Federal Govt               | Federal Govt;Private parties   
|Lease Term                                                       | Through exhaustion                                                      | Varies                                                    | Varies                                     | 2009-2019                                              | Varies                         
|Current production capacity(thousands of tons)                   | 7,000                                                                   | 13,300                                                    | 7,000                                      | 4,000                                                  | 400                            
|Coal Type                                                        | Sub-bituminous                                                          | Sub-bituminous                                            | Lignite                                    | Lignite                                                | Lignite                        
|Acres disturbed by Mining                                        | 3,820                                                                   | 15,819                                                    | 14,460                                     | 4,521                                                  | 534                            
|Acres for which reclamation is complete                          | 2,675                                                                   | 7,123                                                     | 10,253                                     | 3,118                                                  | 209                            
|Major Customers                                                  | Xcel Energy, Western Fuels Assoc., Midwest Energy, Rocky Mountain Power | Colstrip 1&2 owners, Colstrip 3&4 owners, Minnesota Power | NRGT                                       | Otter Tail, MDU, Minnkota, Northwestern Public Service | MDU, Sidney Sugars             
|Delivery Method                                                  | Rail/Truck                                                              | Truck / Rail /      Conveyor                              | Conveyor                                   | Conveyor / Rail                                        | Truck                          
|Approx. Heat Content(BTU/lb.) (6)                                | 8,700                                                                   | 8,529                                                     | 6,613                                      | 6,941                                                  | 6,371                          
|Approx. Sulfur Content(%) (7)                                    | 0.65                                                                    | 0.74                                                      | 1.06                                       | 1.05                                                   | 0.45                           
|Year Opened                                                      | 1974                                                                    | 1968(8)                                                   | 1985                                       | 1963                                                   | 1958                           
|Total Tons Mined Since Inception(thousands of tons)              | 142,000                                                                 | 372,000                                                   | 154,000                                    | 88,000                                                 | 12,700                         

| | (1) |  | Proven
coal reserves are reserves for which (a) quantity is computed from
               dimensions revealed in outcrops, trenches, workings or drill holes; grade
and/or                quality are computed from the results of detailed sampling; and (b)
the sites                for inspection, sampling and measurement are spaced so closely
and the geologic                character is so well defined that size, shape, depth and
mineral content of                reserves are well-established. In addition,
all coal reserves are                assigned coal reserves: coal that we
have committed to operating                mining equipment and plant facilities.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) |  | Includes
tons for each mine as described below that are not fully permitted but
               otherwise meet the definition of proven coal reserves.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) |  | Probable
reserves are reserves for which quantity and grade and/or quality are
               computed from information similar to that used for proven reserves, but
the                sites for inspection, sampling, and measurement are farther apart or
are                otherwise less adequately spaced. The degree of assurance, although
lower than                that for proven reserves, is high enough to assume continuity
between points of                observation.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) |  | Deposits
are reserves which are defined with less geologic information than
               probable reserves and for which no well-defined mine plan has been
prepared.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) |  | We
have assigned all proven reserves to operating mining equipment and plant
               facilities.
| | --- |  | -------------------------------------------------------------------------------------------------------

| | (6) |  | Approximate
heat content applies to the coal mined in 2005.
| | --- |  | -----------------------------------------------------------

| | (7) |  | Approximate
sulfur content applies to the tons mined in 2005.
| | --- |  | -------------------------------------------------------------

| | (8) |  | Initial
sales                from the current mine complex began in 1968. Mining first occurred
at the site                in 1924.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------

We
lease all our coal properties except at the Jewett Mine, where some reserves are
controlled through fee ownership. We believe that we have satisfied all conditions that we
must meet in order to retain the properties and keep the leases in force.

# Absaloka Mine

Our
Westmoreland Resources subsidiary began constructing the mine in late 1972. Construction
was completed in early 1974. Westmoreland Resources has been the mines only owner.

The
Absaloka Mines primary excavating machine (completed in 1979) is a dragline with a
bucket capacity of 110 cubic yards. Westmoreland Resources owns the dragline. The Absaloka
Mines facilities consist of a truck dump, primary and secondary crushers, conveyors,
coal storage barn, train loadout, rail loop, shop, warehouse, boiler house, deep well and
water treatment plant, and other support facilities. These facilities date from the
construction of the mine. Westmoreland Resources mining contractor and minority
stockholder owns most of the other equipment at the mine.

We
believe that all the coal reserves and coal deposits shown in the table above for the
Absaloka Mine are recoverable through the Absaloka Mines existing facilities with
current technology and the existing infrastructure. These reserves and deposits were
estimated to be 800 million tons as of January 1, 1980, based principally upon a report by
IntraSearch, Inc., an independent firm of consulting geologists, prepared that year.

Westmoreland
Resources leases all of its remaining coal reserves and coal deposits from the Crow Tribe
of Indians. The lease runs until exhaustion of the mineable and merchantable coal in the
acreage subject to the lease. In February 2004, Westmoreland Resources reached an
agreement with the Crow Tribe to explore and develop additional acreage located on the
Crow reservation immediately adjacent to the Absaloka Mine. This agreement was approved by
the U.S. Department of the Interior in September 2004 and the initial exploration core
drilling was completed in 2004 in order to fully prove the coal deposits. Further core
drilling was completed in the fall of 2005 for final mine plan development and permit
submittal.

Washington
Group is contractually responsible for reclaiming the Absaloka Mine, whatever the cost,
except for $1.7 million, which is the responsibility of Westmoreland Resources. Our amount
has been fully funded through annual installments made from 1991 through 2005. Washington
Group is also contractually obligated to fund a reclamation escrow account or post
security for its reclamation obligation. After reclamation is complete, Westmoreland
Resources is responsible for maintaining and monitoring the reclaimed property until the
release of the reclamation bond. Westmoreland Resources estimates that it will cost $2.1
million to maintain and monitor the property that it had mined through December 31, 2005
until the reclamation bond for that property is released.



Of
the 103.0 million tons shown for the Absaloka Mine in the table above as proven and
probable coal reserves, 89.5 million tons are not fully permitted but otherwise meet the
definition of coal reserves. Westmoreland Resources has chosen to permit coal
reserves on an incremental basis and currently has sufficient permitted coal to meet
production, given the current rate of mining and demand, through 2007. In Montana, the
Department of Environmental Quality (DEQ) regulates surface mining and
issues mining permits under its OSM-approved program. In Montana, it typically takes two
to four years from the time an initial application is filed to obtain a new permit.
Westmoreland Resources filed an application with DEQ covering an estimated 25 million tons
of unpermitted reserves in June 2004, expanding the mine into Tract III South. The
application was deemed administratively complete by DEQ in November 2004. Based upon the
current status of this application, and our knowledge of the permitting process in Montana
and the Absaloka Mines reserves, we expect to receive final approval by mid-2006, as
required to meet production requirements.

The
operator of the Absaloka Mine purchases electric power under a long-term contract with
Northwestern Energy, the local utility. The mine is accessed from Route 384 via County
Road 42.

# Rosebud Mine

The
Northern Pacific Railroad began mining coal for its steam locomotives at Colstrip in 1924
and continued to do so until 1958. In 1959, the Montana Power Company purchased the
property. Montana Power formed Western Energy Company in 1966 and began selling coal to
customers in 1968. Colstrip Station Units 1&2 entered commercial operation in 1975 and
1976. The long-term contracts required for this plant provided the
foundation for a major expansion of the Rosebud Mine. We acquired the stock of Western
Energy in 2001.

The
Rosebud Mines primary excavating machines are four draglines, three with
bucket-capacities of 60 cubic yards, purchased in 1975, 1976, and 1980, and one with a
bucket-capacity of 80 cubic yards, purchased in 1983. The Rosebud Mines facilities
consist of truck dumps, crushing, storage, and conveying systems, a rail loadout, rail
loop, shops, warehouses, and other support facilities. These facilities date from 1974.

We
estimate that the Rosebud Mine had coal reserves of 242.8 million tons as of December 31,
2005. This estimate is based on a study of the Rosebud Mines
reserves dated October 1, 2005 conducted by Western Energy and adjusted for tons mined
since that date. We estimate that the Rosebud Mine had coal deposits of
approximately 186.2 million tons at the end of 2005. This estimate is based on a study of
the reserves at the Rosebud Mine prepared by the Environmental and Engineering Department
of Western Energy when Western Energy was owned by Montana Power. We believe that all of
these reserves are recoverable through the Rosebud Mines existing
facilities with current technology and the existing infrastructure.



We
are responsible for performing reclamation activities at the Rosebud Mine. The owners of
the Colstrip Station are responsible for paying the costs of reclamation relating to mine
areas where their coal supply is produced, which is approximately 63% of the estimated
total cost of final reclamation for the Rosebud Mine. Certain owners have satisfied these
obligations by prefunding their respective portions of those costs.

Of
the 242.8 million tons shown for the Rosebud Mine in the table above as proven coal
reserves, 74.3 million tons are not fully permitted but otherwise meet the definition of
coal reserves. Western Energy has chosen not to permit all of the coal
reserves in its mine plan because it already has sufficient coal in its current permitted
mine plan, given the current rate of mining and demand for its production, through 2019.
Based upon our current knowledge of the nature of the remaining reserves and the
permitting process in Montana, we believe that there are no matters that would hinder
Western Energys ability to obtain additional mining permits in the future.

The
Rosebud Mine purchases electric power from NorthWestern Energy under regulated default
supply pricing. Access to the mine is from Highway 39 via Castle Rock Road.

# Jewett Mine

Development
of the Jewett Mine began in 1979, when Northwestern Resources Co. and Utility Fuels, Inc.
signed an agreement calling for production of the most economic 240 million
tons from the project area to supply the planned Limestone Station. The coal deposit
was evaluated through a series of exploration programs, including physical and chemical
analysis, according to predetermined criteria. The Jewett Mine has been in continuous
operation since 1985 and consists of five active areas with as many as four lignite seams
within each area. Since 1979, ownership of the Limestone Station has been transferred
several times, most recently to NRGT. We acquired the stock of Northwestern Resources in
2001 and renamed the company Texas Westmoreland Coal Company in 2004.

The
Jewett Mines primary excavating machines consist of three walking draglines, each
with a bucket-capacity of 84 cubic yards, one walking dragline with a bucket-capacity of
128 cubic yards, and one bucketwheel excavator. The Jewett Mines facilities consist
of a truck dump, crusher, conveyors, coal storage, shop/warehouse complex, administrative
support buildings, and water treatment facilities. These facilities date from the
construction of the mine. NRGT owns the draglines, the bucketwheel and other mobile
equipment used to extract lignite and provides this equipment to Texas Westmoreland
without charge. Texas Westmoreland is obligated to maintain the draglines and all other
plant and equipment so that they continue to be serviceable and support production
comparable to the original specifications.

Exploration
work for the mine commenced in the late 1970s, and Texas Westmorelands geologists
and engineers prepared the initial estimates of the mines reserves at a time when
Montana Power owned the Jewett Mine. To further define the coal reserve, exploration
drilling was utilized to delineate that part of the deposit that could economically be
mined. Through 2004, additional drilling was conducted from time to time to further define
the limits of the coal seams. We believe that all the Jewett Mines coal reserves are
recoverable through its existing facilities with current technology and the existing
infrastructure.



Final
reclamation of the Jewett Mine, at the end of its useful life, is the financial
responsibility of its customer.

The
Railroad Commission of Texas, or RCT, regulates surface mining in Texas and issues mining
permits under its OSM-approved program. In Texas, it typically takes eighteen months to
two years from the time an initial application is filed to obtain a new permit. A permit
term encompasses five years of mining. The Jewett Mine currently holds two mining permits,
32F and 47. Permit number 32F is a renewal of the original mining permit that has been in
place and actively mined since the mine opened in 1985. This permit is valid through July
2008. Permit number 47 was issued in December 2001 and has a term that runs through
December 2006.

The
Jewett Mine purchases electric power from the Brazos Electric Power Cooperative, Inc. and
Navasota Valley Electric Cooperative. The mine may be accessed on Farm to Market Road 39.

# Beulah Mine

Knife
River Corporation began producing lignite at the Beulah Mine in 1963. The mine has two
working areas, the West Brush Creek area and the East Beulah area. We purchased the assets
of the Beulah Mine from Knife River in 2001.

On
July 11, 2005, we executed an option and acquired additional reserves in the South Beulah
area. Initial drilling and mine plans have been completed. The South Beulah reserves have
improved quality, lower sodium and lower strip ratios than the existing mine areas. (The
strip ratio is a measure of the overburden that must be removed to allow the extraction of
coal; a strip ratio of 10:1 means that 10 cubic yards of overburden must be removed to
permit the extraction of one ton of coal.) The owners of the Coyote Station have agreed to
include the acquisition costs and development capital in the cost base under the Coyote
contract.

The
Beulah Mines primary excavating machines are a dragline with a bucket-capacity of 17
cubic yards, constructed in 1963, which operates in the West Brush Creek area, and a
dragline with a bucket-capacity of 84 cubic yards, constructed in 1980, which removes
overburden at East Beulah. The Beulah Mines facilities consist of a truck dump
hopper, primary and secondary crushers, conveyors, train loadout, railroad spur, coal
storage bin, and coal stockpile. The support facilities include several maintenance shops,
equipment storage buildings, warehouse, employee change houses, and mine office and
trailers. These facilities date from 1963 and have been replaced or maintained consistent
with normal industry practices.

The
Beulah Mines engineering staff has estimated the mines reserves and updated
the reserves annually, adjusted for tons mined. We estimate that the total owned and
leased coal reserves at the Beulah Mine were approximately 56.1 million tons at
December 31, 2005. We believe that all of these reserves are
recoverable through the Beulah Mines existing facilities with current technology and
the existing infrastructure.

We
are responsible for reclaiming the Beulah Mine and paying the cost of our reclamation
obligations.



Of
the 56.1 million tons shown for the Beulah Mine in the table above as proven and probable
coal reserves, 29.5 million tons are not fully permitted but otherwise meet the definition
of coal reserves. Of the total reserves shown, approximately 5.3 million tons
in the West Brush Creek area and 21.2 million tons at East Beulah are fully permitted at
this time. Based on the current estimated production rates of 800,000 and 2.2 million tons
respectively, there are roughly seven and ten years, respectively, remaining under the
current permitted mine plans. North Dakota Public Service Commission regulates surface
mining in North Dakota and issues mining permits under its OSM-approved program. In North
Dakota, it typically takes one to two years from the time an initial application is filed
to obtain a new permit. Based on our current knowledge of the permitting
process in North Dakota and the environmental issues associated with these reserves, we
believe that there are no matters that would hinder our ability to obtain any mining
permits in the future.

The
Beulah Mine purchases electric power from MDU. The mine is accessed from North Dakota
Highway 49.

# Savage Mine

Knife
River began producing lignite at the Savage Mine in 1958. We purchased the assets of the
Savage Mine from Knife River in 2001.

The
Savage Mines primary excavating machine is a walking dragline with a bucket-capacity
of 12 cubic yards. The Savage Mines facilities consist of a truck dump, near-pit
crushing unit, conveyors, and coal stockpile; support facilities include a shop,
warehouse, and mine office. These facilities date from 1958 and have been replaced or
maintained consistent with normal industry practices. The processing facilities were
constructed in 1996. The facilities were modified and upgraded in 2001.

We
estimate that the total owned and leased coal reserves at the Savage Mine were
approximately 8.4 million tons at December 31, 2005. These reserves were estimated as
of January 1, 1999, based principally on a report prepared by Weir International Mining
Consultants, an independent consulting firm, and updated by our engineering staff in 2005
based on drilling completed in 2004. We believe that all of these reserves are recoverable
through the Savage Mines existing facilities with current technology and the
existing infrastructure.

We
are responsible for reclaiming the Savage Mine and paying the cost of our reclamation
obligations.

Of
the tons shown for the Savage Mine in the table above as coal reserves, approximately 2.6
million tons are fully permitted at this time and 5.8 million tons are not fully permitted
but otherwise meet the definition of coal reserves. We have chosen not to
permit all of the coal reserves in the Savage Mines plan because the mine already
has sufficient coal in its current permitted mine plan given the current rate of mining
and demand for its production into 2013. Based upon our current knowledge of the nature of
the remaining reserves and the permitting process in Montana, we believe that there are no
matters that would hinder our ability to obtain additional mining permits at the Savage
Mine in the future.

The
Savage Mine purchases electric power from MDU. The mine is accessed from Montana Highway
16 via County Road 107.



# Other

Refer
to Note 3 to our Consolidated Financial Statements for a description of Westmoreland
Energys properties.



# ITEM 3  LEGAL
PROCEEDINGS

We
are involved in legal proceedings the outcome of which could be material to the Company.
We have presented the proceedings below based on the Westmoreland entity that is party to
the proceeding.

# Legal proceedings
involving Westmoreland Coal Company

Combined
Benefit Fund Litigation

Under
the Coal Act, we are required to provide postretirement medical benefits for certain UMWA
miners and their dependents by making payments into certain benefit plans, one of which is
the UMWA Combined Benefit Fund (CBF).

The
Coal Act merged the UMWA 1950 and 1974 Benefit Plans into the CBF, and beneficiaries of
the CBF were assigned to coal companies across the country. Congress authorized the
Department of Health & Human Services (HHS) to calculate the amount of the
premium to be paid by each coal company to whom beneficiaries were assigned. Under the
statute, the premium was to be based on the aggregate amount of health care payments made
by the 1950 and 1974 Plans in the plan year beginning July 1, 1991, lessreimbursements, divided by the number of individuals covered. That amount is increased
each year by a cost of living factor.

Prior
to the creation of the CBF, the UMWA 1950 and 1974 Plans had an arrangement with HHS
pursuant to which they would pay the health care costs of retirees entitled to Medicare,
and would then seek reimbursement for the Medicare-covered portion of the costs from HHS.
The determination of the amount to be reimbursed to the Plans proved to be complex and
time-consuming, which led the parties to enter into a capitation agreement in which they
agreed that HHS would pay the Plans a specified per-capita reimbursement amount for each
beneficiary each year, rather than trying to ascertain each year the actual amount to be
reimbursed. The capitation agreement was in effect for the plan year beginning July 1,
1991, the year specified by the Coal Act as the baseline for the calculation of Coal Act
premiums.

On
August 12, 2005, the United States District Court for the District of Maryland issued a
decision in a case filed by a large group of coal operators (including Westmoreland)
against the Commissioner of the Social Security Administration (Social
Security), successor to HHS in this matter, and the Trustees of the CBF (the
Trustees). The case involved the proper calculation of premiums payable to the
CBF pursuant to the Coal Act. Specifically, the issue before the court was the meaning of
the term reimbursements as used in the statutory provision describing how
premiums are to be calculated. The position of the coal operators is that
reimbursements means actual reimbursements received by the CBF pursuant to the
capitation agreement, whereas the Social Security Administration has calculated the
premiums using the amounts of Medicare-covered expenses,i.e., the amount that
would be reimbursed to the CBF if the reimbursement schedule for Medicare-covered expenses
were being applied. The method of calculating reimbursements used by the
Social Security Administration resulted in higher premiums for coal operators than would
have been the case if the actual reimbursements received by the CBF had been used in the
calculation of premiums.

This
issue has been in litigation for over ten years in two different United States Circuit
Courts of Appeals. In 1995, the Court of Appeals for the Eleventh Circuit ruled, in a
victory for coal companies, that the meaning of the statute was clear, i.e., that
it meant the actual amount by which the CBF was reimbursed, regardless of the amount of
the CBFs Medicare-covered expenditures. In 2002, the Court of Appeals for the
District of Columbia Circuit ruled that the statute was ambiguous, and remanded the case
to the Commissioner of Social Security for an explanation of its interpretation so that
the court could evaluate whether the interpretation was reasonable. In the August 2005
decision, the Maryland District Court agreed with the Eleventh Circuit that the term
reimbursements unambiguously means the actual amount by which the CBF was
reimbursed, and the Court granted summary judgment to the coal operators.



The
difference in premium payments for Westmoreland is substantial. Pursuant to the holdings
of the Eleventh Circuit and the Maryland District Court, Westmoreland has overpaid and
expensed premiums by more than $6 million for the period from 1993 through 2005.

On
August 25, 2005, the Trustees filed a motion with the Maryland District Court asking the
court to clarify its order or grant a stay to prevent the coal companies from claiming a
refund or applying the overpayment against current premiums pending appeal of the
courts order. Subsequently, the CBF Plan Trustees and the Commissioner of SSA
appealed the order of the Maryland District Court to the United States Court of Appeals
for the Fourth Circuit.

Oral
arguments before the Fourth Circuit Court of Appeals are expected to take place during the
week of May 22, 2006.

On
December 2, 2005, the Maryland federal district court judge who granted summary judgment
in favor of the coal companies on the premium calculation issue held a hearing on the
motion the CBF filed in August seeking an order barring the coal companies from offsetting
their plan year 2006 premiums by the amount of the premium overpayments. The judge ruled
that until the case is final and all appeals are exhausted, the CBF can retain the premium
overpayments. However, he applied the new premium calculation prospectively.

The
Company now pays premiums to the CBF of approximately $332,000 per month, compared to
$396,000 per month prior to Maryland District Court decision.

1992
UMWA Benefit Plan Surety Bond

On
May 11, 2005, XL Specialty Insurance Company and XL Reinsurance America, Inc. (together,
XL), filed in the U.S. District Court, Southern District of New York, a
Complaint for Declaratory Judgment against Westmoreland Coal Company and named
Westmoreland Mining LLC as a co-defendant. The Complaint asks the court to confirm
XLs right to cancel a $21.3 million bond that secures Westmorelands obligation
to pay premiums to the UMWA 1992 Plan, and also asks the court to direct Westmoreland pay
$21.3 million to XL to reimburse XL for the $21.3 million that would be drawn under the
bond by the 1992 Plan Trustees upon cancellation of the bond.

On
July 19, 2005, Westmoreland filed a motion to dismiss for lack of personal jurisdiction
and on the grounds of improper venue. XL filed a response on August 2, 2005. At a hearing
held on January 31, 2006, the judge changed the venue to the United States District Court
for New Jersey.

We
believe that we have no obligation to reimburse XL for draws under the bond unless the
draw is the result of a default by the Company under its obligations to the UMWA 1992
Plan. No default has occurred. If XL prevails on its claim, the Company will, in effect,
be required to provide cash collateral of $21.3 million for its obligations to the 1992
Plan or, alternatively, put up a letter of credit in such amount.



McGreevey
Litigation

In
late 2002, the Company was served with a complaint in a case styled McGreevey et al. v.
Montana Power Company et al. in a Montana State court. The plaintiffs are former
stockholders of Montana Power who filed their first complaint on August 16, 2001. This was
the Plaintiffs Fourth Amended Complaint; it added Westmoreland as a defendant to a
suit against Montana Power Company, various officers of Montana Power Company, the Board
of Directors of Montana Power Company, financial advisors and lawyers representing Montana
Power Company and the purchasers of some of the businesses formerly owned by Montana Power
Company and Entech, Inc., a subsidiary of Montana Power Company. The plaintiffs seek to
rescind the sale by Montana Power of its generating, oil and gas, and transmission
businesses, and the sale by Entech of its coal business, or to compel the purchasers to
hold these businesses in trust for the shareholders. The Plaintiffs contend that they were
entitled to vote to approve the sale by Entech to the Company even though they were not
shareholders of Entech. Westmoreland has filed an answer, various affirmative defenses and
a counterclaim against the plaintiffs. Shortly after the Company was named as a defendant,
the litigation was transferred from Montana State Court to the U.S. District Court in
Billings, Montana.

There
has been no significant activity in the case involving Westmoreland for the past three
years. Settlement discussions between the plaintiffs and other defendants appear to have
been unsuccessful. We have never participated in settlement discussions with the
plaintiffs because we believe that the case against the Company is totally without merit.
Even if the plaintiffs could establish that shareholder consent was required for the sale
of Montana Powers coal business in 2001, there is virtually no legal support for the
argument that such a sale to a buyer acting in good faith and relying on the sellers
representations can be rescinded. Indeed, the practical issues relating to such rescission
would present a significant obstacle to such a result, particularly when the business has
been operated by the buyer for five years and the original seller is in bankruptcy and has
no means to complete a repurchase or operate the business following a repurchase.

The
Company has considered seeking a dismissal of the claims against it but is waiting for the
outcome of a matter under review in the bankruptcy proceedings in Delaware involving Touch
America (formerly Montana Power Company). In those proceedings, the unsecured creditors
have asserted that the claims originally filed by McGreevey in Montanathe claims
against the officers and directors which, if successful, would likely result in a payment
by the insurance carrier that provided D&O insurance to Montana Power
Companybelong to the creditors, not the shareholders who are the plaintiffs in the
McGreevey action. If the Delaware Bankruptcy Court holds that those claims are
derivative and thus belong to the corporation, then the unsecured creditors
own them. Although the Delaware Bankruptcy Court will not directly decide that issue with
respect to the claims against the various asset purchasers, including the Company, such a
decision would likely affect the analysis of the Montana District Court where our case is
pending.



# Legal Proceedings
involving Westmoreland Coal Company and/or Westmoreland Energy

ROVA
Acquisition

On
August 25, 2004, we signed an Interest Purchase Agreement with a subsidiary of LG&E
Energy LLC to acquire the 50% interest in the ROVA project that we do not currently own.
LG&E Energy LLC is now a subsidiary of E.ON U.S. In November 2004, Dominion, the
purchaser of the electricity generated by the ROVA Project, asserted that the power
purchase agreement gives it the right of first refusal with respect to LG&E
Energys 50% interest. On March 24, 2005, Dominion filed a Petition for Declaratory
Judgment in Virginia in the Circuit Court of the City of Richmond seeking an order
validating its alleged right of first refusal under the power purchase agreement to
acquire LG&Es partnership interest in the ROVA Project. On April 29, 2005, the
ROVA Project filed a demurrer in the Circuit Court of the City of Richmond requesting the
Petition for Declaratory Judgment be denied.

On
September 2, 2005, the Richmond Circuit Court granted the Partnerships demurrer
motion, effectively denying Dominions claim that it has a right of first refusal
under the structure of the proposed acquisition. Dominion filed a motion for
reconsideration of the courts ruling and their motion was denied. Dominion can now
file a new Motion for Summary Judgment based on amendments to the acquisition agreement or
it can appeal the ruling on the Partnerships demurrer motion.

We
are currently in discussion with Dominion and LG&E in the hope that this dispute can
be resolved on business terms acceptable to all parties.

Halifax
County Property Tax

The
ROVA Project is located in Halifax County, North Carolina and is the Countys largest
taxpayer. In 2002, the County hired an independent consultant to review and audit the
property tax returns for the previous five years. In May 2002, the County advised the ROVA
Project that its returns were being scrutinized for potential underpayment due to
undervaluation of property subject to tax. In late 2002, the ROVA Project received notice
of an assessment of $3.2 million for the years 1997 to 2001. Since that date the County
has increased the amount of its assessment for tax years 1996, 2002, 2003, 2004 and 2005.

In
January, 2006, the Partnership paid $7.1 million to Halifax County as full payment for the
years 1996 to 2001. The ROVA Project is negotiating with the county in an attempt to
resolve claims by the county totaling approximately $3.6 million covering the years 2002
through 2005. These amounts, totaling $10.7 million, have been accrued at the ROVA Project
as at year end.

North
Carolina Income Tax

Niagara
Mohawk Power Corporation (NIMO) was party to power purchase agreements with
independent power producers, including the Rensselaer project, in which we owned an
interest. In 1997, the New York Public Service Commission approved NIMOs plan to
terminate or restructure 29 power purchase contracts. The Rensselaer project agreed to
terminate its Power Purchase and Supply Agreement after NIMO threatened to seize the
project under its power of eminent domain. NIMO and the Rensselaer project executed a
settlement agreement in 1998 with a payment to the project. On February 11, 2003, the
North Carolina Department of Revenue notified us that it had disallowed the exclusion of
gain from the settlement agreement between NIMO and the Rensselaer project. The State of
North Carolina assessed a tax of approximately $6 million, including penalties and
interest.



In
February 2006, we proposed a settlement to the North Carolina tax authority under which we
would pay $2.1 million as full settlement of this claim. This amount was fully reserved by
the Company during 2005. We are awaiting a response to our proposal.

# Legal Proceedings
involving Basin Resources, Inc.

Landowner
Claim

In
1998, Basin paid a landowner $48,000 to settle a claim that Basins operations had
caused subsidence that damaged his home. On March 22, 2001, the landowner filed a second
claim in Las Animas County Court, Colorado, again alleging that Basins operations
had caused subsidence that damaged his home. Basin contested this claim. In December 2002,
a judge of that court determined that subsidence had occurred and awarded the landowner
damages of $622,000 plus attorneys fees. We believe that this award was excessive,
in part because the landowners own expert placed the cost of repair below $100,000.
We also believe the settlement in the first case bars the second claim. We appealed to the
Colorado Intermediate Court of Appeals, which affirmed the lower courts decision on
November 17, 2005. We filed a motion for reconsideration on December 1, 2005. If the
motion for reconsideration is denied, we intend to appeal to the Colorado Supreme Court.

# Legal Proceedings
involving Westmoreland Coal Company, Westmoreland Resources, and/or Western Energy

| | Royalty
Claims by Minerals Management Service and Related Tax Claims by Montana Department of
Revenue
| | -----------------------------------------------------------------------------------------------------

The
Company acquired WECO from Montana Power Company in 2001. WECO produces coal from the
Rosebud Mine, which includes federal leases, a state lease and some privately owned leases
near Colstrip, Montana. The Rosebud Mine supplies coal to the four units of the adjacent
Colstrip Power Plant. In the late 1970s, a consortium of six utilities, including
Montana Power, entered into negotiations with WECO for the long-term supply of coal to
Units 3&4 of the Colstrip Plant, which would not be operational until 1984 and 1985,
respectively. The parties could not reach agreement on all the relevant terms of the coal
price and arbitration was commenced. The arbitration panel issued its opinion in 1980. As
a result of the arbitration order, Western Energy and the Colstrip owners entered into a
Coal Supply Agreement and a separate Coal Transportation Agreement. Under the Coal Supply
Agreement, the Colstrip Owners pay a price for the coal F.O.B. mine. Under the Coal
Transportation Agreement, the Colstrip Owners pay a separate fee for the transportation of
the coal from the mine to Colstrip Units 3&4 on a conveyor belt that was designed and
constructed by WECO and has been continuously operated and maintained by WECO.

In
2002, the State of Montana, as agent for the Minerals Management Service (MMS)
of the U.S. Department of the Interior, conducted an audit of the royalty payments made by
WECO on the production of coal from the federal leases. The audit covered two periods:
October 1991 through December 1995, and January 1996 through 2001. Based on these audits,
the Office of Minerals Revenue Management (MRM) of the Department of the
Interior issued orders directing WECO to pay royalties in the amount of $7.0 million on
the proceeds received from the Colstrip owners under the Coal Transportation Agreement
during the two audit periods. Both orders claimed that the payments for transportation
were deemed to be payments for the production of coal. Only the costs paid for coal
production are subject to the federal royalty, not payments for transportation.



WECO
appealed the orders of the MRM to the Directors of MMS. On March 28, 2005, the MMS issued
a decision stating that payments to WECO for transportation across the conveyor belt were
part of the purchase price of the coal and therefore subject to the royalty charged by the
federal government under the federal leases. However, the MMS dismissed the royalty claims
for periods more than seven years before the date of the order on the basis that the
statute of limitations had expired.

On
June 17, 2005, WECO appealed the decision of the MMS on the transportation charges to the
United States Department of the Interior, Office of Hearings and Appeals, Interior Board
of Land Appeals (IBLA). On September 6, 2005, the MMS filed its answer to
WECOs appeal.

The
total amount of the MMS royalty claims through the end of 2003 was approximately $5.0
million, including interest through the end of 2003. This amount, if payable, is subject
to interest through the date of payment.

In
2003, the State of Montana Department of Revenue (DOR) assessed state taxes
for years 1997 and 1998 on the transportation charges collected by WECO from the Colstrip
3&4 owners. The taxes are payable only if the transportation charges are considered
payments for the production of coal. The DOR is relying upon the same arguments used by
the MMS in its royalty claims. WECO has disputed the state tax claims. It is anticipated
that the state tax claims will be resolved following the outcome of WECOs appeal of
the MMS royalty claims or subsequent proceedings in federal court. The total of the state
tax claims through the end of 2003 was approximately $3.6 million. If this amount is
payable it is subject to interest from the time the tax payment was due.

The
MMS has asserted two other royalty claims against WECO. In 2002, the MMS held that
take or pay payments received by WECO during the period from October 1, 1991
to December 31, 1995 from two Colstrip 3&4 owners were subject to the federal royalty.
The MMS is claiming that these take or pay payments are payments for the
production of coal, notwithstanding that no coal was produced. WECO filed a notice of
appeal with MMS on October 22, 2002, disputing this royalty demand. No ruling has yet been
issued by MMS. The total amount of the royalty demand, including interest through August
2003, is approximately $2.7 million.

In
2004, the MMS issued a demand for a royalty payment in connection with a settlement
agreement dated February 21, 1997 between WECO and one of the Colstrip owners, Puget Sound
Energy. This settlement agreement reduced the coal price payable by Puget Sound as a
result of certain inequities caused by the fact that the mine owner at the
time, Montana Power, was also one of the Colstrip owners. The MMS has claimed that the
coal price reduction is subject to the federal royalty. WECO has appealed this demand to
the MMS, which has not yet ruled on the appeal. The amount of the royalty demand, with
interest through mid-2003, is approximately $1.3 million.



Finally,
in May 2005 the State of Montana asserted a demand for unpaid royalties on the state lease
for the period from January 1, 1996 through December 31, 2001. This demand, which was for
$0.6 million, is based on the same arguments as those used by the MMS in its claim for
payment of royalties on transportation charges and the 1997 retroactive
inequities adjustment of the coal price payable to Puget Sound.

Neither
the MMS nor the DOR has made royalty or tax demands for all periods during which WECO has
received payments for transportation of coal. Presumably, the royalty and tax demands for
periods after the years in disputegenerally, 1997 to 2001and future years will
be determined by the outcome of the pending proceedings. However, if the MMS and DOR were
to make demands for all periods through the present, including interest, the total amount
claimed against WECO, including the pending claims and interest thereon through the
present, could exceed $40 million.

We
believe that WECO has meritorious defenses against the royalty and tax demands made by the
MMS and the DOR. We expect a favorable ruling from the IBLA, although it could be a year
or more before the IBLA issues its decision. If the outcome is not favorable to Western
Energy, we will seek relief in Federal district court.

Moreover,
in the event of a final adverse outcome with DOR and MMS, we believe that certain of the
Companys customers are contractually obligated to reimburse the Company for any
royalties and taxes imposed on the Company, plus legal expenses.

Derivative Action brought by
Washington Group International, Inc., in connection with sales agency agreement

On
February 17, 2006, we were served with a complaint filed by Washington Group
International, Inc. in Colorado District Court, City and County of Denver. The defendants
in this legal action are Westmoreland Coal Company, Westmoreland Coal Sales Company,
Westmoreland Resources, Inc., and certain directors and officers of Westmoreland
Resources. Washington Group owns a 20% interest in Westmoreland Resources and the Company
owns the other 80%. This litigation relates to a coal sales agency agreement between
Westmoreland Resources and Westmoreland Coal Sales Company, a wholly owned subsidiary of
the Company that was entered into in January of 2002. Under this coal sales agency
agreement, Westmoreland Coal Sales Company agreed to act as agent for Westmoreland
Resources in marketing and selling Westmoreland Resources produced coal, in exchange
for an agency fee per ton sold. Washington Group objected to this fee and is now claiming
that the directors of Westmoreland Resources and its President breached their fiduciary
duty by granting an over-market agency fee to an affiliated company. The total amount in
dispute, if the fee were to be rescinded retroactively to 2002, is in the range of $1.2
million to $1.5 million. The Company intends to vigorously defend this action and strongly
believes that the directors and the President of Westmoreland Resources acted in good
faith and made a reasonable determination with respect to the agency fee. We further
believe that the sales agency fee reflected the market rate for marketing and selling
coal, as of 2002 and that Westmoreland Coal Sales Company provides significant value to
Westmoreland Resources for which it should be compensated at a market rate.

# Other

In
the ordinary course of our business, we and our subsidiaries are party to other legal
proceedings that are not material.



# ITEM 4  SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS

No
matter was submitted to a vote of the Companys stockholders during the fourth
quarter of 2005.



# Executive Officers of
the Registrant

The
following table shows the executive officers of the Company, their ages as of March 1,
2006, positions held and year of election to their present offices. No family
relationships exist among them. All of the officers are elected annually by the Board of
Directors and serve at the pleasure of the Board of Directors.

|                          |     |  |                                                    |           
|------------------------- | --- |  | -------------------------------------------------- | ----------
|Name                      | Age |  | Position                                           | Held Since
|                          |     |  |                                                    |           
|                          |     |  |                                                    |           
|Christopher K. Seglem (1) | 59  |  | Chairman of the Board,                             | 1996      
|                          |     |  | President and                                      | 1992      
|                          |     |  | Chief Executive Officer                            | 1993      
|                          |     |  |                                                    |           
|David J. Blair (2)        | 52  |  | Chief Financial Officer                            | 2005      
|                          |     |  |                                                    |           
|Roger D. Wiegley (3)      | 57  |  | General Counsel and Secretary                      | 2005      
|                          |     |  |                                                    |           
|Robert W. Holzwarth (4)   | 58  |  | Senior Vice President, Power                       | 2004      
|                          |     |  |                                                    |           
|                          |     |  |                                                    |           
|Todd A. Myers (5)         | 42  |  | Vice President, Sales and Marketing                | 2000      
|                          |     |  |                                                    |           
|John V. O'Laughlin (6)    | 54  |  | Vice President, Coal Operations                    | 2005      
|                          |     |  |                                                    |           
|Ronald H. Beck (7)        | 61  |  | Vice President, Finance and Treasurer,             | 2001      
|                          |     |  | Assistant Secretary                                | 2005      
|                          |     |  |                                                    |           
|Thomas G. Durham (8)      | 57  |  | Vice President, Planning and Engineering           | 2000      
|                          |     |  |                                                    |           
|Douglas P. Kathol (9)     | 53  |  | Vice President, Development                        | 2003      
|                          |     |  |                                                    |           
|Thomas M. Cirillo (10)    | 51  |  | Vice President, Administration                     | 2003      
|                          |     |  |                                                    |           
|Gregory S. Woods (11)     | 52  |  | Vice President, Eastern Operations                 | 2000      
|                          |     |  |                                                    |           
|Diane S. Jones (12)       | 47  |  | Vice President, Corporate Relations                | 2000      
|                          |     |  |                                                    |           
|Bronwen J. Turner (13)    | 51  |  | Vice President, Government and Community Relations | 2006      

|(1) |  | Mr.
Seglem was elected President and Chief Operating Officer in June 1992, and a
               Director of Westmoreland in December 1992. In June 1993, he was elected
Chief                Executive Officer, at which time he relinquished the position of
Chief Operating                Officer. In June 1996, he was elected Chairman of the
Board. He is a member of                the bar of Pennsylvania.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Mr.
Blair joined Westmoreland in April 2005. He joined Westmoreland after a
               seventeen year career with Nalco Chemical Company where he was most
recently                acting Chief Financial Officer for Ondeo Nalco Company, a global
specialty                chemical company.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Mr.
Wiegley joined Westmoreland in May 2005. Prior to joining Westmoreland he
               held legal positions with Credit Suisse Group from 1999 to 2005 and served
as                General Counsel for one of its affiliates. Mr. Wiegley served as
outside counsel                for Westmoreland from 1992 to 1996 while a partner with
Sidley Austin Brown                & Wood and later with Pillsbury Winthrop LLP.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Mr.
Holzwarth joined Westmoreland in November 2004. Prior to joining
               Westmoreland, he was Chief Executive Officer of United Energy, a
publicly-traded                utility in Australia. From 1993 to 2003 he was employed by
Aquila, Inc. in                various management positions, including from 1997 to 2000
as Vice President and                General Manager of Power Services and Generation, in
which capacity he managed                power plants capable of generating over 2,000 MW
of electricity, and from 2002                to 2003 as Chief Executive Officer of United
Energy, Australia, an electric                distribution utility serving 600,000
customers.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) |  | Mr.
Myers re-joined Westmoreland in January 2000 as Vice President Marketing and
               Business Development and in 2002 became Vice President Sales and
Marketing. He                originally joined Westmoreland in 1989 as a Market Analyst
and was promoted in                1991 to Manager of the Contract Administration
Department. He left Westmoreland                in 1994. Between 1994 and 2000, he was
Senior Consultant and Manager of the                environmental consulting group of a
nationally recognized energy consulting                firm, specializing in coal
markets, independent power development, and                environmental regulation.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Mr.
OLaughlin joined Westmoreland in February 2001 as Vice President,
               Mining, and was named President and General Manager of Dakota Westmoreland
               Corporation in March 2001. He later became President and General Manager
of                Western Energy Company and President of Texas Westmoreland Coal Company
and was                promoted to Vice President of Coal Operations for Westmoreland
Coal Company in                May 2005. Prior to joining Westmoreland Mr. OLaughlin
was with Morrison                Knudsen Corporations mining group for twenty-eight
years, most recently as                Vice President of Mine Operations which included
responsibility for the contract                mining services at the Absaloka Mine.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Mr.
Beck joined Westmoreland in July 2001 as Vice President  Finance and
               Treasurer. From September 2003 to April 2005, Mr. Beck also served as
Acting                Chief Financial Officer. He was appointed as Assistant Secretary in
April 2005.                Prior to joining Westmoreland he was a financial officer at
Columbus Energy                Corp. from 1985 to 2000, lastly as Vice President and
Chief Financial Officer.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | Mr.
Durham joined Westmoreland as Vice President, Coal Operations in April 2000
               and was named Vice President, Planning and Engineering in May 2005. For
the four                years prior to joining Westmoreland, he was a Vice President of
NorWest Mine                Services, Inc. which provides worldwide consulting services
on surface mining                and other projects. Mr. Durham has 30 years of surface
mine management and                operations experience with various mining companies.
He became a registered                professional engineer in 1976.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | Mr.
Kathol joined Westmoreland in August 2003 as Vice President, Development.
               Prior to joining Westmoreland, Mr. Kathol was Senior Vice President and
               principal with Norwest Corporation (1985 to 2003) a firm that provides
worldwide                consulting services to the mining and energy industries. Mr.
Kathol has held                senior financial positions with other mining companies.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) |  | Mr.
Cirillo joined Westmoreland in June 2002 as Director, Planning and
               Administration. Prior to joining Westmoreland, Mr. Cirillo held various
senior                positions in defense contracting following a twenty year career as
a U.S Navy                pilot. He was named Vice President, Administration in January
2003.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) |  | Mr.
Woods joined Westmoreland in May 1973 and held various corporate accounting
               and management information systems positions while at Westmorelands
               Virginia and West Virginia coal mining operations. Mr. Woods has been with
               Westmoreland Energy, LLC since 1990 and has held the positions of
Controller,                Asset Manager, and Vice President, Finance and Asset
Management. Mr. Woods was                elected to his current positions as Vice
President, Eastern Operations of                Westmoreland Coal Company in June 2000,
as Executive Vice President of                Westmoreland Energy, LLC in February 1997,
and as President of Westmoreland                Technical Services, Inc. in April 2001.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) |  | Ms.
Jones joined Westmoreland in March 1993 as Manager, Business Development of
               Westmoreland Energy, LLC and became Manager of Business Development and
               Corporate Relations for Westmoreland Coal Company in 1995. She was named
Vice                President Corporate Business Development and Corporate Relations in
2000 and                then named Vice President Corporate Relations in August 2003.
Prior to joining                Westmoreland, Ms. Jones held engineering and business
development positions in                the utility industry. She became a registered
professional engineer in 1985.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(13) |  | Ms.
Turner joined Westmoreland in August 2003 as Director, Government and
               Community Relations and was named Vice President, Corporate Government and
               Community Relations in January, 2006. Prior to joining Westmoreland she
was a                policy analyst for the Education Commission of the States and
director of                marketing and communications for Quark Inc. She has over 25
years experience in                various positions in marketing, communications and
public policy, including                representing communities impacted by energy
development.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

|ITEM 5 |  | MARKET FOR
REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
|------ | - | ------------------------------------------------------------------------------------------------------------

# Market Information:

The
following table shows the range of sales prices for the Companys common stock, par
value $2.50 per share (the Common Stock), and depositary shares, each
representing one quarter of a share of the Companys Series A Convertible
Exchangeable Preferred Stock, $1.00 par value per preferred share (the Depositary
Shares) for the past two years.

The
Common Stock and Depositary Shares are listed for trading on the American Stock Exchange
(AMEX) and the sales prices below were reported by the AMEX.

|               |              |                   |         |        
|-------------- | ------------ | ----------------- | ------- | -------
|               | Sales Prices
|               | Common Stock | Depositary Shares
|               |              |                   |         |        
|               | High         | Low               | High    | Low    
|               |              |                   |         |        
|2004           |              |                   |         |        
|First Quarter  | $ 19.29      | $ 15.99           | $ 42.00 | $ 36.75
|Second Quarter | 21.89        | 16.35             | 44.75   | 37.50  
|Third Quarter  | 30.32        | 19.25             | 52.75   | 42.25  
|Fourth Quarter | 31.25        | 22.06             | 57.75   | 45.50  
|               |              |                   |         |        
|2005           |              |                   |         |        
|First Quarter  | 33.65        | 24.26             | 59.00   | 48.50  
|Second Quarter | 25.80        | 16.92             | 49.25   | 38.00  
|Third Quarter  | 28.70        | 20.54             | 52.00   | 42.00  
|Fourth Quarter | 29.42        | 20.48             | 51.50   | 41.75  
|               |              |                   |         |        

# Approximate Number of
Equity Security Holders of Record:

|                                         |                            
|---------------------------------------- | ---------------------------
|                                         | Number of Holders of Record
|Title of Class                           | (as of March 1, 2006)      
|                                         |                            
|Common Stock ($2.50 par value)           | 1,395                      
|Depositary Shares, each representing     |                            
|one-quarter share of a share of Series A |                            
|Convertible Exchangeable Preferred       |                            
|Stock                                    | 16                         
|                                         |                            

# Dividends:

We
issued the Depositary Shares on July 19, 1992. Each Depositary Share represents
one-quarter of a share of our Series A Convertible Exchangeable Preferred Stock. We paid
quarterly dividends on the Depositary Shares until the third quarter of 1995, when we
suspended dividend payments pursuant to the requirements of Delaware law, described below.
We resumed dividends to preferred shareholders on October 1, 2002 as described below. The
quarterly dividends which are accumulated through and including January 1, 2006 amount to
$17.2 million in the aggregate ($84.03 per preferred share or $21.01 per Depositary
Share). We cannot pay dividends on our common stock until we pay the accumulated preferred
dividends in full.



There
are statutory restrictions limiting the payment of preferred stock dividends under
Delaware law, the state in which we are incorporated. Under Delaware law, we are permitted
to pay preferred stock dividends only: (1) out of surplus, surplus being the amount of
shareholders equity in excess of the par value of our two classes of stock; or (2)
in the event there is no surplus, out of net profits for the fiscal year in which a
preferred stock dividend is declared (and/or out of net profits from the preceding fiscal
year), but only to the extent that shareholders equity exceeds the par value of the
preferred stock (which par value was $205,000 at December 31, 2005). The par value of all
outstanding shares of preferred stock and shares of common stock aggregated $21.2 million
at December 31, 2005. Upon completion of the restatement of its prior period financial
statements, as described in this Amendment No. 1 to the 2005 Annual Report on Form 10-K,
the Company is currently reporting a deficit in shareholders equity of $10.2
million. As a result, the Company is prohibited from paying preferred stock dividends in
the future.

Our
Board regularly considers issues affecting our preferred shareholders, including current
dividends and the accumulated amount. Our Board is committed to meeting its obligations to
the preferred shareholders in a manner consistent with the best interests of all
shareholders. Quarterly dividends of $0.15 per Depositary Share were paid beginning on
October 1, 2002; we increased the dividend to $0.20 per Depositary Share beginning on
October 1, 2003, and further increased the dividend to $0.25 per Depositary Share on
October 1, 2004.

On
August 9, 2002, our Board of Directors authorized the repurchase of up to 10% of the
outstanding Depositary Shares on the open market or in privately negotiated transactions
with institutional and accredited investors between then and the end of 2004. The timing
and amount of Depositary Shares repurchased was determined by our management based on its
evaluation of our capital resources, the price of the Depositary Shares offered to us and
other factors. We converted acquired Depositary Shares into shares of Series A Convertible
Exchangeable Preferred Stock and retired the preferred shares. During the Depositary Share
purchase program, we purchased a total of 14,500 Depositary Shares for an aggregate
consideration of $457,000. This purchase program terminated on December 31, 2004.

These
programs reflect our continuing commitment to our preferred shareholders.

Information
regarding the Companys equity compensation plans and the securities authorized for
issuance thereunder is incorporated by reference in Item 12 below.



|ITEM 6 |  | SELECTED
FINANCIAL DATA
|------ | - | -----------------------

|Westmoreland Coal Company and SubsidiariesFive-Year Review                  
|----------------------------------------------------------------------------
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Consolidated Statements of Operations Information                           
|Revenue  Coal                                                              
| Independent power and other                                               
|                                                                            
|Total revenues                                                              
|Cost and expenses                                                           
|                                                                            
|Operating income from continuing operations                                 
|Interest expense                                                            
|Minority interest                                                           
|Interest and other income                                                   
|                                                                            
|                                                                            
|Income (loss) from continuing operations     before  income taxes           
|Income tax benefit (expense) from continuing operations                     
|                                                                            
|Net income (loss) from continuing operations                                
|Income (loss) from discontinued operations                                  
|                                                                            
|Net income (loss) before cumulative effect of change in accounting principle
|                                                                            
|Cumulative effect of change in accounting principle, net                    
|                                                                            
|Net income (loss)                                                           
|                                                                            
|Less preferred stock dividend requirements                                  
|                                                                            
|                                                                            
|Net income (loss) applicable to common shareholders                         
|                                                                            
|Net income (loss) per share applicable to common shareholders:              
|Basic                                                                       
|Diluted                                                                     
|Weighted average number of common shares outstanding:                       
|Basic                                                                       
|Basic                                                                       
|                                                                            
|Balance Sheet Information                                                   
|Working capital                                                             
|Net property, plant and equipment                                           
|Total assets                                                                
|Total debt                                                                  
|Shareholders' equity (deficit)                                              
|                                                                            

|(1) |  | Effective
April 30, 2001, the Company acquired the operating coal business of
               Montana Power and the coal assets of Knife River Corporation.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 7 |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|------ | - | -------------------------------------------------------------------------------------

# Restatement

The
Company is filing herein an amendment to its 2005 Annual Report on Form 10-K to restate
its consolidated financial statements as of December 31, 2005 and 2004 and for the years
ended December 31, 2005, 2004 and 2003, and selected financial information for the years
2001 to 2005. The consolidated balance sheets and statements of operations have been
restated to correct errors in the Companys accounting for income taxes, its
accounting for asset retirement obligations and the classification of restricted cash. The
restatement adjustments had no effect on the cash flows of the Company for any of the
periods presented.

State
Income Tax Expense

During
the process of preparing financial statements for the first quarter of 2006, the Company
reviewed its accounting practices with respect to income taxes and determined that its
accounting for income taxes was not in compliance with Financial Accounting Standards
Board Standard No. 109, Accounting for Income Taxes. We discovered an
error in our tax provision for 2005 relating to a $2.1 million provision for a North
Carolina state income tax assessment, which had originally been recorded in the third
quarter of 2005. The provision was inadvertently omitted from the calculation of the
full-year 2005 income tax expense. The error resulted in an understatement of income tax
expense and net loss for the year ended December 31, 2005 of $2.1 million.

# Valuation Allowance for
Deferred Tax Assets

As
a result of the identification of this state income tax error, the Company, in conjunction
with its external tax advisors, completed a review of its accounting for income taxes for
2005 and prior years. This included a review of the calculations and assumptions
originally used in estimating the amount of benefit expected to be derived from the
utilization of its net operating loss carryforwards, alternative minimum tax
(AMT) credit carryforwards, and net deductible temporary differences.

In
connection with this review, the Company has determined that such tax benefits should have
been evaluated for utilization assuming the Company will be subject to the alternative
minimum tax system, rather than the regular income tax system, for the foreseeable future.
The Company believes it will be taxed under the alternative minimum tax system for the
foreseeable future due to significant statutory tax depletion in excess of book depletion
expected to be generated by its mining operations. As a result, the Company has determined
that a valuation allowance should have been recorded for all of its regular net operating
loss carryforwards, since they are not available to reduce alternative minimum taxable
income in the future.The Company has also determined that a full valuation
allowance should have been recorded for all its alternative minimum tax credit
carryforwards, since they are only available to offset future regular income taxes
payable. In addition, the Company has determined that since its net deductible temporary
differences will not reverse for the foreseeable future, a full valuation allowance should
have been recorded for these deferred tax assets. These errors resulted in an
overstatement of income tax benefit and an understatement of net loss of $12.4 million,
$7.8 million and $9.7 million for the years ended December 31, 2005, 2004 and 2003,
respectively, including the income tax expense attributable to the cumulative effect of
changes in accounting principles recorded in 2005 and 2003 of $1.1 million and $0.1
million, respectively.



The
purchase price allocation prepared in connection with the 2001 acquisition of Westmoreland
Mining LLC (WML) included an allocation for the benefits expected to be
derived from the Companys existing deferred income tax assets, including the
Companys net operating loss carryforwards, using regular income tax rates. As
a result of the Companys determination that it should have evaluated utilization of
such tax benefits assuming the Company will be subject to the alternative minimum tax for
the foreseeable future, the Company retroactively adjusted the purchase price allocation
for the WML acquisition.

This
adjustment resulted in the elimination of the $55.6 million net deferred income tax asset
recognized as part of the purchase price allocation for the acquisition in 2001, with a
corresponding increase in property, plant and equipment. The additional amount allocated
to property, plant and equipment is being amortized over the life of the mines acquired,
resulting in adjustments to previously reported depreciation, depletion and amortization
expense in each period since the date of the acquisition. The error resulted in an
understatement of depreciation, depletion and amortization expense and net loss of $3.7
million for each of the years ended December 31, 2005, 2004 and 2003.

# Asset Retirement
Obligations

During
2005, the Company identified an error in the calculation of the asset retirement
obligation for one of the Companys mines. The error resulted in an overstatement of
the asset retirement obligation, the related asset retirement asset, and the related
contractual third party reclamation receivable. The error affected the amount of
amortization recorded for the asset retirement asset in 2003, 2004 and 2005 and the amount
of accretion of the asset retirement liability recorded in those years. Adjustments were
recorded to correct the asset retirement liability at December 31, 2004, and the amount of
amortization and accretion recorded in the fourth quarter of the year ended December 31,
2005, with a corresponding adjustment to the asset retirement assets for this mine. The
financial statements are also being restated to reflect the known error in the amount of
amortization and accretion expense recorded in the first three quarters of 2005 and in
2004 and 2003, which had not previously been recorded in the financial statements for
those years. The error resulted in an overstatement (understatement) of amortization
expense of ($0.2) million, $0.3 million, and $0.1 million, an overstatement of accretion
expense of $1.3 million, $0.2 million and $0.1 million, and an overstatement of the net
loss of $1.1 million, $0.5 million and $0.2 million, for the years ended December 31,
2005, 2004, and 2003, respectively.

# Revenue Recognition

In
connection with the restatement process, the Company also identified an error in the
accounting treatment afforded certain payments received from one of its customers under an
amendment to their coal supply agreement. The original agreement provided that the
customer was responsible for its share of the final reclamation costs of the area of the
mine from which the coal it purchased was produced. The amendment to the coal supply
agreement entered into in 2003 provided that the customer was to pay the Company its share
of these costs on a per ton basis as the coal was delivered. A portion of the payments
received in 2005 and 2004 and subsequent to the amendment in 2003, were inadvertently
recorded as revenue, with a corresponding increase in the associated asset retirement
asset. The error resulted in an overstatement of revenue and an understatement of net loss
of $0.9 million, $0.6 million, and $0.1 million for the years ended December 31, 2005,
2004 and 2003, respectively.



# Classification of
Restricted Cash

Also
in connection with the restatement process, the Company determined that restricted cash
held in a debt service fund should have been classified as a non-current asset. The error
resulted in an overstatement of restricted cash classified as a current asset and total
current assets at December 31, 2005 and 2004 of $10.0 million and $9.8 million,
respectively, with a corresponding understatement of restricted cash classified as a
non-current asset.

The following table shows the
adjustments to our originally filed consolidated statements of operations to correct the
errors described above:

|                                                                                                                                                          | For years ended December 31,
|--------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------
|                                                                                                                                                          |                             
|                                                                                                                                                          |                             
|                                                                                                                                                          |                             
|                                                                                                                                                          | (In thousands)              
|Net income applicable to common shareholders, as previously reported                                                                                      | $                           
|                                                                                                                                                          |                             
|Decrease in income tax benefit as a result of the increase in valuation
allowance for net deferred tax assets                                             |                             
|                                                                                                                                                          |                             
|Increase in income tax expense for North
Carolina assessment                                                                                              |                             
|                                                                                                                                                          |                             
|Increase in depreciation, depletion, and amortization as a result of retroactive
adjustment to property, plant, and equipment acquired in WML acquisition |                             
|                                                                                                                                                          |                             
|Decrease in cumulative effect of change in accounting for asset retirement
obligations                                                                    |                             
|                                                                                                                                                          |                             
|Decrease in revenue as a result of adjustment related to payments
received from customer                                                                  |                             
|                                                                                                                                                          |                             
|Decrease (increase) in amortization expense as a result
of adjustments to asset retirement assets                                                         |                             
|                                                                                                                                                          |                             
|Decrease in accretion expense as a
result of adjustments to asset retirement obligations                                                                  |                             
|                                                                                                                                                          |                             
|Total adjustments                                                                                                                                         |                             
|                                                                                                                                                          |                             
|Net income (loss) applicable to common shareholders, as restated                                                                                          | $                           
|                                                                                                                                                          |                             

After
discussion with our Audit Committee and our independent registered public accounting firm,
management recommended to the Audit Committee that previously reported financial results
be restated. The Audit Committee agreed with this recommendation. This Amendment No. 1 to
Form 10-K restates our previously issued consolidated balance sheets as of December 31,
2005 and 2004, our consolidated statements of operations and stockholders equity and
comprehensive income for each of the years ended December 31, 2005, 2004 and 2003, and our
interim quarterly periods in 2005 and 2004 to correct our accounting for income taxes and
asset retirement obligations. Restated selected financial data for 2002 and 2001 are also
presented in this Amendment No. 1 to Form 10-K.



We
also identified three additional material weaknesses, as described in Item 9A 
Controls and Procedures. The first material weakness relates to the Company lacking
personnel with adequate expertise in accounting for income taxes. The second material
weakness relates to the Company not having a sufficiently detailed management review at
one of its mines of the accounting for payments received under its coal sales contracts.
The third material weakness relates to the Company not having sufficiently detailed review
over financial reporting.

Effects of Restatement

The following table sets forth the
effects of the restatement on affected line items within our previously reported
Statements of Operations for the years 2005, 2004, 2003, 2002, and 2001:

|Effects on Statements of Operations                 |                                       |          | For years ended December 31,
|--------------------------------------------------- | ------------------------------------- | -------- | ----------------------------
|                                                    |                                       |          |                             
|                                                    |                                       | Total    |                             
|                                                    |                                       |          |                             
|                                                    | (In thousands; except per share data)
|Revenue                                             | $                                     | (1,683)  | $                           
|Costs and Expenses:                                 |                                       |          |                             
|Depreciation, depletion, and amortization           |                                       | (17,007) |                             
|Cost of sales - coal                                |                                       | 1,497    |                             
|Income tax benefit (expense)                        |                                       | (39,361) |                             
|Cumulative effect of change in accounting principle |                                       | 882      |                             
|                                                    |                                       |          |                             
|Change in net earnings (loss)                       | $                                     | (55,672) | $                           
|                                                    |                                      

|                              |  |  |   | 2005   |   | 2004   |   | 2003   |   | 2002   |   | 2001  
|----------------------------- |  |  | - | ------ | - | ------ | - | ------ | - | ------ | - | ------
|                              |  |  |   |        |   |        |   |        |   |        |   |       
|Effect on per share amounts : |  |  |   |        |   |        |   |        |   |        |   |       
|Basic, as reported            |  |  | $ | 1.25   | $ | 0.34   | $ | 1.39   | $ | 1.10   | $ | 0.48  
|Adjustment                    |  |  |   | (2.18) |   | (1.45) |   | (1.75) |   | (1.23) |   | (0.41)
|                              |  |  |   |        |   |        |   |        |   |        |   |       
|Basic, as restated            |  |  | $ | (0.93) | $ | (1.11) | $ | (0.36) | $ | (0.13) | $ | 0.07  
|                              |  |  |  
|                              |  |  |   |        |   |        |   |        |   |        |   |       
|Diluted, as reported          |  |  | $ | 1.17   | $ | 0.31   | $ | 1.30   | $ | 1.03   | $ | 0.43  
|Adjustment                    |  |  |   | (2.10) |   | (1.42) |   | (1.66) |   | (1.16) |   | (0.37)
|                              |  |  |   |        |   |        |   |        |   |        |   |       
|Diluted, as restated          |  |  | $ | (0.93) | $ | (1.11) | $ | (0.36) | $ | (0.13) | $ | 0.06  
|                              |  |  |  



The following table sets forth the
effects of the restatement on affected line items within our previously reported
Statements of Operations for each of the quarters in the year 2005:

|Effects on Quarterly Statements of Operations       |                                       |          | 2005
|--------------------------------------------------- | ------------------------------------- | -------- | ----
|                                                    |                                       |          |     
|                                                    |                                       | Total    |     
|                                                    |                                       |          |     
|                                                    | (In thousands; except per share data)
|Revenue                                             | $                                     | (946)    | $   
|Costs and Expenses:                                 |                                       |          |     
|Depreciation, depletion, and amortization           |                                       | (3,863)  |     
|Cost of sales - coal                                |                                       | 1,264    |     
|Income tax benefit (expense)                        |                                       | (15,564) |     
|Cumulative effect of change in accounting principle |                                       | 1,065    |     
|                                                    |                                       |          |     
|Change in net earnings (loss)                       | $                                     | (18,044) | $   
|                                                    |                                      

|                              |  |  |   | FirstQuarter |   | SecondQuarter |   | ThirdQuarter |   | FourthQuarter
|----------------------------- |  |  | - | ------------ | - | ------------- | - | ------------ | - | -------------
|                              |  |  |   |              |   |               |   |              |   |              
|Effect on per share amounts : |  |  |   |              |   |               |   |              |   |              
|Basic, as reported            |  |  | $ | 0.77         | $ | (0.48)        | $ | (0.42)       | $ | 1.38         
|Adjustment                    |  |  |   | (0.49)       |   | (0.33)        |   | (0.53)       |   | (0.82)       
|                              |  |  |   |              |   |               |   |              |   |              
|Basic, as restated            |  |  | $ | 0.28         | $ | (0.81)        | $ | (0.95)       | $ | 0.56         
|                              |  |  |  
|                              |  |  |   |              |   |               |   |              |   |              
|Diluted, as reported          |  |  | $ | 0.71         | $ | (0.48)        | $ | (0.42)       | $ | 1.29         
|Adjustment                    |  |  |   | (0.46)       |   | (0.33)        |   | (0.53)       |   | (0.77)       
|                              |  |  |   |              |   |               |   |              |   |              
|Diluted, as restated          |  |  | $ | 0.25         | $ | (0.81)        | $ | (0.95)       | $ | 0.52         
|                              |  |  |  



The following table sets forth the
effects of the restatement on affected line items within our previously reported
Statements of Operations for each of the quarters in the year 2004:

|Effects on Quarterly Statements of Operations |                                       |          | 2004
|--------------------------------------------- | ------------------------------------- | -------- | ----
|                                              |                                       |          |     
|                                              |                                       | Total    |     
|                                              |                                       |          |     
|                                              | (In thousands; except per share data)
|Revenue                                       | $                                     | (643)    | $   
|Costs and Expenses:                           |                                       |          |     
|Depreciation, depletion, and amortization     |                                       | (3,403)  |     
|Cost of sales - coal                          |                                       | 169      |     
|Income tax benefit (expense)                  |                                       | (7,830)  |     
|                                              |                                       |          |     
|Change in net earnings (loss)                 | $                                     | (11,707) | $   
|                                              |                                      

|                              |  |  |   | FirstQuarter |   | SecondQuarter |   | ThirdQuarter |   | FourthQuarter
|----------------------------- |  |  | - | ------------ | - | ------------- | - | ------------ | - | -------------
|                              |  |  |   |              |   |               |   |              |   |              
|Effect on per share amounts : |  |  |   |              |   |               |   |              |   |              
|Basic, as reported            |  |  | $ | 0.26         | $ | 0.54          | $ | 0.10         | $ | (0.56)       
|Adjustment                    |  |  |   | (0.25)       |   | (0.40)        |   | (0.35)       |   | (0.44)       
|                              |  |  |   |              |   |               |   |              |   |              
|Basic, as restated            |  |  | $ | 0.01         | $ | 0.14          | $ | (0.25)       | $ | (1.00)       
|                              |  |  |  
|                              |  |  |   |              |   |               |   |              |   |              
|Diluted, as reported          |  |  | $ | 0.25         | $ | 0.51          | $ | 0.09         | $ | (0.56)       
|Adjustment                    |  |  |   | (0.24)       |   | (0.38)        |   | (0.34)       |   | (0.44)       
|                              |  |  |   |              |   |               |   |              |   |              
|Diluted, as restated          |  |  | $ | 0.01         | $ | 0.13          | $ | (0.25)       | $ | (1.00)       
|                              |  |  |  

# Forward-Looking
Disclaimer

Please
keep the Forward-Looking Disclaimer on page 6 in mind as you review the following
discussion and analysis.

# Overview

Competitive,
economic and industry factors

We
are an energy company. We mine coal, which is used to produce electric power, and we own
interests in power-generating plants. All of our five mines supply baseloaded power
plants. Several of these power plants are located adjacent to our mines and we sell
virtually all our coal under long-term contracts. Consequently, our mines enjoy relatively
stable demand and pricing compared to competitors who sell more of their production on the
spot market. We also earned royalties for the production of coalbed methane gas from the
first quarter of 2004 until early in 2006.

In
partnership with others, we have developed eight independent power projects totaling 866
MW of generating capacity. We have sold our interests in five of those projects. We
currently own a 50% interest in the ROVA I and II coal-fired plants, which have a total
generating capacity of 230 MW. We also retain a 4.49% interest in the gas-fired Fort
Lupton Project, which has a generating capacity of 290 MW and provides peaking power to
the local utility. The ROVA Project, which accounted for 96% of our equity in earnings
from independent power in 2005, is baseloaded and supplies power pursuant to long-term
contracts.



According
to the 2005 Annual Energy Outlook prepared by the EIA, approximately 50% of all
electricity generated in the United States in 2004 was produced by coal-fired units. The
EIA projects that the demand for coal used to generate electricity will increase 1.5% per
year from 2004 through 2025. Consequently, we believe that the demand for coal will grow,
in part because coal is the lowest cost fossil-fuel used for generating baseload electric
power.

Revenues
and expenses; sources and uses of cash

In
2005, $28.5 million of our operating income (as restated, note 2) came from coal
operations, and $10.7 million came from independent power projects. This income was mostly
offset by $38.5 million of expenses in the corporate segment for our heritage health
benefit expenses and selling, general and administrative expenses.

In
2001, in order to finance the purchase of the Rosebud, Jewett, Beulah, and Savage Mines,
Westmoreland Mining borrowed $120 million from institutional lenders under a term loan
agreement. By the end of 2005, Westmoreland Mining had repaid $52.1 million of that $120
million and deposited an additional $22.2 million into two restricted accounts for the
benefit of its lenders. In early March 2004, Westmoreland Mining made arrangements to
borrow an additional $35 million from the lenders pursuant to what we call the add-on
facility. Westmoreland Mining borrowed $20.4 million immediately and the additional $14.6
million in December 2004. The add-on facility permits Westmoreland Mining to undertake
certain significant capital projects in the near term without adversely affecting cash
available to us. We may also seek additional capital in 2006 for general corporate
purposes and to support our growth and development strategy.

# Meeting Our Commitment
to Preferred Stockholders

We
remain committed to meeting our obligation for accumulated dividends to our preferred
stockholders. Due to legal and business constraints, no dividends were declared from the
third quarter of 1995 until 2002. On October 1, 2002 and for the following three quarters,
a partial dividend of $0.15 per Depositary Share was paid. In October 2003 and October
2004, the quarterly dividend was increased to $0.20 and $0.25, respectively. As of January
1, 2006, $17.2 million of arrearages had accumulated ($84.03 per preferred share or $21.01
per Depositary Share). A quarterly dividend of $0.25 per Depositary Share will be paid on
April 1, 2006, to stockholders of record on March 17, 2006. The accumulated amount will
continue to increase until we pay quarterly dividends of $0.53 per Depositary Share.

Upon
completion of the restatement of its prior period financial statements, as described in
Amendment No. 1 to its Annual Report on Form 10-K, the Company is currently reporting a
deficit in shareholders equity. As a result, the Company is prohibited from paying
preferred stock dividends in the future, because of the statutory restrictions limiting
the payment of preferred stock dividends under Delaware law, the state in which the
Company is incorporated. Under Delaware law, the Company is permitted to pay preferred
stock dividends only to the extent that shareholders equity exceeds the par value
of the preferred stock ($205,000 at December 31, 2006).

# Challenges

We
believe that our principal challenges today include the following:

| |  |  |  | re-determining
sales prices with our customers to reflect significantly higher market prices and
commodity and production                costs;
| |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | addressing
the potential impact of limited availability of tires for heavy equipment used at our
mines;
| |  | - |  | -------------------------------------------------------------------------------------------------------



| |  |  |  | high
ongoing heritage health benefit expenses associated with inflation in medical costs,
potentially longer life expectancies for retirees and active employees and the failure of
the UMWA Health and Benefit Fund to manage those costs;
| |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | maintaining
and collateralizing, where necessary, our Coal Act and reclamation bonds;
| |  | - |  | -------------------------------------------------------------------------------------

| |  |  |  | funding
required contributions to pension plans that are underfunded at the end of 2005;
| |  | - |  | ----------------------------------------------------------------------------------------

| |  |  |  | providing
adequate capital for on-going operations and our growth initiatives;
| |  | - |  | ------------------------------------------------------------------------------

| |  |  |  | completing
the acquisition of LG&E's 50% interest in the ROVA Project and obtaining the necessary
financing;
| |  | - |  | ------------------------------------------------------------------------------------------------------------

| |  |  |  | implementation
of a new company-wide computer system to support our mining and corporate segments;
| |  | - |  | --------------------------------------------------------------------------------------------------

| |  |  |  | integration
of new personnel, especially in the area of finance and accounting;
| |  | - |  | -------------------------------------------------------------------------------

| |  |  |  | new
environmental regulations, which have the potential to significantly reduce sales from
our mines; and
| |  | - |  | ---------------------------------------------------------------------------------------------------------

| |  |  |  | claims
for potential taxes and royalties asserted by various governmental entities.
| |  | - |  | -----------------------------------------------------------------------------------

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.

# Internal Control over
Financial Reporting

We
had five material weaknesses in internal control over financial reporting in 2005. In
connection with the audit of our 2005 financial statements, we identified matters
involving our internal controls over financial reporting that constituted material
weaknesses as defined by the Public Company Accounting Oversight Board in Auditing
Standard No. 2, pursuant to which:

| |  |  |  | material
weaknesses are defined as a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material misstatement
of the annual or interim financial statements will not be prevented or detected; and
| |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | a
significant deficiency is a control deficiency, or combination of control deficiencies,
that adversely affects our ability to initiate, authorize, record, process, or report
external financial data reliably in accordance with generally accepted accounting
principles such that there is more than a remote likelihood that a misstatement of our
annual or interim financial statements that is more than inconsequential will not be
prevented or detected.
| |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
are committed to maintaining effective internal control over financial reporting to
provide reasonable assurance regarding the reliability of our financial reporting and the
preparation of financial statements for external purposes in accordance with GAAP. Our
accounting personnel report regularly to our audit committee on all accounting and
financial matters. In addition, our audit committee actively communicates with and
oversees the engagement of our independent registered public accounting firm.



We
describe the actions that we have taken in response to the identification of the material
weakness in more detail in Item 9A  Controls and Procedures.

We
believe we have remediated the two material weakness that were identified in March 2006, in
connection with the preparation of the Form 10-K and have a plan in place to remediate the
three weakness associated with our recent financial statement restatement. However, we
cannot assure you that additional significant deficiencies or material weaknesses in our
internal control over financial reporting will not be identified in the future. Failure to
implement and maintain effective internal control over financial reporting could result in
material misstatements in our financial statements. See Item 1A, Risk Factors.

# Critical Accounting
Estimates and Related Matters

Our
discussion and analysis of financial condition, results of operations, liquidity and
capital resources is based on our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. Generally
accepted accounting principles require that we make estimates and judgments. We base our
estimates on historical experience and on various other assumptions that we believe are
reasonable under the circumstances. Actual results may differ materially from these
estimates.

We
have made significant judgments and estimates in connection with the following accounting
matters. Our senior management has discussed the development, selection and disclosure of
the accounting estimates in the section below with the Audit Committee of our Board of
Directors.

In
connection with our discussion of these critical accounting matters, and in order to
reduce repetition, we also use this section to present information related to these
judgments and estimates.

Postretirement
Benefits and Pension Obligations

Our
most significant long-term obligations are the obligations to provide postretirement
medical benefits, pension benefits, workers compensation and pneumoconiosis (black
lung) benefits. We provide these benefits to our current and former employees and their
dependents. See Notes 6, 7, 8, 9 and 10 to the Consolidated Financial Statements for
current information about these assumptions, estimates, and obligations.

Estimates
and Judgments

We
estimate the total amount of these obligations with the help of third party professionals
using actuarial assumptions and information. Our estimates are sensitive to judgments we
make about the discount rate, about the rate of inflation in medical costs, about
mortality rates, and about the Medicare Prescription Drug Improvement and Modernization
Act of 2003 or Medicare Reform Act. We review these estimates and obligations at least
annually.



We
pay these obligations currently and will have continuing obligations for future periods.
Under generally accepted accounting principles, we are required to estimate the present
value of these obligations. In order to do this, we make a judgment about the discount
rate, which is an estimate about the current interest rate at which these obligations
could be effectively settled on the date we estimate them. Significant changes to interest
rates result in substantial volatility to our financial statements by influencing our
estimate of these amounts. The recent trend of decreasing discount rates has significantly
increased the present value of our obligations and our reported costs.

In
order to estimate the total cost of our obligation to provide medical benefits, we must
make a judgment about the rate of inflation in medical costs. As our estimate of the rate
of inflation of medical costs increases, our calculation of the total cost of providing
these benefits increases.

Our
accruals for postretirement medical, pension, workers compensation and black lung
benefits are also affected by the mortality rate of the population for which we provide
benefits. As people live longer, the cost of providing these benefits increases. However,
the number of assigned beneficiaries for our Company under the Coal Act is fixed, since we
discontinued our eastern underground operations, and the primary beneficiaries are
elderly.

Related
Information

Actuarial
valuations project that our retiree health benefit costs for current employees and
retirees will continue at the current level in the near term and then decline to zero over
the next approximately sixty years as the number of eligible beneficiaries declines.

We
expect to incur lower cash payments for workers compensation benefits in 2006 than
in 2005 and expect that amount to decline over time. We anticipate that these payments
will decline because we are no longer self-insured for workers compensation benefits
and have had no new claimants since 1995.

We
do not pay pension or black lung benefits directly. These benefits are paid from trusts
that we established and funded. As of December 31, 2005, our pension trusts were
underfunded by $25.8 million, and we expect to contribute approximately $1.4 million to
these trusts in 2006. As of December 31, 2005, our black lung trust was overfunded by $7.5
million, and we do not expect to be required to make additional contributions to this
trust.

The
Coal Act, passed in 1992, established three benefit plans.

| |  |  |  | First,
the statute merged the UMWA 1950 and 1974 Plans into the CBF. The CBF provides benefits
to a closed pool of beneficiaries, retirees who were actually receiving benefits from
either the 1950 or 1974 Plan as of July 20, 1992. The Coal Act requires that the
benefits provided to this group remain substantially the same as provided by the 1950 and
1974 Plans as of January 1, 1992. This group is essentially Medicare-eligible and
the CBF supplements the benefits this group receives under Medicare.
| |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | Second,
the Coal Act requires companies that had established individual employer plans, or IEPs,
pursuant to prior collective bargaining agreements to maintain those IEPs and provide the
beneficiaries a level of benefits substantially the same as they received as of January 1,
1992. The beneficiaries of these statutorily-required IEPs are retirees meeting age and
service requirements as of February 1, 1993 and who actually retired before September 30,
1994.
| |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  |  | Third,
the Coal Act established the 1992 UMWA Benefit Plan which serves three distinct
populations: miners who were eligible to retire as of February 1, 1993 and actually
retired before September 30, 1992 and whose employers are no longer in business;
miners receiving benefits under an IEP but whose former employer went out of business;
and new spouses or new dependants of retirees in the CBF.
| |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As
required by the Coal Act, we maintain an IEP for our own retirees, and we pay premiums
that cover a portion of the retired miners whose previous employers have gone out of
business.

In
addition, and separate from the Coal Act, we continue to provide benefits under another
IEP to a smaller group of former UMWA employees who retired under our last collective
bargaining agreement, which ended in 1998.

One
of the estimates we have made relates to the implementation of the Medicare Reform Act. As
provided for under that Act, we recognized a benefit to our anticipated future
prescription drug costs for retirees and their dependents in 2003 based on a coordinated
implementation of the Medicare Reform Act and our existing benefit programs, including the
UMWA 1992 Plan. In 2005, the government issued regulations which made the subsidy approach
the only practical alternative given our existing programs. In October 2005, we adopted
the subsidy approach for 2006. The subsidy approach will limit our annual benefit to 28%
(to a maximum of $1,330/participant) of actual costs. A revised actuarial analysis reduced
the projected net present value benefit to us from the Medicare Reform Act as reflected in
our Postretirement medical obligations, but caused a higher resultant future annual
expense of approximately $1.3 million compared to what we had previously anticipated with
a coordinated benefits approach.

Asset
Retirement Obligations, Reclamation Costs and Reserve Estimates

Asset
retirement obligations primarily relate to the closure of mines and the reclamation of
land upon cessation of mining. We account for reclamation costs, along with other costs
related to mine closure, in accordance with Statement of Financial Accounting Standards
No. 143  Asset Retirement Obligations or SFAS No. 143, which we adopted on January
1, 2003. This statement requires us to recognize the fair value of an asset retirement
obligation in the period in which we incur that obligation. We capitalize the present
value of our estimated asset retirement costs as part of the carrying amount of our
long-lived assets.

Certain
of the Companys customers have either agreed to reimburse the Company for
reclamation expenditures as they are incurred or have pre-funded a portion of the expected
reclamation costs. These funds will serve as sources for use in final reclamation
activities.

The
liability Asset retirement obligations on our consolidated balance sheet
represents our estimate of the present value of the cost of closing our mines and
reclaiming land that has been disturbed by mining. This liability increases as land is
mined and decreases as reclamation work is performed and cash expended. The asset,
Property, plant and equipment  capitalized asset retirement costs,
remains constant until new liabilities are incurred or old liabilities are re-estimated.
We estimate the future costs of reclamation using standards for mine reclamation that have
been established by the government agencies that regulate our operations as well as our
own experience in performing reclamation activities. These estimates can and do change.
Developments in our mining program also affect this estimate by influencing the timing of
reclamation expenditures.



Adopting
SFAS No. 143 significantly affected our financial statements. See the Summary of
Significant Accounting Policies to our Consolidated Financial Statements, which includes a
discussion of the effect on our financial statements of adopting SFAS No. 143. However,
the adoption of SFAS No. 143 did not affect our cash costs, because the annual cash
requirements for reclamation activities are the same using SFAS No. 143 and the
units-of-production accrual method, the accounting method we used prior to adopting SFAS
No. 143.

We
amortize our acquisition costs, development costs, capitalized asset retirement costs and
some plant and equipment using the units-of-production method and estimates of recoverable
proven and probable reserves. We review these estimates on a regular basis and adjust them
to reflect our current mining plans. The rate at which we record depletion also depends on
the estimates of our reserves. If the estimates of recoverable proven and probable
reserves decline, the rate at which we record depletion increases. Such a decline in
reserves may result from geological conditions, coal quality, effects of governmental,
environmental and tax regulations, and assumptions about future prices and future
operating costs.

See
Note 4 to the Consolidated Financial Statements for current information about these
obligations, costs and reserve estimates.

Deferred
Income Taxes

As
of December 31, 2005, we have significant deferred tax assets comprised of Federal and
State regular net operating losses (NOLs), alternative minimum tax
(AMT) NOLs, AMT credits and deductible temporary reversing differences related
to on-going differences between book and taxable income. We have reduced our deferred
income tax assets by a full valuation allowance. The valuation allowance is primarily an
estimate of the deferred tax assets that will more likely than not expire before they can
be realized in the future by our current operations existing as of December 31, 2005.
These estimates and judgments are reviewed annually and also when new, material events,
such as an acquisition, take place within the Company.

The
total of our net deductible temporary differences has been increasing each year primarily
because reclamation and postretirement medical and pension benefit expenses for book
purposes have exceeded deductions for tax purposes. Until a reversal of these temporary
differences occurs, or can be forecasted, and the company is reporting, or forecasts to
report, taxable income, the benefit of these deferred tax assets will not be recognized.

AMT
NOLs reduce the amount of benefit each year through reduced current income tax expense.

The
AMT credits that we accumulate do not expire. However their value has not been recognized,
and will not be recognized, until we can forecast paying regular income taxes and are
therefore able to use the credits. This will not occur until all of our regular NOLs are
used or expire and regular income tax exceeds the alternative minimum tax.



# Contractual Obligations
and Commitments

The
following table presents information about our contractual obligations and commitments as
of December 31, 2005. Some of the figures below are estimates. We discuss these
obligations and commitments elsewhere in this filing.

|                                       | Payments Due by Period(in thousands of dollars)
|-------------------------------------- | -----------------------------------------------
|Contractual Obligationsand Commitments | Total                                          
|Westmoreland Mining term debt (1)      | 102,900                                        
|Other debt                             | 9,343                                          
|Interest on debt (2)                   | 28,320                                         
|Operating leases                       | 8,538                                          
|Workers' compensation                  | 9,343                                          
|Combined Benefit Fund(Multiemployer)   | 34,141 (3)                                     
|Postretirement medical                 | 274,047 (4)                                    
|Qualified pension benefits             | 65,916 (5)                                     
|SERP benefits                          | 2,409 (6)                                      
|Pneumoconiosis                         | 16,879 (7)                                     
|Reclamation costs                      | 396,096 (8)                                    
|Preferred dividends                    | 17,232 (9)                                     

| |  | (1) |  | At
December 31, 2005, Westmoreland Mining had deposited $22.2 million in two
               restricted accounts as collateral against these obligations.
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (2) |  | In
calculating the amount of interest on debt, we have assumed that the interest
               rate on Westmoreland Minings $14.6 million of floating rate debt
would not                increase or decrease from the December 31, 2005 rate.
| |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (3) |  | We
have not accrued the present value of this obligation, because this plan is a
               multiemployer plan. We expense our premium payments when due.
| |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (4) |  | The
table presents our estimate of our gross benefit obligation. The accrued
               liability, net of the unrecognized net actuarial loss and the unrecognized
net                transition obligation, was $141.9 million as of December 31, 2005.
| |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (5) |  | The
fair value of plan assets at December 31, 2005 was $42.5 million. The
               expected pension benefit payments shown above will be made from these
assets.
| |  | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | (6) |  | The
table presents our estimate of our gross benefit obligation. The accrued
               liability, net of the unrecognized net actuarial gain and an unrecognized
prior                service cost, was $2.4 million as of December 31, 2005. The plan was
unfunded at                December 31, 2005.
| |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (7) |  | The
fair value of plan assets at December 31, 2005 was $24.3 million.
               Pneumoconiosis benefits will be paid from these assets.
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------

| |  | (8) |  | The
table presents our estimate of our gross cost of final reclamation. The
               accrued liability of $158.4 million as of December 31, 2005 will increase
in                present value as acres are disturbed in mining operations and as mine
closures                draw nearer. The accrued liability reflects the present value of
contractual                obligations of our customers and of Washington Group, the
contract miner at the                Absaloka Mine, to perform reclamation; we estimate
that the present value of                their combined obligations is $35.3 million. The
table does not reflect $58.8                million, the amount held in escrow as of
December 31, 2005 from contributions by                customers for reclamation of the
Rosebud Mine, or $1.1 million in restricted                cash for other mines. In
addition, the Absaloka contract mine operator is                funding a separate
reclamation escrow account that is approximately $4.8 million                as of
December 31, 2005. We estimate that the present value of our net
               obligation for final reclamation  that is, the costs of final
reclamation                that are not the contractual responsibilities of others  is
$63.2 million                at December 31, 2005.
| |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (9) |  | Represents
quarterly dividends that are accumulated through and including                January 1,
2006.
| |  | --- |  | ---------------------------------------------------------------------------------------------------------

| |  | (10) |  | As
provided in the Certificate of Designation establishing the Series A
               Preferred Stock, the holders of the Series A Preferred Stock are entitled
to                receive dividends when, as and if declared by the Board of
Directors out                of funds of the Corporation legally available therefore. In
general,                dividends that are not paid accumulate, as provided in the
Certificate of                Designation.
| |  | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
ROVA Projects debt is not listed in the table above because, at December 31, 2005,
we were required to account for our investment in the ROVA Project using the equity method
of accounting. If we complete the ROVA acquisition, we will no longer account for our
investment in the ROVA Project using the equity method, and the ROVA Projects debt
will be fully consolidated in our financial statements with our debt and the debt of our
subsidiaries. The ROVA Project had outstanding indebtedness of $184 million at December
31, 2005, and the principal of that debt is payable from 2006 through 2015.

# Growth and Development
Strategy

Our
growth and development strategy is founded on the ownership and operation of assets that
generate profits. We strive to identify assets that are low-cost suppliers and
environmental leaders and that supply customers who share our orientation for low-cost
supply and our environmental concern. We believe that we will be more likely to achieve
success in niche markets. Our goal is to acquire stable, long-term earnings.

The
acquisitions we completed in 2001 exemplify this strategy. Among other things, the
Rosebud, Jewett, Beulah and Savage Mines are essentially adjacent to their principal
customers, to which they deliver coal by conveyor belt or truck, and are the lowest-cost
suppliers for their respective customers. These mines principal customers all employ
modern emissions control technology. These mines are party to long-term contracts with
their principal customers that generate relatively stable earnings.

Examples of our current development
efforts include the following:

| |  |  |  | In
August 2004, we signed a Purchase Agreement with LG&E to acquire LG&Es 50%
interest in the ROVA Project. While this acquisition has been delayed by litigation over
the customers alleged right of first refusal, we are currently in discussion with
the customer in the hope that we can resolve the dispute on mutually acceptable business
terms.
| |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  |  | In
2001, as part of our transaction with Knife River, we acquired rights to develop the
lignite deposits at Gascoyne, North Dakota. Our subsidiary, Westmoreland Power, Inc.,
then joined with MDU Resources Group, Inc. to pursue development of a baseloaded
lignite-fired power plant near Gascoyne as part of the State of North Dakotas
Lignite Vision 21 (LV-21) program. LV-21 is a partnership between North
Dakota and the Lignite Energy Council (LEC) that is administered by the North
Dakota Industrial Commission (NDIC). Westmoreland Power and MDU executed a
joint development agreement in 2001, and we each own half of the venture that is seeking
to develop the power plant. In September 2001, NDIC awarded the Westmoreland/MDU joint
venture up to $10 million in matching funds to finance feasibility and technical studies.
In January 2003, as a result of these studies, we and MDU sought additional support from
NDIC to study the feasibility of substituting a 250 MW or 175 MW power plant for the 500
MW plant that had originally been proposed. NDIC awarded the funds sought, and we and MDU
completed studies of generation technology, and lignite mining issues in 2003. Air
quality evaluation was completed in early 2004. In May 2004, we and MDU filed an
application for an air permit for a proposed 175 MW plant and a completeness
determination was received in July 2004. The North Dakota Department of Health
(Department of Health) issued a draft air permit on March 29, 2005. The Department of
Health issued the final air permit in June 2005, after holding a 30-day public comment
period and a public hearing.
| |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | We
also continue to identify and evaluate other potential growth opportunities in the coal
and independent power sections.
| |  | - |  | --------------------------------------------------------------------------------------------------------------------------

An
existing source of future income and cash flow relates to the Caballo Mine in Campbell
County, Wyoming. In connection with the 2001 acquisitions, we acquired the stock of
Horizon Coal Services, Inc. Horizons only asset is a royalty interest in coal
reserves located at the Caballo Mine, which is owned by a company that is not affiliated
with us. The royalty of $0.10 per ton covers the mining of 225 million tons of coal,
making the potential gross royalty amount $22.5 million. The latest mine plan projects
that mining of coal subject to the royalty is expected to begin in mid-year 2007 and
continue to 2015.

In
Note 3 to our Consolidated Financial Statements in this Amendment No. 1 to Form 10-K, we
describe our possible acquisition of LG&Es interest in the ROVA Project,
including the current status. We describe the financial aspects of that transaction in
more detail below under  Financial Implications of the ROVA Acquisition.
As a strategic matter, owning 100% of the ROVA Project would give us an additional
long-lived asset whose value, we believe, extends well beyond the expiration of the ROVA
Projects existing contracts with Dominion in 2019. It also should enhance our
ability to develop and implement strategies to restructure the projects contracts
with its principal customer, Dominion, and with the projects lenders, to the mutual
benefit of all parties, including us, as owners. The ROVA acquisition also would double
the number of megawatts of generated power that we own and substantially expands the
foundation for further growth of the power segment of our business. Such growth may
include the development and construction of additional power-generating units at the ROVA
site, the Gascoyne site or elsewhere. Such growth may also include the operation of power
plants. With improving market potential we have re-evaluated the original plant capacity
and now intend to file for a 500 MW air permit in the second quarter of 2006. With the
larger plant we hope to capture better economies of scale.



# Liquidity and Capital
Resources

As
discussed in the Overview section above, Westmoreland Minings add-on facility
substantially improved our liquidity during 2004 and 2005. In addition, even though the
requirements of Westmoreland Minings basic term loan agreement, including debt
service requirements, restrict our access to some of Westmoreland Minings cash,
Westmoreland Mining itself provides liquidity to Westmoreland Coal Company.

Cash
provided by operating activities was $28.8 million in 2005, $9.5 million in 2004, and
$24.8 million in 2003. Cash from operations in 2005 compared to 2004 increased because of
several factors which include:

| |  |  |  | We
sold more coal at higher prices at the Jewett Mine due to restructuring of the contract
with its customer, where in 2004, unusually high rainfall disrupted production and costs
of commodities increased to a greater extent than customer revenue.
| |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | We
had significantly higher distributions from the ROVA Project in 2005 compared to 2004,
because in 2004 the projects lenders withheld $8.3 million (of which our share was
$4.15 million) as a reserve for a disputed personal property assessment by Halifax
County, North Carolina and in connection with a scheduled maintenance outage.
| |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | Mandatory
contributions to our defined benefit pension plans declined to $1.6 million in 2005
compared to $3.4 million in contributions in 2004.
| |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | We
received a payment at the Jewett Mine of $2.4 million in 2005 that was related to 2004
operations.
| |  | - |  | -----------------------------------------------------------------------------------------------------

| |  |  |  | We
also increased cash from working capital during 2005 primarily through higher levels of
accounts payable, net of slightly higher receivables and inventory levels.
| |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
used $22.8 million of cash for investing activities in 2005, $28.5 million in 2004 and
$17.3 million in 2003. In 2005, additions to property and equipment totaled $18.3 million
reflecting continued investment in mine equipment and development and over $3 million for
implementation of a corporate-wide computer system. We also deposited $5.1 million into
our restricted cash accounts, pursuant to Westmoreland Minings term loan agreement
and as collateral for our surety bonds. Cash used in investing activities in 2004 included
$18.3 million of additions to property, plant and equipment for mine equipment and
development projects. Cash used in investing activities in 2004 also included a $10.5
million increase in restricted cash accounts. Additions to property, plant and equipment
in 2003 were $13.2 million and increases in restricted cash accounts were $11.0 million.
During 2003, net proceeds from sales of assets of $7.0 million included $4.5 million cash
received from the sale of DTA and $1.4 million received from the sale of land and mineral
rights in Colorado.

Cash
used in financing activities in 2005 primarily represented repayment of long-term debt of
$12.2 million partially offset by $5.5 million borrowings of revolving lines of credit. We
generated cash from financing activities of $20.9 million in 2004, comprised primarily of
new borrowings of $34.1 million of long-term debt. We used cash of $11.7 million for the
repayment of long-term debt in 2004. We used cash of $8.1 million for financing activities
in 2003, including $5.2 million for the net repayment of long-term debt and $1.5 million
for the net repayment of revolving debt. Dividends paid to Westmoreland Resources
20% shareholder in 2005, 2004 and 2003 were $1.1 million, $1.2 million and $1.0 million,
respectively.



At
December 31, 2005 cash and cash equivalents totaled $11.2 million, including $3.0 million
at Westmoreland Mining, $4.2 million at Westmoreland Resources, and $3.4 million at our
captive insurance subsidiary. Consolidated cash and cash equivalents at December 31, 2004
totaled $11.1 million, including $4.6 million at Westmoreland Mining, $4.1 million at
Westmoreland Resources, and $2.5 million at our captive insurance subsidiary. The cash at
Westmoreland Mining is available to us through quarterly distributions, as described
below. The cash at Westmoreland Resources is available to us through dividends. In
addition, we had restricted cash and bond collateral, which were not classified as cash or
cash equivalents, of $34.6 million at December 31, 2005 and $32.7 million at December 31,
2004. The restricted cash at December 31, 2005 included $22.2 million in Westmoreland
Minings debt service reserve and long-term prepayment accounts. The restricted cash
at December 31, 2004 included $21.9 million in Westmoreland Minings debt service and
long-term prepayment accounts. At December 31, 2005, our reclamation, workers
compensation and postretirement medical cost obligation bonds were collateralized by
interest-bearing cash deposits of $12.4 million, which amounts we have classified as
non-current assets. In addition, we had reclamation deposits of $58.8 million at December
31, 2005 and $55.6 million at December 31, 2004, which we received from customers of the
Rosebud Mine to pay for reclamation. We also had $5.0 million in interest-bearing debt
reserve accounts for the ROVA Project at December 31, 2005. This cash is restricted as to
its use and is classified as part of our investment in independent power projects.

In
March 2004, Westmoreland Mining entered into the add-on facility. This facility made $35
million available to us in 2004. The add-on facility permits Westmoreland Mining to
undertake significant capital projects, principally at the Rosebud and Jewett Mines, in
the near term without adversely affecting cash available to Westmoreland Coal Company. The
terms of the add-on facility permit Westmoreland Mining to distribute this $35 million to
Westmoreland Coal Company. Westmoreland Mining distributed $9.1 million in 2005 and $19.3
million in 2004 to Westmoreland Coal Company and expects to distribute the balance in
2006. The original term loan agreement, which financed our acquisition of the Rosebud,
Jewett, Beulah, and Savage Mines, continues to restrict Westmoreland Minings ability
to make distributions to Westmoreland Coal Company from ongoing operations. Until
Westmoreland Mining has fully paid the original acquisition debt, which is scheduled for
December 31, 2008, Westmoreland Mining may only pay Westmoreland Coal Company a management
fee and distribute to Westmoreland Coal Company 75% of Westmoreland Minings surplus
cash flow. Westmoreland Mining is depositing the remaining 25% into an account that will
be applied to the $30 million balloon payment due December 31, 2008. In 2004 when
Westmoreland Mining entered into the add-on facility, it also extended its revolving
credit facility to 2007 and reduced the amount of the facility to $12 million. In December
2005, Westmoreland Mining amended the revolving facility to increase the borrowing base to
$20 million and to extend its maturity to April 2008 to better align with our operating
needs. The increase includes the ability to issue letters of credit up to $10 million
which the Company expects to use for reclamation bond collateral needs. As of December 31,
2005, Westmoreland Mining had the entire $20 million revolving facility available to
borrow.



As
of December 31, 2005, Westmoreland Coal Company had $8.5 million of its $14.0 million
revolving line of credit available to borrow.

# Liquidity Outlook

We describe certain liquidity
comparisons in the Liquidity Outlook section below. In addition, the following items are
important.

Reclamation

Our
asset retirement obligations, as previously described under Critical Accounting
Estimates above, increased $24.1 million during 2005. Two of the more significant
reasons for that increase were changes we made about the timing of required reclamation
activities and the amount of work necessary. These and other factors are disclosed in more
detail in Note 4 to the Consolidated Financial Statements.

Jewett
Mine Supply Contract

Texas
Westmoreland and NRGT are party to a lignite supply agreement that expires in 2015 and
that provides annual price redeterminations based on an equivalent cost of SPRB coal used
at the Limestone Station.  In January 2004, the parties agreed to fix a price for the
period 2004 through 2007, with pricing thereafter to be determined pursuant to the
underlying contract.  Subsequent dramatic and unexpected increases in commodity
costs, including costs for diesel fuel and steel, among other items, rendered the
four-year fixed price agreement uneconomic.  At the same time, market prices for SPRB
coal and associated rail rates also increased dramatically.  A new interim agreement
was reached in September 2005 that enhanced the economics of the Jewett Mine over previous
interim pricing arrangements, provides capital to support mine development, improves the
mechanics for determining equivalent market pricing pursuant to the parties
underlying contract after 2007, and has returned Texas Westmoreland to a stable and
satisfactory level of financial performance through the end of 2007, when the price will
be determined annually based on equivalent market value, or until the current long-term
supply agreement is modified further or restructured. Payments of $4.9 million related to
the first nine months of 2005 were recorded as revenue in the fourth quarter as related
performance obligations were completed and payments were received from the customer.

Combined
Benefit Fund

As
previously reported in Item 3 Legal Proceedings and in Note 21 to the
Consolidated Financial Statements, on August 12, 2005 the United States District Court for
the District of Maryland ruled that the CBF has been charging an excessive premium to coal
operators since 1992. In our case, the total of the overpayment is approximately $6
million.

The
CBF Trustees and the Commissioner of Social Security have appealed the District Court
decision. However, we believe that the decision will be upheld on appeal. At that time,
the Company would recognize the $6 million as income. In the interim, the Company accrued,
but withheld, payment of its monthly premium for the fourth quarter, thereby benefiting
cash flow in the amount of approximately $1 million. In early 2006, the CBF resumed
invoicing and the Company paid the withheld payments. However, as provided for by the
Court, the Company is paying at the lower, adjusted rate going forward.



Indian
Coal Production Tax Credit

In
August 2005 the Energy Policy Act of 2005 was enacted. Among other provisions, it contains
a tax credit for the production of coal owned by Indian tribes. The credit is $1.50 per
ton beginning 2006 through 2009 and $2.00 per ton from 2010 through 2012, with both
amounts escalating for inflation. The credit may be used against regular corporate income
tax for all years and against Alternative Minimum Tax for the initial period. The
Companys 80%-owned Absaloka Mine, which produces coal under a lease with the Crow
Tribe, produces about 7 million tons per year. The savings will be shared with the Crow
Tribe when they are realized.

Significant
Anticipated Variances Between 2005 and 2006

We
anticipate that the following events and developments, which we expect will occur in 2006
but which did not occur in 2005, and the following events and developments, which we
expect will not occur in 2006 but which did occur in 2005, will affect our liquidity and
our net income.

| |  |  |  | We
discuss the prospective effects of the anticipated ROVA acquisition in more detail below.
| |  | - |  | --------------------------------------------------------------------------------------------

| |  |  |  | Tons
sold increased in 2005 but are likely to remain comparable in 2006. Coal revenues are
expected to increase in 2006 due to contract renewals at higher prices. However, overall
cost of sales are also increasing due to inflation of commodity costs although not as
much as revenues.
| |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | We
anticipate that capital expenditures related to our mining activities will be comparable
in 2006 and 2005. However, if 2006 capital expenditures at the Jewett Mine are included
which are mostly reimbursed by the customer, the overall level of capital projects will
be higher in 2006 than in 2005.
| |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | We
anticipate higher interest costs in 2006 because of increased use of our revolving credit
lines and higher rates for the floating rate portion of Westmoreland Minings debt.
| |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | Our
results for 2005 reflect a negative impact of increased prospective and retroactive
personal property taxes at the ROVA Project. Our pre-tax income in 2005 was reduced by
$2.7 million for the accrual of our portion of the estimated cost. In 2006 pre-tax income
should not suffer the cost of retroactive payments. The lender to the ROVA Project
withheld funds in an amount equal to the total amount claimed by Halifax County, which
funds are normally available for distribution. In early 2006, the claim was resolved, and
the county was paid from the withheld funds.
| |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | We
expect higher depreciation, depletion and amortization expense in 2006 than in 2005 due
to continued capital expenditures at our mines and an increase in the carrying value of
our capitalized asset retirement costs.
| |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | In
2005, we did not pay, but did accrue about $1.0 million of the CBFs 2005 assessment
which amount was paid in early 2006 thereby increasing cash costs in 2006 compared to
2005. Our cash payments for this obligation are expected to decrease about $0.8 million
in 2006 as compared to 2005, in part because we have now fully paid this assessment. See
Notes 9 and 21 to the Consolidated Financial Statements for additional information.
| |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  |  | During
2005 and 2006, we have continued implementation of a corporate-wide computer system to
enhance our accounting, reporting and analysis capability. The total investment at
year-end 2005 was approximately $6.4 million. We expect that the system will produce
efficiencies and reduce costs associated with our current, separate systems.
| |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | In
2000, we adopted a long-term incentive plan to promote the successful implementation of
our strategic plan and link the compensation of our key managers to the appreciation in
the price of our common stock. The Board of Directors Compensation & Benefits
Committee granted awards under this long-term incentive plan with a variable value in
2000, 2001, 2002 and 2004. There was a reduction of expense of $0.9 million for these
awards in 2005 due to a reduction of the previous estimate of the obligations. We are not
able to predict the variable expense for these awards in 2006.
| |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | New
accounting rules require that we expense the value of stock options over their vesting
periods, beginning in the first quarter of 2006. We have not determined the impact of
this new requirement for new stock option awards. The cost of expensing existing stock
option grants will be minimal. We accelerated vesting of all stock appreciation rights at
the end of 2005, resulting in an additional expense of $0.2 million. This decision will
reduce future expense.
| |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Significant
Factors Affecting Our Liquidity

The
matters discussed above focus on anticipated differences between 2005 and 2006. A number
of non-recurring events significantly influenced our 2005 results. Our operational
performance, our financial results, and our liquidity may also be affected by all of the
other matters discussed in this Annual Report on Amendment No. 1 to Form 10-K, including
the legal proceedings discussed in Item 3 and the matters discussed in this
Managements Discussion and Analysis of Financial Condition and Results of
Operations. Primarily because of our size and the multitude of issues related to our
transition from an eastern underground producer of coal, to a western niche surface
producer with significant reliance on independent power operations, we have been subject
to the impact of many matters.

# Financial Implications
of the ROVA Acquisition

On
August 25, 2004, we signed an Interest Purchase Agreement with a subsidiary of LG&E
Energy LLC to acquire the 50% interest in the ROVA project that we do not currently own.
LG&E Energy LLC is now a subsidiary of E.ON U.S. In November 2004, Dominion, the
purchaser of the electricity generated by the ROVA Project, asserted that the power
purchase agreement gives it the right of first refusal with respect to LG&E
Energys 50% interest. Dominion brought a legal action in Virginia State Court to
assert their alleged right of first refusal. This legal action has delayed the acquisition
and made the ultimate outcome uncertain. We are currently in negotiations with Dominion
and LG&E in the hope that we can find a business solution that will resolve the
pending dispute on terms that are acceptable to all parties.



The
financial implications of the ROVA transaction depend significantly on when it is
completed, how we choose to finance the transaction and the terms of any such financing.

In
evaluating the terms of any proposed financing or any proposed agreement with Dominion, we
start with the existing contracts that were negotiated initially when the project was
developed. The principal contracts are two power purchase and operating contracts,
pursuant to which the ROVA Project sells electricity to Dominion, and the agreements
between the ROVA Project and its lenders that financed the projects construction.
Annual principal payments on the projects debt are projected to increase from $22
million in 2005, to approximately $34 million in 2008, and approximately $33 million in
2009. Annual principal payments are projected to fall sharply thereafter until the
projects debt is fully paid in 2015. The revenues under the power purchase contracts
were structured to permit the ROVA Project to make these principal payments, but the
projects revenues and expenses do not correspond perfectly, and under the
projects existing arrangements, cash flow from the project after payment of
principal and interest is expected to decline from 2005 through 2012 and then gradually
increase through 2019. The coal supply agreements expire in 2014 and given todays
market, the cost of coal is expected to increase.

If
the ROVA acquisition is completed, we will subsequently consolidate their financial
results in our consolidated financial statements. We also expect that, through at least
2008, the ROVA acquisition would increase our cash flow on an after-tax basis over what we
would have received from owning 50% of the project, but the magnitude of the impact would
again depend in part on the factors described above. The alternative minimum tax also
affects our return from the acquisition: we anticipate that, if we acquire LG&Es
50% interest in the ROVA Project, we would increase our alternative minimum taxable
income.

# Coal Markets and Rail
Delivery Issues

Significant
events occurred during 2005 in the market for coal from the SPRB of Wyoming, the market
benchmark for most of the Companys sales. First, the BNSF and Union Pacific
(UP) railroads experienced significant disruptions in their ability to carry
coal out of the SPRB on the so-called Joint Line due to continued increases in demand for
SPRB coal and due to a major rail bed ballast rehabilitation project that caused limited
capacity on that route. The railroads rehabilitation work commenced in Summer 2005
and will continue into 2006. These rail issues, combined with increasing demand for SPRB
coal, resulted in a marked increase in prices for SPRB coal during the second half of 2005
and into 2006. Prices for higher Btu, ultra-low sulfur SPRB coal made further gains due to
the rise in market prices for sulfur dioxide emission allowances, which are required by
most coal-fired power plants for compliance with regulations under the federal Clean Air
Act.

Two-thirds
of the Companys coal sales are delivered to its customers via conveyor belt, coal
haulers, or highway trucks, while the remaining third is delivered via the BNSF. The
Companys BNSF-served mines, in Montana and North Dakota, are not directly affected
by the Joint Line rehabilitation project. Rather, Company mines have been affected
indirectly, and to a much lesser extent than the SPRB mines, because the BNSF has shifted
some crews and locomotives to the SPRB from time-to-time to help to alleviate the issues
there. Unlike the SPRB producers, the Company did not lose significant budgeted production
or sales in 2005 as a result of the on-going rail issues.



Market
prices for SPRB coal increased significantly from the first half of 2005. Eighteen percent
of the Companys total sales tonnage was scheduled for price re-determination on
January 1, 2006, and most of these tons were generally benchmarked to SPRB market prices
with certain contractual and other restrictions. These redeterminations resulted in a
weighted average price increase for these tons of almost 30% effective January 1, 2006.
Our ability to capture further market gains is restricted by the fact that almost all of
our production is sold under long-term contracts. In addition, our mines are now producing
at maximum in-place capacity. About 5% of total Company tons are currently scheduled to be
open to market, via contract renewal, or market-benchmarked price re-determinations on
January 1, 2007, 18% on January 1, 2008, and, if certain customers elect not to invoke
extension options, 10% on January 1, 2009 (plus an additional 22% in 2008 and 2009 if the
market-based pricing mechanism under the Jewett Mines contract with NRGT is
preserved in the renegotiation of a long-term supply agreement).

# Off-Balance Sheet
Arrangements

We
do not have any off-balance sheet arrangements within the meaning of the rules of the
Securities and Exchange Commission.



---

Coal
Operations. Coal revenues increased from 2004 primarily as a result of a 1.0 million
increase in tons sold and because of higher prices, including a one-time
catch-up payment of $2.4 million received in the first quarter of 2005 for
past cost increases for commodities. As discussed in the Liquidity Outlook section of this
Amendment No. 1 to Form 10-K under Jewett Mine Supply Contract, payments of $4.9 million
related to the first nine months of 2005 were recorded as revenue in the fourth quarter as
performance obligations were completed and payments were received from the customer. The
increase in tons sold in 2005 came from new or extended sales contracts at the Rosebud
mine as well as increases at the Jewett and Absaloka Mines. Cost of sales increased in
2005 compared to 2004 primarily as a result of increased tons produced, higher commodity
prices (for diesel fuel, electricity and explosives) and higher stripping ratios. Very
difficult mining conditions and unusually heavy rainfall increased costs at the Beulah
Mine in 2005. The 2004 revenue includes the $16.3 million Colstrip 1&2 arbitration
award for the price reopener with the owners of Colstrip Units 1&2 for coal shipped
from July 30, 2001 to May 31, 2004. Production taxes and royalties on those revenues
totaled $5.1 million. Costs at the Jewett Mine in 2004 included unplanned repairs to a
primary dragline combined with significant weather related production interruptions.

The
following table shows comparative coal revenues, sales volumes, cost of sales and
percentage changes between the periods for actual results as reported and on a pro forma
basis (which excludes the portion of the Colstrip arbitration award which relates to
periods prior to 2004):

|                                           |               | Year Ended
|------------------------------------------ | ------------- | ----------
|                                           |               |           
|                                           | Actual        |           
|                                           |               |           
|                                           | 2005          | 2004      
|                                           |               |           
|                                           | (As restated) |           
|Revenues  thousands                       | $             | 361,017   
|                                           |               |           
|Volumes  millions of equivalent coal tons |               | 30.0      
|                                           |               |           
|Cost of sales  thousands                  | $             | 288,728   

* Change represents change between 2005 Actual amounts and 2004 Pro forma
amounts.

Independent
Power.Our equity in earnings from the independent power projects were $12.7 million
in both 2005 and 2004. For 2005 and 2004, the ROVA Project produced 1,601,000 and
1,625,000 megawatt hours, respectively, and achieved capacity factors of 87% in 2005 and
88% in 2004. The slightly lower capacity factor in 2005 was the result of increased
start-up hours after scheduled outages. In 2005 and 2004, equity in earnings was reduced
by $2.7 and $2.0 million, respectively, for costs associated with higher Halifax County
personal property tax assessments from prior years, which we unsuccessfully contested.
Most of the contested claims were paid to Halifax County in early 2006. In 2005, the ROVA
I and II units had more scheduled outages for planned repairs that decreased the capacity
factor, and they experienced more unscheduled outages for repairs than in 2004. We
recognized $455,000 in equity earnings in 2005, compared to $317,000 in 2004 from our
4.49% interest in the Fort Lupton project.



Costs
and Expenses. Depreciation, depletion and amortization (as restated, note 2) increased
to $21.6 million in 2005 compared to $18.4 million in 2004. The increase is primarily
related to increased coal production, increased capital expenditures at the mines for both
continued mine development and the replacement of mining equipment, and increased
amortization of capitalized asset retirement costs.

Selling
and administrative expenses were $35.1 million for 2005 compared to $30.9 million for
2004. In 2005, costs increased as a result of:

| |  |  |  | The
$1.2 million Entech settlement plus related legal fees.
| |  | - |  | -----------------------------------------------------------

| |  |  |  | Legal
fees associated with the Companys legal contingencies.
| |  | - |  | -------------------------------------------------------------

| |  |  |  | Professional
and consulting fees (largely related to Sarbanes-Oxley compliance activities).
| |  | - |  | -------------------------------------------------------------------------------------------

| |  |  |  | Compensation
costs due to an increase in the number of employees required to pursue our growth
initiatives.
| |  | - |  | -----------------------------------------------------------------------------------------------------------

| |  |  |  | Higher
costs at Westmoreland Energy LLC for outside consulting.
| |  | - |  | ---------------------------------------------------------------

However,
as a result of the decline in the market price of the Companys common stock in 2005,
the projected cost of our long-term incentive performance unit plan declined and resulted
in a benefit of $0.9 million compared to an expense of $2.3 million in 2004.

Heritage
health benefit expenses, exclusive of the cumulative effect of change in accounting
principle associated with workers compensation, were $5.6 million lower in 2005
compared to 2004 due primarily to three factors as follows:

| |  |  |  | Costs
for pneumoconiosis (black lung) benefits were $1.6 million in 2004, but primarily because
of reduced actuarial projections a credit of $3.1 million was recorded in 2005.
| |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | Workers compensation
expense was $0.9 million less than in 2004 with the conclusion of the case audits
discussed below.
| |  | - |  | ------------------------------------------------------------------------------------------------------------------------

| |  |  |  | Costs
for the CBF were $0.8 million less than in 2004 as a result of factors discussed more
fully in Note 21 to the Consolidated Financial Statements.
| |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

Accrued
workers compensation expense was significantly higher in 2005 and 2004 relative to
2003 because we conducted and completed case audits of all active claims over the past two
years, and because we are using more current mortality tables for those claims. Cash
payments, however, have declined over the past three years because indemnity payments for
a majority of the beneficiaries have been satisfied. We incurred cash costs of $1.3
million for workers compensation during 2005 compared to $1.9 million in 2004.

We
incurred cash costs of $16.9 million for postretirement medical costs during 2005 compared
to $16.7 million in 2004. We expect to incur approximately $17.3 million for these costs
in 2006.



Interest
expense was $10.9 million and $11.0 million for 2005 and 2004, respectively. Another $0.3
million was incurred and capitalized as acquisition costs in 2005. Interest associated
with the increased debt outstanding from the Westmoreland Mining add-on facility and
borrowing using the Companys revolving credit facilities was offset by the lower
interest expense on the acquisition financing obtained during 2001 as principal payments
are made. Interest income decreased in 2005 in spite of larger balances in our restricted
cash and surety bond collateral accounts because 2004 included $0.7 million in interest
relating to the Colstrip Units 1 & 2 arbitration decision. Both years include
amortization of debt financing costs.

Current
income tax expense in both 2005 and 2004 relates to obligations for State income taxes,
including the $2.1 million expense recorded for tax assessments for prior years in North
Carolina, and Federal alternative minimum tax.

Results
of operations for the quarter ending December 31, 2005 were affected by several
significant adjustments as follows:

| |  |  |  | A
$4.0 million credit in Heritage Health Benefit Expenses for Black Lung Benefits.
| |  | - |  | ----------------------------------------------------------------------------------

| |  |  |  | Workers Compensation
expense of $2.1 million as the result of actuarial changes and updated estimates.
| |  | - |  | -------------------------------------------------------------------------------------------------------

| |  |  |  | Revenue
totaling $4.9 million for coal shipped earlier in the year for which the related
performance obligations werent completed
until the fourth quarter.
| |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

---

Coal
Operations.We sold about 1.2 million more tons of coal in 2004 than we did in 2003.
The increase in tons sold in 2004 came from new or extended sales contracts at the Rosebud
and Absaloka Mines. Revenues increased at a greater rate primarily because, in 2004, we
received an arbitration award increasing the contract price for tons sold to Colstrip
Units 1&2 from our Rosebud Mine retroactive to July 2001. This resulted in the
recognition in 2004 of additional revenue of $16.3 million and related production taxes
and royalties of $5.1 million. The increased price will continue through the expiration of
the contract with Colstrip Units 1&2 in 2009. In spite of the additional margin from
this retroactive price increase, costs, as a percentage of revenues, increased to 78% in
2004 compared to 77% in 2003. This was mostly a result of weather related interruptions in
2004 at the Jewett Mine and increased costs for diesel fuel and electricity used at our
mines.

The
following table shows comparative coal revenues, sales volumes, cost of sales and
percentage changes between the periods:

|                                           | Year Ended    |        
|------------------------------------------ | ------------- | -------
|                                           |               |        
|                                           | 2004          | 2003   
|                                           |               |        
|                                           | (As restated) |        
|Revenues  thousands                       | $             | 319,648
|                                           |               |        
|Volumes  millions of equivalent coal tons |               | 29.0   
|                                           |               |        
|Cost of sales  thousands                  | $             | 249,131



Independent
Power. Our equity in earnings from independent power operations decreased to $12.7
million in 2004 from $15.8 million in 2003. The decrease was attributable to a $2.0
million charge for Halifax County personal property tax assessments from prior years, and
costs associated with a major five-year scheduled maintenance outage. During 2004 and
2003, the ROVA Project produced 1,625,000 and 1,653,000 megawatt hours, respectively, and
achieved average capacity factors of 88% and 90%, respectively. We also recognized
$317,000 in equity in earnings in 2004 from our 4.49% interest in the Fort Lupton project
compared to $582,000 in 2003.

Costs
and Expenses.Depreciation, depletion and amortization (as restated, note 2) increased
to $18.4 million in 2004 compared to $15.5 million in 2003, primarily because we increased
capital expenditures at the mines for both continued mine development and the replacement
of mining equipment and because increased depreciation resulted from the increase in
production levels. There was also higher amortization due to an increase in capitalized
asset retirement costs.

Selling and administrative expenses decreased to $30.9 million in 2004 from $33.4
million in 2003. Contributing to the decrease were lower expenses for both severance and
long-term incentive compensation plans, a decrease in health care costs for active
employees and decreased legal fees associated with coal contract negotiations and other
litigation. Long-term incentive compensation decreased to $2.3 million in 2004 from $2.5
million in 2003. This is a non-cash expense until it is paid. Payments are currently being
made over a five-year period following maturity. The Compensation and Benefits Committee
elected to pay a portion of the 2003 payments in shares of common stock. Future exercises
of stock appreciation rights will be settled in common stock.

Heritage
health benefit expenses increased to $33.1 million in 2004 compared to $29.9 million in
2003. Several factors impacted these costs:

| |  |  |  | These
expenses included a $6.3 million credit in 2003 for settlement of the UMWA 1974 pension
plan, which was partially offset by a $4.7 million retroactive premium assessed by the
Combined Fund.
| |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | In
2004, we increased our estimate of outstanding workers compensation costs by $3.2
million based upon increased claims experience and revised actuarial projections.
| |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

Interest
expense was $11.0 million in 2004 and $10.8 million in 2003. Interest associated with the
larger amount of outstanding debt as a result of Westmoreland Minings add-on
facility and increased use of Westmoreland Minings revolver facility during the year
was offset by lower interest payments due to the pay-down of the acquisition financing
obtained in 2001. Interest income increased in 2004 because of larger restricted cash and
surety bond collateral balances and interest of $0.7 million associated with the
arbitration decision relating to Colstrip Units 1&2.

New
Accounting Pronouncements

Please
refer to the new accounting pronouncements discussed in Note 1 to the Consolidated
Financial Statements.



|ITEM 7A |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | - | ----------------------------------------------------------

The
Company is exposed to market risk, including the effects of changes in commodity prices as
discussed below.

# Commodity Price Risk

The
Company, through its subsidiaries WRI and WML, produces and sells coal to third parties
from coal mining operations in Montana, Texas and North Dakota and through its subsidiary,
WELLC, produces and sells electricity and steam to third parties from its independent
power projects located in North Carolina and Colorado. Nearly all of the Companys
coal production and all of its electricity and steam production are sold through long-term
contracts with customers. These long-term contracts serve to minimize the Companys
exposure to revenue volatility due to changes in commodity prices although some of the
Companys contracts are adjusted periodically based upon market prices. However, the
Company is subject to variable costs for commodities it consumes such as diesel fuel,
electricity and steel. During 2005, the Company was not party to any derivative contracts.

# Interest Rate Risk

The
Company and its subsidiaries are subject to interest rate risk on its debt obligations.
Long-term debt obligations have both fixed and variable interest rates, and the
Companys revolving line of credit has a variable rate of interest indexed to either
the prime rate or LIBOR. Interest rates on these instruments approximate current market
rates as of December 31, 2005. Based on the balances outstanding as of December 31, 2005,
a one percent change in the prime interest rate or LIBOR would increase interest expense
by approximately $200,000 on an annual basis. The Companys heritage health benefit
costs are also impacted by interest rate changes because its pension, pneumoconiosis and
post-retirement medical benefit obligations are recorded on a discounted basis.

The
carrying value and estimated fair value of the Companys long-term debt with fixed
interest rates at December 31, 2005 were $88.3 million and $94.8 million, respectively.



|ITEM 8 |  | FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|------ | - | -------------------------------------------

|Index to Financial
Statements Page                                       | Page
|------------------------------------------------------------------------ | ----
|                                                                         |     
|                                                                         |     
|Consolidated Balance Sheets                                              | 84  
|                                                                         |     
|Consolidated Statements of Operations                                    | 86  
|                                                                         |     
|Consolidated Statements of Shareholders' Equity and Comprehensive Income | 88  
|                                                                         |     
|Consolidated Statements of Cash Flows                                    | 89  
|                                                                         |     
|Notes to Consolidated Financial Statements                               | 90  



|Westmoreland Coal Company and Subsidiaries
Consolidated Balance Sheets
|----------------------------------------------------------------------
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Assets                                                                
|Current assets:                                                       
|Cash and cash equivalents                                             
|Receivables:                                                          
|Trade                                                                 
|Other                                                                 
|                                                                      
|                                                                      
|Inventories                                                           
|Deferred overburden removal costs                                     
|Other current assets                                                  
|                                                                      
|Total current assets                                                  
|                                                                      
|Property, plant and equipment:                                        
|Land and mineral rights                                               
|Capitalized asset retirement costs                                    
|Plant and equipment                                                   
|                                                                      
|                                                                      
|Less accumulated depreciation, depletion and amortization             
|                                                                      
|Net property, plant and equipment                                     
|Investment in independent power projects                              
|Excess of trust assets over pneumoconiosis benefit obligation         
|Restricted cash and bond collateral                                   
|Advance coal royalties                                                
|Deferred overburden removal costs                                     
|Reclamation deposits                                                  
|Contractual third party reclamation obligations                       
|Other assets                                                          
|                                                                      
|Total Assets                                                          
|                                                                      
|See accompanying Notes to Consolidated Financial Statements.          



|Westmoreland Coal Company and Subsidiaries
Consolidated Balance Sheets (Continued)
|----------------------------------------------------------------------------------
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Liabilities and Shareholders' Equity                                              
|Current liabilities:                                                              
|Current installments of long-term debt                                            
|Accounts payable and accrued expenses:                                            
|Trade                                                                             
|Deferred revenue - current                                                        
|Income taxes                                                                      
|Production taxes                                                                  
|Workers' compensation                                                             
|Postretirement medical costs                                                      
|Asset retirement obligations                                                      
|                                                                                  
|Total current liabilities                                                         
|                                                                                  
|Long-term debt, less current installments                                         
|Revolving lines of credit                                                         
|Workers' compensation, less current portion                                       
|                                                                                  
|Postretirement medical costs, less current portion                                
|Pension and SERP costs                                                            
|Deferred revenue - less current portion                                           
|Asset retirement obligations, less current portion                                
|Other liabilities                                                                 
|Minority interest                                                                 
|Commitments and contingent liabilities                                            
|Shareholders' equity:                                                             
|Preferred stock of $1.00 par value                                                
|Authorized 5,000,000 shares;                                                      
|Issued and outstanding 205,083 shares at                                          
|December 31, 2005 and 2004                                                        
|Common stock of $2.50 par value                                                   
|Authorized 20,000,000 shares;                                                     
|Issued and outstanding 8,413,312 shares at                                        
|December 31, 2005 and 8,168,601 shares                                            
|at December 31, 2004                                                              
|Other paid-in capital                                                             
|Accumulated other comprehensive loss                                              
|Accumulated deficit                                                               
|                                                                                  
|Total shareholders' equity                                                        
|                                                                                  
|Total Liabilities and Shareholders' Equity                                        
|                                                                                  



## 

|Westmoreland Coal Company and SubsidiariesConsolidated Statements of Operations                            
|-----------------------------------------------------------------------------------------------------------
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Revenues:                                                                                                  
|Coal                                                                                                       
|Independent power projects - equity in earnings                                                            
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Cost and expenses:                                                                                         
|Cost of sales - coal                                                                                       
|Depreciation, depletion and amortization                                                                   
|Selling and administrative                                                                                 
|Heritage health benefit expenses                                                                           
|Loss (gain) on sales of assets                                                                             
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Operating income from continuing operations                                                                
|Other income (expense):                                                                                    
|Interest expense                                                                                           
|Interest income                                                                                            
|Minority interest                                                                                          
|Other income                                                                                               
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Loss from continuing operations before income taxes and cumulative effect of change in accounting principle
|Income tax benefit (expense) from continuing operations                                                    
|                                                                                                           
|Loss from continuing operations before cumulative effect of change in accounting principle                 
|Discontinued operations:                                                                                   
|Loss from operations of discontinued terminal segment                                                      
|Gain on sale of discontinued terminal segment                                                              
|Income tax expense                                                                                         
|                                                                                                           
|Income from discontinued operations                                                                        
|                                                                                                           
|Net loss before cumulative effect of change in accounting principle                                        
|                                                                                                           
|Cumulative effect of change in accounting principle                                                        
|                                                                                                           
|Net loss                                                                                                   
|Less preferred stock dividend requirements                                                                 
|                                                                                                           
|Net loss applicable to common shareholders                                                                 
|                                                                                                           



|Westmoreland Coal Company and SubsidiariesConsolidated Statements of Operations (Continued)                     
|----------------------------------------------------------------------------------------------------------------
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Net loss per share applicable to common shareholders before cumulative effect of change in accounting principle:
|Basic                                                                                                           
|Diluted                                                                                                         
|Income per share applicable to common shareholders from cumulative effect of change in accounting principle:    
|Basic                                                                                                           
|Diluted                                                                                                         
|Net loss per share applicable to common shareholders:                                                           
|Basic                                                                                                           
|Diluted                                                                                                         
|                                                                                                                
|Pro forma amounts assuming the change in accountingfor workers' compensation is
applied retroactively:          
|Net loss applicable to common shareholders                                                                      
|Net loss per share applicable to common shareholders:                                                           
|Basic                                                                                                           
|Diluted                                                                                                         
|                                                                                                                
|Weighted average number of common shares outstanding - basic                                                    
|Weighted average number of common shares outstanding - diluted                                                  

See accompanying Notes to Consolidated Financial Statements.



|Westmoreland Coal Company and SubsidiariesConsolidated Statements of Shareholders' Equity and Comprehensive Loss
Years Ended December 31, 2003, 2004, and 2005
|--------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                              
|                                                                                                                                                              
|                                                                                                                                                              
|                                                                                                                                                              
|Balance at December 31, 2002 (206,833 preferred and 7,711,379 common shares outstanding), as restated (note 2)                                                
|Common stock issued as compensation (131,087 shares)                                                                                                          
|Common stock options exercised (114,700 shares)                                                                                                               
|Repurchase and retirement of preferred shares  (1,750 shares)                                                                                                 
|Dividends declared                                                                                                                                            
|Net loss, as restated (note 2)                                                                                                                                
|Minimum pension liability                                                                                                                                     
|Net unrealized gain on interest rate swap agreement                                                                                                           
|                                                                                                                                                              
|Comprehensive loss, as restated (note 2)                                                                                                                      
|                                                                                                                                                              
|Balance at December 31, 2003 (205,083 preferred and 7,957,166 common shares outstanding), as restated (note 2)                                                
|Common stock issued as compensation (80,135 shares)                                                                                                           
|Common stock options exercised (131,300 shares)                                                                                                               
|Dividends declared                                                                                                                                            
|Net loss, as restated (note 2)                                                                                                                                
|Minimum pension liability                                                                                                                                     
|Net unrealized gain on interest rate swap agreement                                                                                                           
|                                                                                                                                                              
|Comprehensive loss, as restated (note 2)                                                                                                                      
|                                                                                                                                                              
|Balance at December 31, 2004 (205,083 preferred and 8,168,601 common shares outstanding), as restated (note 2)                                                
|Common stock issued as compensation (72,863 shares)                                                                                                           
|Common stock options exercised (171,848 shares)                                                                                                               
|Dividends declared                                                                                                                                            
|Net loss, as restated (note 2)                                                                                                                                
|Minimum pension liability                                                                                                                                     
|Net unrealized gain on interest rate swap agreement                                                                                                           
|                                                                                                                                                              
|Comprehensive loss, as restated (note 2)                                                                                                                      
|                                                                                                                                                              
|Balance at December 31, 2005 (205,083 preferred and 8,413,312 common shares outstanding), as restated (note 2)                                                
|                                                                                                                                                              



|Westmoreland Coal Company and SubsidiariesConsolidated Statements of Cash Flows
|-------------------------------------------------------------------------------
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Cash flows from operating activities:                                          
|Net loss                                                                       
|Adjustments to reconcile net loss to net cash provided by operating activities:
|Equity in earnings of independent power projects                               
|Cash distributions from independent power projects                             
|Depreciation, depletion and amortization                                       
|Stock compensation expense                                                     
|Losses (gains) on sales of assets                                              
|Minority interest                                                              
|Cumulative effect of change in accounting principle                            
|Changes in assets and liabilities:                                             
|Receivables, net                                                               
|Inventories                                                                    
|Excess of trust assets over pneumoconiosis benefit obligation                  
|Accounts payable and accrued expenses                                          
|Income taxes payable                                                           
|Accrual for workers' compensation                                              
|Accrual for postretirement medical costs                                       
|1974 UMWA Pension Plan obligations                                             
|Other assets and liabilities                                                   
|                                                                               
|Net cash provided by operating activities                                      
|                                                                               
|Cash flows from investing activities:                                          
|Additions to property, plant and equipment                                     
|Change in restricted cash and bond collateral                                  
|Net proceeds from sales of assets                                              
|                                                                               
|Net cash used in investing activities                                          
|                                                                               
|Cash flows from financing activities:                                          
|Proceeds from long-term debt, net of debt issuance costs                       
|Repayment of long-term debt                                                    
|Net borrowings (repayments) of revolving lines of credit                       
|Repurchase of preferred shares                                                 
|Dividends paid to minority shareholders of subsidiary                          
|Exercise of stock options                                                      
|Dividends on preferred shares                                                  
|                                                                               
|Net cash provided by (used in) financing activities                            
|                                                                               
|Net increase (decrease) in cash and cash equivalents                           
|Cash and cash equivalents, beginning of year                                   
|                                                                               
|Cash and cash equivalents, end of year                                         
|                                                                               
|Supplemental disclosures of cash flow information:                             
|Cash paid during the year for:                                                 
|Interest                                                                       
|Income taxes                                                                   



---

|1. |  | SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|-- |  | ------------------------------------------

# Nature of Operations

The
Companys principal activities, all conducted within the United States, are: (i) the
production and sale of coal from surface mines in Montana, North Dakota and Texas; and
(ii) the development, ownership and management of interests in cogeneration and other
non-regulated independent power plants. Prior to the sale of the Companys interest
in Dominion Terminal Associates (DTA), which was effective as of June 30,
2003, the Company was also engaged in the leasing of capacity at that coal storage and
vessel loading facility. As described in Note 19, the Companys share of DTAs
activities has been classified as discontinued operations in the Consolidated Statements
of Operations.

# Consolidation Policy

The
consolidated financial statements of Westmoreland Coal Company (the Company)
include the accounts of the Company and its majority-owned subsidiaries, after elimination
of intercompany balances and transactions. The Company uses the equity method of
accounting for entities where its ownership is between 20% and 50% and for partnerships
and joint ventures in which less than a controlling interest is held.

# Use of Estimates

The
preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenues and expenses during
the reporting period. This includes estimates related to the useful lives of property and
equipment. Actual results could differ from those estimates.

In
particular, the Company has significant long-term liabilities relating to retiree health
care, work-related injuries and illnesses and defined pension plans. Each of these
liabilities is actuarially determined and the Company uses various actuarial assumptions,
including the discount rate and future cost trends, to estimate the costs and obligations
for these items. In addition, the Company has significant asset retirement obligations
that involve estimations of costs to reclaim mining lands and the timing of cash payments
for such costs. If these assumptions do not materialize as expected, actual cash
expenditures and costs incurred could differ materially from current estimates. Moreover,
regulatory changes could increase the obligation to satisfy these or additional
obligations.

Finally,
in evaluating the valuation allowance related to the Companys deferred tax assets,
the Company takes into account various factors, including the expected level of future
taxable income and available tax planning strategies. If actual results differ from the
assumptions made in the evaluation of our valuation allowance, we may record a change in
the valuation allowance through income tax expense (benefit) in the period such
determination is made.



# Coal Revenues

The
Company recognizes coal sales revenue at the time title passes to the customer in
accordance with the terms of the underlying sales agreements and after any contingent
performance obligations have been satisfied. Coal sales revenue is recognized based on the
pricing contained in the coal contracts in place at the time that title passes and any
retroactive pricing adjustments to those contracts are recognized as revised agreements
are reached with the customers and any performance obligations included in the agreements
are satisfied.

# Cash Equivalents

The
Company considers all highly liquid debt instruments purchased with original maturities of
three months or less to be cash equivalents. All such instruments are carried at cost,
which approximates market. Cash equivalents consist of Eurodollar time deposits, money
market funds and bank repurchase agreements.

# Inventories

Inventories,
which include materials and supplies as well as raw coal, are stated at the lower of cost
or market. Cost is determined using the average cost method.

# Property, Plant and
Equipment

Property,
plant and equipment are carried at cost and include expenditures for new facilities and
those expenditures that substantially increase the productive lives of existing plant and
equipment. Maintenance and repair costs are expensed as incurred. Mineral rights and
development costs are depleted based upon estimated recoverable proven and probable
reserves. Plant and equipment are depreciated on a units-of-production or straight-line
basis over the assets estimated useful lives, ranging from 3 to 40 years. The
Company assesses the carrying value of its property, plant and equipment for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability is measured by comparing estimated undiscounted
cash flows expected to be generated from such assets with their net book value. If net
book value exceeds estimated cash flows, the asset is written down to fair value. When an
asset is retired or sold, its cost and related accumulated depreciation and depletion are
removed from the accounts. The difference between the net book value of the asset and
proceeds on disposition is recorded as a gain or loss. Fully depreciated plant and
equipment still in use are not eliminated from the accounts.

# Deferred Overburden
Removal Costs

During
the development of the Companys mines, before production commences, the costs of
removing overburden (stripping costs), net of amounts reimbursed by customers, are
capitalized as part of the depreciable cost of building and constructing the mine. Those
costs are amortized on a units of production basis as the coal is produced, based on
estimates of total reserves.

Stripping
costs incurred during the production phase have also been capitalized and deferred and
have been expensed using methods and estimates consistent with those used to account for
pre-production costs. However, this method will change effective January 1, 2006 as the
result of EITF Issue No. 04-6 (See Note 1, Recent Accounting Pronouncements).
All future stripping costs incurred during the production phase will be absorbed on a
current basis in inventory and recognized as a component of cost of sales-coal in the same
period as the related revenue. While the Company continues to analyze the impact that EITF
04-6 will have on their financial statements, it is anticipated that substantially all of
the $16.8 million on the balance sheet as of December 31, 2005 will be adjusted during the
first quarter of 2006 as described more fully below under Recent Accounting
Pronouncements.



# Income Taxes

The
Company accounts for deferred income taxes using the asset and liability method. Deferred
tax liabilities and assets are recognized for the expected future tax consequences of
events that have been reflected in the Companys financial statements based on the
difference between the financial statement carrying amounts and tax bases of assets and
liabilities, as well as operating loss and tax credit carryforwards, using enacted tax
rates in effect in the years in which the differences are expected to reverse. The Company
establishes a valuation allowance against all net deferred tax assets to the extent the
Company believes that it is more likely than not that it will not realize the net deferred
tax assets.

# Postretirement Health
Care and Life Insurance Benefits

The
Company accounts for postretirement benefits other than pension in accordance with SFAS
No. 106 Employers Accounting for Postretirement Benefits Other Than
Pensions (SFAS 106) which requires the cost to provide the benefits to
be accrued over the employees period of active service. These costs are determined
on an actuarial basis.

The
Company is amortizing its transition obligation for past service costs relating to these
benefits over twenty years. Unrecognized actuarial gains and losses are amortized over the
estimated average remaining service period for active employee plans and over the
estimated average remaining life for retiree plans. For UMWA represented union employees
who retired prior to 1976, the Company provides similar medical and life insurance
benefits by making payments to a multiemployer union trust fund. The Company expenses such
payments when they become due.

# Single-Employer Plans

The
Company and its subsidiaries provide certain health care and life insurance benefits for
retired employees and their dependents either voluntarily or as a result of the Coal Act.
Substantially all of the Companys current employees may also become eligible for
these benefits if certain age and service requirements are met at the time of termination
or retirement as specified in the plan document. The majority of these benefits are
provided through self-insured programs. The Company adopted Statement of Financial
Accounting Standards No. 106  Employers Accounting for Postretirement Benefits
Other than Pensions, or SFAS 106, effective January 1, 1993 and elected to amortize its
unrecognized, unfunded accumulated postretirement benefit obligation over a 20-year
period.

# Pension Plans

The
Company sponsors non-contributory defined benefit pension plans which are accounted for in
accordance with SFAS No. 87 Employers Accounting for Pensions
(SFAS 87) which requires the cost to provide the benefits to be accrued over
the employees period of active service. These costs are determined on an actuarial
basis.



# Workers
Compensation

The
Company is self-insured for workers compensation claims incurred prior to 1996.
Workers compensation claims incurred after January 1, 1996 are covered by a third
party insurance provider.

The
liabilities for workers compensation claims are actuarially determined estimates of
the ultimate losses incurred based on the Companys experience, and include a
provision for incurred but not reported losses. Adjustments to the probable ultimate
liabilities are made annually based on subsequent developments and experience and are
included in operations as incurred.

Effective
January 1, 2005, Westmoreland changed its method of accounting for workers
compensation. Under the new method, the liability is recorded on a discounted basis. The
gross obligation is actuarially determined using various assumptions including a future
health care trend rate of 10% declining to 5% in 2011. A risk-free interest rate (4.5% at
December 31, 2005) is then used to present value the obligation. Westmoreland believes
this change is preferable since it aligns the accounting of workers compensation
liabilities with the Companys other long-term employee benefit obligations, which
are recorded on a discounted basis. In addition, these obligations have settled into a
predictable payment pattern. The change decreased the workers compensation liability
by $2.7 million. If this change were applied retroactively the loss for 2004 would have
decreased by $1.0 million and the loss for 2003 would have decreased $1.4 million.

# Asset Retirement
Obligations

SFAS
No. 143, which was adopted by the Company on January 1, 2003, addresses financial
accounting and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The Companys asset
retirement obligation (ARO) liabilities primarily consist of estimated costs
related to reclaiming surface land and support facilities at our mines in accordance with
federal and state reclamation laws as defined by each mining permit. See Note 4 below for
specific information.

# Reclamation, Reclamation
Deposits and Contractual Third Party Reclamation Obligations

Certain
of the Companys customers have either agreed to reimburse the Company for
reclamation expenditures as they are incurred or have pre-funded a portion of the expected
reclamation costs. These funds will serve as sources for use in final reclamation
activities.

# Financial Instruments

Pursuant
to SFAS No. 107, Disclosures about Fair Value of Financial Instruments, the Company
is required to disclose the fair value of financial instruments where practicable. The
carrying amounts of cash equivalents, accounts receivable and accounts payable reflected
on the balance sheets approximate the fair value of these instruments due to the short
duration to maturities. The fair value of long-term debt is based on the interest rates
available to the Company for debt with similar terms and maturities.



# Reclassifications

Certain
prior year amounts have been reclassified to conform to the current year presentation.

# Recent Accounting
Pronouncements

In
June 2005, the Financial Accounting Standards Board (FASB) issued SFAS Statement No. 154,
Accounting Changes and Error Corrections  a replacement of APB Opinion No. 20
and FASB Statement No. 3 (SFAS No. 154). SFAS No. 154 provides guidance
on the accounting for and reporting of accounting changes and error corrections. It
established, unless impracticable, retrospective application as the required method for
reporting a change in accounting principle in the absence of explicit transition
requirements specific to the newly adopted accounting principle. SFAS No. 154 also
provides guidance for determining whether retrospective application of a change in
accounting principle is impracticable and for reporting a change when retrospective
application is impracticable. The correction of an error in previously issued financial
statements is not an accounting change. However, the reporting of an error correction
involves adjustments to previously issued financial statements similar to those generally
applicable to reporting an accounting change retrospectively. Therefore, the reporting of
a correction of an error by restating previously issued financial statements is also
addressed by SFAS No. 154. SFAS No. 154 shall be effective for accounting changes and
correction of errors made in fiscal years beginning after December 15, 2005.

In
June 2005, the FASB ratified a modification to the consensus reached by the Emerging
Issues Task Force in EITF 04-06 Accounting for Stripping Costs Incurred during
Production in the Mining Industry. The EITF clarified that stripping costs incurred
during the production phase of a mine are variable production costs that should be
included in the costs of the inventory produced during the period that the stripping costs
are incurred. The Task Force noted that the consensus does not address the accounting for
stripping costs incurred during the pre-production phase of a mine. In addition, the
consensus in this issue is effective for the first reporting period in fiscal years
beginning after December 15, 2005. The effect of initially applying this consensus should
be accounted for in a manner similar to a cumulative effect adjustment with any adjustment
recognized in the opening balance of retained earnings in the year of adoption. When the
Company adopts EITF 04-6 on January 1, 2006, it is anticipated that substantially all of
the $16.8 million on the balance sheet at December 31, 2005 will be removed and
reclassified as a cumulative effect adjustment reducing beginning retained earnings as
required by this pronouncement. Adoption of EITF 04-6 will have no impact on the
Companys cash position.

In
December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment, or SFAS 123R, which replaces SFAS No. 123 and supersedes APB
Opinion No. 25. SFAS No. 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial statements
based on their fair values beginning with the first interim or annual period after
June 15, 2005, with early adoption encouraged. In April 2005, the FASB changed the
effective date of SFAS No. 123R to the first interim or annual period after December 15,
2005. The pro forma disclosures previously permitted under SFAS No. 123 no longer
will be an alternative to financial statement recognition.



As
a result the Company will adopt SFAS No. 123R on January 1, 2006, using the modified
prospective application. Accordingly, compensation expense will be recognized for all
newly granted awards and awards modified, repurchased, or cancelled after January 1,
2006. Compensation expense for the unvested portion of awards that are outstanding as of
January 1, 2006, based on the fair value at date of grant as calculated for the pro
forma disclosures under SFAS No. 123, will be recognized ratably over the remaining
vesting period. Additionally, SFAS No. 123R requires that any tax benefits, arising
from compensation deductions that are different than recognized compensation expense, to
be reported as a financing cash flow, rather than as an operating cash flow as required
under current rules. Compensation expense in the periods following adoption of SFAS
No. 123R may differ from our pro forma disclosure under SFAS No. 123, based on
changes in the fair value of our common stock, changes in the number of options granted or
the terms of such options, the treatment of tax benefits and changes in interest rates or
other factors.

In
November 2004, the FASB issued SFAS No. 151, Inventory Costs: An Amendment of ARB
43, Chapter 4 (SFAS No. 151). This statement clarifies the accounting
for abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage). It requires that amounts be recognized as current period charges. In
addition, this statement requires that allocation of fixed production overheads to the
costs of inventory be based on the normal capacity of the production facilities. The
provisions of this statement are effective for fiscal years beginning after June 15, 2005.
The Company does not expect this guidance to have a material impact on its consolidated
results of operations and financial condition.

|2. |  | RESTATEMENT
|-- |  | -----------

The
Company is filing herein an amendment to its 2005 Annual Report on Form 10-K to restate
its consolidated financial statements as of December 31, 2005 and 2004 and for the years
ended December 31, 2005, 2004 and 2003, and selected financial information for the years
2001 to 2005. The consolidated balance sheets and statements of operations have been
restated to correct errors in the Companys accounting for income taxes and in its
accounting for asset retirement obligations and the classification of restricted cash. The
restatement adjustments had no effect on the cash flows of the Company for any of the
periods presented.

State
Income Tax Expense

During
the process of preparing financial statements for the first quarter of 2006, the Company
reviewed its accounting practices with respect to income taxes and determined that its
accounting for income taxes was not in compliance with Financial Accounting Standards
Board Standard No. 109, Accounting for Income Taxes. We discovered an
error in our tax provision for 2005 relating to a $2.1 million provision for a North
Carolina state income tax assessment, which had originally been recorded in the third
quarter of 2005. The provision was inadvertently omitted from the calculation of the
full-year 2005 income tax expense. The error resulted in an understatement of income tax
expense and net loss for the year ended December 31, 2005 of $2.1 million.



# Valuation Allowance for
Deferred Tax Assets

As
a result of the identification of this state income tax error, the Company, in conjunction
with its external tax advisors, completed a review of its accounting for income taxes for
2005 and prior years. This included a review of the calculations and assumptions
originally used in estimating the amount of benefit expected to be derived from the
utilization of its net operating loss carryforwards, alternative minimum tax
(AMT) credit carryforwards, and net deductible temporary differences.

In
connection with this review, the Company has determined that such tax benefits should have
been evaluated for utilization assuming the Company will be subject to the alternative
minimum tax system, rather than the regular income tax system, for the foreseeable future.
The Company believes it will be taxed under the alternative minimum tax system for the
foreseeable future due to significant statutory tax depletion in excess of book depletion
expected to be generated by its mining operations. As a result, the Company has determined
that a valuation allowance should have been recorded for all of its regular net operating
loss carryforwards, since they are not available to reduce alternative minimum taxable
income in the future.The Company has also determined that a full valuation
allowance should have been recorded for all its alternative minimum tax credit
carryforwards, since they are only available to offset future regular income taxes
payable. In addition, the Company has determined that since its net deductible temporary
differences will not reverse for the foreseeable future, a full valuation allowance should
have been recorded for these deferred tax assets. These errors resulted in an
overstatement of income tax benefit and an understatement of net loss of $12.4 million,
$7.8 million and $9.7 million for the years ended December 31, 2005, 2004 and 2003,
respectively, including the income tax expense attributable to the cumulative effect of
changes in accounting principles recorded in 2005 and 2003 of $1.1 million and $0.1
million, respectively.

The
purchase price allocation prepared in connection with the 2001 acquisition of Westmoreland
Mining LLC (WML) included an allocation for the benefits expected to be
derived from the Companys existing deferred income tax assets, including the
Companys net operating loss carryforwards, using regular income tax rates. As
a result of the Companys determination that it should have evaluated utilization of
such tax benefits assuming the Company will be subject to the alternative minimum tax for
the foreseeable future, the Company retroactively adjusted the purchase price allocation
for the WML acquisition.

This
adjustment resulted in the elimination of the $55.6 million net deferred income tax asset
recognized as part of the purchase price allocation for the acquisition in 2001, with a
corresponding increase in property, plant and equipment. The additional amount allocated
to property, plant and equipment is being amortized over the life of the mines acquired,
resulting in adjustments to previously reported depreciation, depletion and amortization
expense in each period since the date of the acquisition. The error resulted in an
understatement of depreciation, depletion and amortization expense and net loss of $3.7
million for each of the years ended December 31, 2005, 2004 and 2003.

# Asset Retirement
Obligations

During
2005, the Company identified an error in the calculation of the asset retirement
obligation for one of the Companys mines. The error resulted in an overstatement of
the asset retirement obligation, the related asset retirement asset, and the related
contractual third party reclamation receivable. The error affected the amount of
amortization recorded for the asset retirement asset in 2003, 2004 and 2005 and the amount
of accretion of the asset retirement liability recorded in those years. Adjustments were
recorded to correct the asset retirement liability at December 31, 2004, and the amount of
amortization and accretion recorded in the fourth quarter of the year ended December 31,
2005, with a corresponding adjustment to the asset retirement assets for this mine. The
financial statements are also being restated to reflect the known error in the amount of
amortization and accretion expense recorded in the first three quarters of 2005 and in
2004 and 2003, which had not previously been recorded in the financial statements for
those years. The error resulted in an overstatement (understatement) of amortization
expense of ($0.2) million, $0.3 million, and $0.1 million, an overstatement of accretion
expense of $1.3 million, $0.2 million and $0.1 million, and an overstatement of the net
loss of $1.1 million, $0.5 million and $0.2 million, for the years ended December 31,
2005, 2004, and 2003, respectively.



# Revenue Recognition

In
connection with the restatement process, the Company also identified an error in the
accounting treatment afforded certain payments received from one of its customers under an
amendment to their coal supply agreement. The original agreement provided that the
customer was responsible for its share of the final reclamation costs of the area of the
mine from which the coal it purchased was produced. The amendment to the coal supply
agreement entered into in 2003 provided that the customer was to pay the Company its share
of these costs on a per ton basis as the coal was delivered. A portion of the payments
received in 2005 and 2004 and subsequent to the amendment in 2003, were inadvertently
recorded as revenue, with a corresponding increase in the associated asset retirement
asset. The error resulted in an overstatement of revenue and an understatement of net loss
of $0.9 million, $0.6 million, and $0.1 million for the years ended December 31, 2005,
2004 and 2003, respectively.

# Classification of
Restricted Cash

Also
in connection with the restatement process, the Company determined that restricted cash
held in a debt service fund should have been classified as a non-current asset. The error
resulted in an overstatement of restricted cash classified as a current asset and total
current assets at December 31, 2005 and 2004 of $10.0 million and $9.8 million,
respectively, with a corresponding understatement of restricted cash classified as a
non-current asset.



The following table shows the
adjustments to our originally filed consolidated statements of operations to correct the
errors described above:

|                                                                                                                                                          |      | For years ended December 31,
|--------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | ----------------------------
|                                                                                                                                                          | 2005 |                             
|                                                                                                                                                          |     
|                                                                                                                                                          |      | (In thousands)              
|Net income applicable to common shareholders, as previously reported                                                                                      | $    | 10,366                      
|Decrease in income tax benefit as a result of the increase in valuation allowance for net deferred tax assets                                             |      | (12,369)                    
|Increase in income tax expense for North Carolina assessment                                                                                              |      | (2,130)                     
|Increase in depreciation, depletion, and amortization as a result of retroactive adjustment to property, plant, and equipment acquired in WML acquisition |      | (3,707)                     
|Decrease in cumulative effect of change in accounting for asset retirement obligations                                                                    |      | -                           
|Decrease in revenue as a result of adjustment related to payments received from customer                                                                  |      | (946)                       
|Decrease (increase) in amortization expense as a result of adjustments to asset retirement assets                                                         |      | (156)                       
|Decrease in accretion expense as a result of adjustments to asset retirement obligations                                                                  |      | 1,264                       
|                                                                                                                                                          |     
|Total adjustments                                                                                                                                         |      | (18,044)                    
|                                                                                                                                                          |     
|Net loss applicable to common shareholders, as restated                                                                                                   | $    | (7,678)                     
|                                                                                                                                                          |     



The following table shows the impact
of the restatement adjustments on our previously reported consolidated statements of
operations for the years ended December 31, 2005, 2004, and 2003:

|                                                                                                                          |                                       | Years ended December 31,
|------------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------------------------
|                                                                                                                          | 2005                                  |                         
|                                                                                                                          |                                      
|                                                                                                                          | As previously reported                | Asrestated              
|                                                                                                                          |                                      
|Consolidated Statement of Operations                                                                                      | (In thousands; except per share data)
|Revenue                                                                                                                   | $                                     | 374,690                 
|Cost and Expenses:                                                                                                        |                                       |                         
|Cost of sales - coal                                                                                                      |                                       | 289,992                 
|Depreciation, depletion, and amortization                                                                                 |                                       | 17,740                  
|Loss from continuing operations before income taxes and cumulative effect of change in accounting principle               |                                       | (2,384)                 
|Income tax benefit (expense) from continuing operations                                                                   |                                       | 12,987                  
|Net income (loss) from continuing operations before cumulative effect of change in accounting principle                   |                                       | 10,513                  
|Cumulative effect of change in accounting principle                                                                       |                                       | 1,597                   
|Net income (loss)                                                                                                         |                                       | 12,110                  
|Net income (loss) applicable to common shareholders                                                                       |                                       | 10,366                  
|Net income (loss) per share applicable to common shareholders before cumulative effect of change in accounting principle: |                                       |                         
|Basic earnings per share                                                                                                  | $                                     | 1.06                    
|Diluted earnings per share                                                                                                |                                       | 0.99                    
|Net income (loss) per share applicable to common shareholders:                                                            |                                       |                         
|Basic earnings per share                                                                                                  | $                                     | 1.25                    
|Diluted earnings per share                                                                                                |                                       | 1.17                    



The following table shows the impact
of the restatement adjustments on our previously reported consolidated balance sheets as
of December 31, 2005 and 2004:

|                                                  | December 31,          
|------------------------------------------------- | ----------------------
|                                                  | 2005                  
|                                                  |                       
|                                                  | As previously reported
|                                                  |                       
|Consolidated Balance Sheet                        | (In thousands)        
|                                                  |                       
|Other receivables                                 | $                     
|Restricted cash  (current)                        |                       
|Deferred income taxes (current)                   |                       
|Total current assets                              |                       
|Property, plant, and equipment, net               |                       
|Deferred income taxes (non-current)               |                       
|Investment in independent power projects          |                       
|Restricted cash  (non-current)                    |                       
|Total assets                                      |                       
|                                                  |                       
|Accrued income taxes                              |                       
|Total current liabilities                         |                       
|Asset retirement obligation, less current portion |                       
|                                                  |                       
|Accumulated other comprehensive loss              |                       
|Accumulated deficit                               |                       
|Total shareholders' equity                        |                       
|                                                  |                       
|Total liabilities and shareholders' equity        |                       



The following tables show the
adjustments to our originally filed quarterly unaudited consolidated statements of
operations for 2004 and 2005 to correct the errors described above:

|                                                                                                                                                          | 2005          
|--------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------
|                                                                                                                                                          |               
|                                                                                                                                                          |               
|                                                                                                                                                          | (In thousands)
|Net income (loss) applicable to common shareholders, as previously reported                                                                               | $             
|Decrease in income tax benefit as a result of the increase in valuation allowance for net deferred tax assets                                             |               
|Increase in income tax expense for North Carolina assessment                                                                                              |               
|Increase in depreciation, depletion, and amortization as a result of retroactive adjustment to property, plant, and equipment
acquired in WML acquisition |               
|Decrease in revenue as a result of adjustment related to payments received from customer                                                                  |               
|Increase in amortization expense as a result of adjustments to asset retirement assets                                                                    |               
|Decrease (increase) in accretion expense as a result of adjustments to asset retirement obligations                                                       |               
|                                                                                                                                                          |               
|Total adjustments                                                                                                                                         |               
|                                                                                                                                                          |               
|Net income (loss) applicable to common shareholders, as restated                                                                                          | $             
|                                                                                                                                                          |               

|                                                                                                                                                          | 2004          
|--------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------
|                                                                                                                                                          |               
|                                                                                                                                                          |               
|                                                                                                                                                          | (In thousands)
|Net income (loss) applicable to common shareholders, as previously reported                                                                               | $             
|Decrease in income tax benefit as a result of the increase in valuation allowance for net deferred tax assets                                             |               
|Increase in depreciation, depletion, and amortization as a result of retroactive adjustment to property, plant, and equipment
acquired in WML acquisition |               
|Decrease in revenue as a result of adjustment related to payments received from customer                                                                  |               
|Decrease in amortization expense as a result of adjustments to asset retirement assets                                                                    |               
|Decrease (increase) in accretion expense as a result of adjustments to asset retirement obligations                                                       |               
|                                                                                                                                                          |               
|Total adjustments                                                                                                                                         |               
|                                                                                                                                                          |               
|Net income (loss) applicable to common shareholders, as restated                                                                                          | $             
|                                                                                                                                                          |               



The following tables show the impact
of the restatement adjustments on our previously reported unaudited quarterly financial
information for the year ended December 31, 2005:

|                                                                                                                          | 2005                                 
|------------------------------------------------------------------------------------------------------------------------- | -------------------------------------
|                                                                                                                          |                                      
|                                                                                                                          | First quarter                        
|                                                                                                                          |                                      
|                                                                                                                          | As previously reported               
|                                                                                                                          |                                      
|Consolidated Statement of Operations                                                                                      | (In thousands; except per share data)
|Revenue                                                                                                                   | $                                    
|Cost and Expenses:                                                                                                        |                                      
|Cost of sales - coal                                                                                                      |                                      
|Depreciation, depletion, and amortization                                                                                 |                                      
|Income (loss) from continuing operations before income taxes and cumulative effect of change in accounting principle      |                                      
|Income tax benefit (expense) from continuing operations                                                                   |                                      
|Net income (loss) from continuing operations before cumulative effect of change in accounting principle                   |                                      
|Cumulative effect of change in accounting principle                                                                       |                                      
|Net income (loss)                                                                                                         |                                      
|Net income (loss) applicable to common shareholders                                                                       |                                      
|Net income (loss) per share applicable to common shareholders before cumulative
effect of change in accounting principle: |                                      
|Basic earnings per share                                                                                                  | $                                    
|Diluted earnings per share                                                                                                |                                      
|Net income (loss) per share applicable to common shareholders:                                                            |                                      
|Basic earnings per share                                                                                                  | $                                    
|Diluted earnings per share                                                                                                |                                      

|                                                                                                                          | 2005                                 
|------------------------------------------------------------------------------------------------------------------------- | -------------------------------------
|                                                                                                                          |                                      
|                                                                                                                          | Third quarter                        
|                                                                                                                          |                                      
|                                                                                                                          | As previously reported               
|                                                                                                                          |                                      
|Consolidated Statement of Operations                                                                                      | (In thousands; except per share data)
|Revenue                                                                                                                   | $                                    
|Cost and Expenses:                                                                                                        |                                      
|Cost of sales - coal                                                                                                      |                                      
|Depreciation, depletion, and amortization                                                                                 |                                      
|Income (loss) from continuing operations before income taxes and cumulative effect of change in accounting principle      |                                      
|Income tax benefit (expense) from continuing operations                                                                   |                                      
|Net income (loss) from continuing operations before cumulative effect of change in accounting principle                   |                                      
|Cumulative effect of change in accounting principle                                                                       |                                      
|Net income (loss)                                                                                                         |                                      
|Net income (loss) applicable to common shareholders                                                                       |                                      
|Net income (loss) per share applicable to common shareholders before cumulative
effect of change in accounting principle: |                                      
|Basic earnings per share                                                                                                  | $                                    
|Diluted earnings per share                                                                                                |                                      
|Net income (loss) per share applicable to common shareholders:                                                            |                                      
|Basic earnings per share                                                                                                  | $                                    
|Diluted earnings per share                                                                                                |                                      



The following tables show the impact
of the restatement adjustments on our previously reported unaudited interim quarterly
consolidated balance sheets for the year ended December 31, 2005:

|                                                  | 2005                  
|------------------------------------------------- | ----------------------
|                                                  |                       
|                                                  | March 31,             
|                                                  |                       
|                                                  | As previously reported
|                                                  |                       
|                                                  | (In thousands)        
|Consolidated Balance Sheets                       |                       
|                                                  |                       
|Other receivables                                 | $                     
|Restricted cash  (current)                        |                       
|Total current assets                              |                       
|Deferred income taxes (current)                   |                       
|Property, plant, and equipment, net               |                       
|Deferred income taxes (non-current)               |                       
|Investment in independent power projects          |                       
|Restricted cash  (non-current)                    |                       
|Total assets                                      |                       
|                                                  |                       
|Accrued income taxes                              |                       
|Total current liabilities                         |                       
|Asset retirement obligation, less current portion |                       
|                                                  |                       
|Accumulated other comprehensive loss              |                       
|Accumulated deficit                               |                       
|Total shareholders' equity                        |                       
|                                                  |                       
|Total liabilities and shareholders' equity        |                       

|                                                  | 2005                   |           
|------------------------------------------------- | ---------------------- | ----------
|                                                  |                       
|                                                  | September 30,          |           
|                                                  |                       
|                                                  | As previously reported | Asrestated
|                                                  |                       
|                                                  | (In thousands)         |           
|Consolidated Balance Sheets                       |                        |           
|                                                  |                        |           
|Other receivables                                 | $                      | 5,500     
|Restricted cash  (current)                        |                        | 10,025    
|Total current assets                              |                        | 103,757   
|Deferred income taxes (current)                   |                        | 12,747    
|Property, plant, and equipment, net               |                        | 169,703   
|Deferred income taxes (non-current)               |                        | 79,781    
|Investment in independent power projects          |                        | 48,586    
|Restricted cash  (non-current)                    |                        | 23,985    
|Total assets                                      |                        | 532,149   
|                                                  |                        |           
|Accrued income taxes                              |                        | 1,749     
|Total current liabilities                         |                        | 95,798    
|Asset retirement obligation, less current portion |                        | 135,632   
|                                                  |                        |           
|Accumulated other comprehensive loss              |                        | (4,862)   
|Accumulated deficit                               |                        | (52,915)  
|Total shareholders' equity                        |                        | 40,640    
|                                                  |                        |           
|Total liabilities and shareholders' equity        |                        | 532,149   



The following tables show the impact
of the restatement adjustments on our previously reported unaudited quarterly financial
information for the year ended December 31, 2004:

|                                                                                                                          | 2004                                 
|------------------------------------------------------------------------------------------------------------------------- | -------------------------------------
|                                                                                                                          |                                      
|                                                                                                                          | First quarter                        
|                                                                                                                          |                                      
|                                                                                                                          | As previously reported               
|                                                                                                                          |                                      
|Consolidated Statement of Operations                                                                                      | (In thousands; except per share data)
|Revenue                                                                                                                   | $                                    
|Cost and Expenses:                                                                                                        |                                      
|Cost of sales - coal                                                                                                      |                                      
|Depreciation, depletion, and amortization                                                                                 |                                      
|Income (loss) from continuing operations before income taxes and cumulative effect of change in accounting principle      |                                      
|Income tax benefit (expense) from continuing operations                                                                   |                                      
|Net income (loss) from continuing operations before cumulative effect of change in accounting principle                   |                                      
|Cumulative effect of change in accounting principle                                                                       |                                      
|Net income (loss)                                                                                                         |                                      
|Net income (loss) applicable to common shareholders                                                                       |                                      
|Net income (loss) per share applicable to common shareholders before cumulative
effect of change in accounting principle: |                                      
|Basic earnings per share                                                                                                  | $                                    
|Diluted earnings per share                                                                                                |                                      
|Net income (loss) per share applicable to common shareholders:                                                            |                                      
|Basic earnings per share                                                                                                  | $                                    
|Diluted earnings per share                                                                                                |                                      

|                                                                                                                          | 2004                                 
|------------------------------------------------------------------------------------------------------------------------- | -------------------------------------
|                                                                                                                          |                                      
|                                                                                                                          | Third quarter                        
|                                                                                                                          |                                      
|                                                                                                                          | As previously reported               
|                                                                                                                          |                                      
|Consolidated Statement of Operations                                                                                      | (In thousands; except per share data)
|Revenue                                                                                                                   | $                                    
|Cost and Expenses:                                                                                                        |                                      
|Cost of sales - coal                                                                                                      |                                      
|Depreciation, depletion, and amortization                                                                                 |                                      
|Income (loss) from continuing operations before income taxes and cumulative effect of change in accounting principle      |                                      
|Income tax benefit (expense) from continuing operations                                                                   |                                      
|Net income (loss) from continuing operations before cumulative effect of change in accounting principle                   |                                      
|Cumulative effect of change in accounting principle                                                                       |                                      
|Net income (loss)                                                                                                         |                                      
|Net income (loss) applicable to common shareholders                                                                       |                                      
|Net income (loss) per share applicable to common shareholders before cumulative
effect of change in accounting principle: |                                      
|Basic earnings per share                                                                                                  | $                                    
|Diluted earnings per share                                                                                                |                                      
|Net income (loss) per share applicable to common shareholders:                                                            |                                      
|Basic earnings per share                                                                                                  | $                                    
|Diluted earnings per share                                                                                                |                                      



The following tables show the impact
of the restatement adjustments on our previously reported unaudited interim quarterly
consolidated balance sheets for the year ended December 31, 2004:

|                                           | 2004                  
|------------------------------------------ | ----------------------
|                                           |                       
|                                           | March 31,             
|                                           |                       
|                                           | As previously reported
|                                           |                       
|                                           | (In thousands)        
|Consolidated Balance Sheets                |                       
|                                           |                       
|Other receivables                          | $                     
|Restricted cash  (current)                 |                       
|Deferred income taxes (current)            |                       
|Total current assets                       |                       
|Property, plant, and equipment, net        |                       
|Deferred income taxes (non-current)        |                       
|Investment in independent power projects   |                       
|Restricted cash  (non-current)             |                       
|Total assets                               |                       
|                                           |                       
|Total current liabilities                  |                       
|                                           |                       
|Accumulated other comprehensive loss       |                       
|Accumulated deficit                        |                       
|Total shareholders' equity                 |                       
|                                           |                       
|Total liabilities and shareholders' equity |                       

|                                           | 2004                   |           
|------------------------------------------ | ---------------------- | ----------
|                                           |                       
|                                           | September 30,          |           
|                                           |                       
|                                           | As previously reported | Asrestated
|                                           |                       
|                                           | (In thousands)         |           
|Consolidated Balance Sheet                 |                        |           
|                                           |                        |           
|Other receivables                          | $                      | 3,459     
|Restricted cash  (current)                 |                        | 9,722     
|Deferred income taxes (short-term)         |                        | 14,227    
|Total current assets                       |                        | 97,884    
|Property, plant, and equipment, net        |                        | 151,845   
|Deferred income taxes (long-term)          |                        | 67,379    
|Investment in independent power projects   |                        | 48,117    
|Restricted cash  (non-current)             |                        | 22,354    
|Total assets                               |                        | 491,961   
|                                           |                        |           
|Total current liabilities                  |                        | 84,780    
|                                           |                        |           
|Accumulated other comprehensive loss       |                        | (4,542)   
|Accumulated deficit                        |                        | (46,654)  
|Total shareholders' equity                 |                        | 44,405    
|                                           |                        |           
|Total liabilities and shareholders' equity |                        | 491,961   



|3. |  | WESTMORELAND
ENERGY, LLC
|-- |  | ------------------------

Westmoreland
Energy, LLC (WELLC), a wholly owned subsidiary of the Company, holds general
and limited partner interests in partnerships which were formed to develop and own
cogeneration and other non-regulated independent power plants. Equity interests in these
partnerships range from 4.49 percent to 50 percent. As of December 31, 2005, WELLC held
interests in three operating projects as listed and described in the summary below. The
lenders to these projects have recourse only against these projects and the income and
revenues there-from. The debt agreements contain various restrictive covenants including
restrictions on making cash distributions to the partners, with which the partnerships are
in compliance. The type of restrictions on making cash distributions to the partners vary
from one project lender to another.

|Project                    | Ft. Lupton              | RoanokeValley I         | RoanokeValley II       
|-------------------------- | ----------------------- | ----------------------- | -----------------------
|Location:                  | Ft. Lupton,Colorado     | Weldon,North  Carolina  | Weldon,North  Carolina 
|Gross Megawatt Capacity:   | 290 MW                  | 180 MW                  | 50 MW                  
|WELLC Equity Ownership:    | 4.49%                   | 50.0%                   | 50.0%                  
|Electricity Purchaser:     | Xcel Energy             | Dominion Virginia Power | Dominion Virginia Power
|Steam Host:                | Rocky Mtn.Produce, Ltd. | Patch Rubber Company    | Patch Rubber Company   
|Fuel Type:                 | Natural Gas             | Coal                    | Coal                   
|Fuel Supplier:             | Thermo Fuels,  Inc.     | TECO Coal/ CONSOL       | TECO Coal/ CONSOL      
|Commercial Operation Date: | 1994                    | 1994                    | 1995                   



The
following is a summary of aggregated financial information for all investments owned by
WELLC which are accounted for under the equity method:

|Balance Sheets                       |   |                |   |        
|------------------------------------ | - | -------------- | - | -------
|December 31,                         |   | 2005           |   | 2004   
|                                     |   |                |   |        
|                                     |   | (in thousands)
|Assets                               |   |                |   |        
|Current assets                       | $ | 46,458         | $ | 47,109 
|Property, plant and equipment, net   |   | 228,323        |   | 237,343
|Other assets                         |   | 25,872         |   | 26,297 
|                                     |   |                |   |        
|Total assets                         | $ | 300,653        | $ | 310,749
|                                     |   |                |   |        
|                                     |   |                |   |        
|Liabilities and equity               |   |                |   |        
|Current liabilities                  | $ | 45,481         | $ | 34,019 
|Long-term debt and other liabilities |   | 158,529        |   | 185,109
|Equity                               |   | 96,643         |   | 91,621 
|                                     |   |                |   |        
|Total liabilities and equity         | $ | 300,653        | $ | 310,749
|                                     |   |                |   |        
|                                     |   |                |   |        
|WELLC's share of equity              | $ | 50,894         | $ | 48,565 
|                                     |   |                |   |        

|Income Statements            |   |                |   |         |   |        
|---------------------------- | - | -------------- | - | ------- | - | -------
|For years ended December 31, |   | 2005           |   | 2004    |   | 2003   
|                             |   |                |   |         |   |        
|                             |   | (in thousands)
|                             |   |                |   |         |   |        
|Revenues                     | $ | 109,991        | $ | 112,669 | $ | 110,673
|Operating income             |   | 38,716         |   | 40,768  |   | 45,918 
|Net income                   |   | 24,396         |   | 25,063  |   | 30,446 
|                             |   |                |   |         |   |        
|WELLC's share of earnings    | $ | 12,272         | $ | 12,424  | $ | 15,242 
|                             |   |                |   |         |   |        

WELLC
performs asset management services for the partnerships and has recognized related
revenues of $258,000 for each of the years ended December 31, 2005, 2004 and 2003.
Management fees, net of related costs, are recorded as other income when the service is
performed.

On
August 25, 2004, we signed an Interest Purchase Agreement with a subsidiary of LG&E
Energy LLC to acquire the 50% interest in the ROVA project that we do not currently own.
LG&E Energy LLC is now a subsidiary of E.ON U.S. In November 2004, Dominion, the
purchaser of the electricity generated by the ROVA Project, asserted that the power
purchase agreement gives it the right of first refusal with respect to LG&E
Energys 50% interest. On March 24, 2005, Dominion filed a Petition for Declaratory
Judgment in Virginia in the Circuit Court of the City of Richmond seeking an order
validating its alleged right of first refusal under the power purchase agreement to
acquire LG&Es partnership interest in the ROVA Project. On April 29, 2005, the
ROVA Project filed a demurrer in the Circuit Court of the City of Richmond requesting the
Petition for Declaratory Judgment be denied.

On
September 2, 2005, the Richmond Circuit Court granted the Partnerships demurrer
motion, effectively denying Dominions claim that it has a right of first refusal
under the structure of the proposed acquisition. Dominion filed a motion for
reconsideration of the courts ruling and their motion was denied. Dominion can now
file a new Motion for Summary Judgment based on amendments to the acquisition agreement or
it can appeal the ruling on the Partnerships demurrer motion.



We
are currently in discussion with Dominion and LG&E in the hope that this dispute can
be resolved on business terms acceptable to all parties.

|4. |  | ASSET
RETIREMENT OBLIGATION, RECLAMATION, RECLAMATION DEPOSITS AND CONTRACTUAL           THIRD
PARTY RECLAMATION OBLIGATIONS
|-- |  | ----------------------------------------------------------------------------------------------------------------------------

Changes
in the Companys asset retirement obligations during 2005 and 2004 (in thousands)
were:

|                                                |                     | 2005    |   | 2004   
|----------------------------------------------- | ------------------- | ------- | - | -------
|                                                |                     |         |   |        
|                                                | As Restated, note 2
|Asset retirement obligation - beginning of year | $                   | 134,348 | $ | 120,445
|Accretion                                       |                     | 8,945   |   | 8,182  
|Settlements (final reclamation performed)       |                     | (2,944) |   | (5,321)
|Gains on settlements                            |                     | 732     |   | (187)  
|Changes due to amount and timing of reclamation |                     | 17,326  |   | 11,229 
|                                                |                     |         |   |        
|Asset retirement obligation - end of year       | $                   | 158,407 | $ | 134,348
|                                                |                     |         |   |        

As
a result of the adoption of SFAS No. 143 in the first quarter of 2003, the Company
recorded a loss of $22,000 (as restated, see note 2) for the cumulative effect of the
change in accounting principle. The Company also reduced its recorded liability for mine
reclamation from $159 million to $114 million as of January 1, 2003 and reduced the net
book value of its property, plant and equipment from $189 million to $145 million on its
Consolidated Balance Sheets as a result of the change from undiscounted to present values.

The
total reclamation deposits of $58.8 million at December 31, 2005 consist of $11.9 million
of cash and cash equivalents and $46.9 million of Federal agency bonds (government backed
securities). The Company has the intent and ability to hold these securities to maturity,
and, therefore, accounts for them as held-to-maturity securities. Held-to-maturity
securities are recorded at amortized cost, adjusted for the amortization or accretion of
premiums or discounts calculated on the effective interest method. Interest income is
recognized when earned. The Company has evaluated the securities for an other than
temporary impairment and determined that they are not impaired due to the nature of the
investments being government backed securities held to maturity. In addition, the Company
has recognized as an asset $31.6 million as contractual third party reclamation
obligations, representing the present value of obligations of certain customers and a
contract miner.

The
amortized cost, gross unrealized holding losses and fair value of held-to-maturity
securities at December 31, 2005 are as follows (in thousands):

|                                |   |         |  | 
|------------------------------- | - | ------- |  | 
|Amortized cost                  | $ | 46,858  |  | 
|Gross unrealized holding gains  |   | -       |  | 
|Gross unrealized holding losses |   | (1,314) |  | 
|                                |   |         |  | 
|Fair value                      | $ | 45,544  |  | 
|                                |   |         |  | 



Maturities
of held-to-maturity securities are as follows at December 31, 2005 (in thousands):

|                                  |   | Amortized Cost |   | Fair Value
|--------------------------------- | - | -------------- | - | ----------
|                                  |   |                |   |           
|Due in five years or less         | $ | 22,432         | $ | 21,789    
|Due after five years to ten years |   | 9,917          |   | 9,603     
|Due in more than ten years        |   | 14,509         |   | 14,152    
|                                  |   |                |   |           
|                                  | $ | 46,858         | $ | 45,544    
|                                  |   |                |   |           

|5. |  | LINES
OF CREDIT AND LONG-TERM DEBT
|-- |  | ----------------------------------

The
amounts outstanding at December 31, 2005 and 2004 under the Companys lines of credit
and long-term debt consist of the following:

|                                   |                | 2005     |   | 2004    
|---------------------------------- | -------------- | -------- | - | --------
|                                   |                |          |   |         
|                                   | (in thousands)
|WML term debt                      | $              | 102,900  | $ | 113,200 
|WML revolving line of credit       |                | -        |   | -       
|Corporate revolving line of credit |                | 5,500    |   | -       
|Other term debt                    |                | 3,843    |   | 4,059   
|                                   |                |          |   |         
|                                   |                | 112,243  |   | 117,259 
|Less current portion               |                | (12,437) |   | (11,819)
|                                   |                |          |   |         
|                                   | $              | 99,806   | $ | 105,440 
|                                   |                |          |   |         

As
of December 31, 2005, Westmoreland Mining LLC (WML) has a $20 million
revolving credit facility (the Facility) with PNC Bank, National Association
(PNC), which expires on April 27, 2008. The interest rate is either PNCs
Base Rate plus 1.00% or Euro-Rate plus 3.00%, at WMLs option. In addition, a
commitment fee of 1⁄2 of 1% of the average unused portion of the available credit is
payable quarterly. The amount available under the Facility is based upon, and any
outstanding amounts are secured by, eligible accounts receivable.

In
2001, WML borrowed $120 million from a group of institutions using PNC Capital Markets,
Inc. as lead arranger to fund the acquisitions of four coal mining operations and certain
other assets. The borrowings consisted of $20 million in variable-rate Series A Notes and
$100 million in fixed-rate Series B Notes. The Series A Notes were repaid in full on June
30, 2002. The Series B Notes bear interest at a rate of 9.39% and require quarterly
principal and interest payments from September 2002 to December 2008, when the remaining
outstanding balance of $30.0 million is due. The Series B Notes are secured by assets of
WML.

The
agreements governing both the revolving line of credit and the term notes contain various
covenants which limit WML or its subsidiaries ability to merge or consolidate with
another entity, dispose of assets, pay dividends, or change the nature of their business
operations. WML is also required to maintain certain financial ratios as defined in the
agreements. As of December 31, 2005, WML was in compliance with such covenants.



Under
the terms of the Series B Notes, WML is required to maintain a debt service reserve
account equal to the principal and interest payments and certain fees scheduled to become
due within the next six months. In addition, 25% of any Surplus Cash Flow (as
such term is defined in the agreement) is applied to a prepayment account for repayment of
the final $30 million of indebtedness and 75% of any Surplus Cash Flow is available to
WML. WML may distribute such Surplus Cash Flow to the Company so long as no Event of
Default or Potential Event of Default under the term loan agreement exists or is likely to
result from the distribution. The quarterly distribution is in addition to a quarterly
$500,000 management fee that WML pays the Company. At December 31, 2005, WML had funded
$10.0 million in the debt service reserve account and $12.2 million in the long-term
prepayment account, which is to be used to fund the $30.0 million payment due December 31,
2008 for the Series B Notes. Those funds have been classified as restricted cash in the
consolidated balance sheet.

On
March 8, 2004, WML amended its term loan agreement to borrow an additional $35 million,
$20.4 million in Series C Notes and $14.6 million in Series D Notes. The Series C Notes
were drawn immediately and the Series D Notes were drawn in December 2004. Both series of
notes require quarterly interest payments with principal payments beginning March 31, 2009
and final payment on December 31, 2011. The Series C Notes bear interest at a fixed rate
of 6.85%, and the Series D Notes have a variable rate of interest based upon three-month
LIBOR plus 2.90%. The new notes are secured by assets of WML and require the same
covenants and financial ratios, as amended, as the Series A and B Notes.

The
Company has a $14.0 million revolving credit agreement with First Interstate Bank.
Interest is payable monthly at the Banks prime rate. The Company is required to
maintain certain financial ratios. The revolving credit agreement is collateralized by the
Companys stock in Westmoreland Resources, Inc. (WRI), 100% of the common
stock of Horizon Coal Services, Inc., and the dragline located at WRIs Absaloka Mine
in Big Horn County, Montana. The expiration date is June 30, 2007.

Other
term debt consists of notes payable associated with reserve acquisitions, certain notes
payable related to the purchase of real property, and capital lease obligations for mining
equipment. These obligations expire at various dates through 2010 and bear interest at a
weighted-average rate of 5.31%.

The
maturities of all long-term debt and the revolving credit facilities outstanding at
December 31, 2005 are (in thousands):

|2006       | $ | 12,437 
|---------- | - | -------
|2007       |   | 18,567 
|2008       |   | 45,422 
|2009       |   | 12,080 
|2010       |   | 11,737 
|Thereafter |   | 12,000 
|           |   |        
|           | $ | 112,243
|           |   |        

# Restricted Net Assets

At
December 31, 2005, the Company had approximately $66.9 million of net assets at our
subsidiaries that were not available to be transferred to the Company in the form of
dividends, loans, or advances due to restrictions contained in the credit facilities of
these subsidiaries. In addition, the Company also had $49.9 million of net assets
attributable to its investments in independent power projects that were also not available
to be transferred to the Company.



|6. |  | HERITAGE
HEALTH BENEFIT EXPENSES
|-- |  | --------------------------------

The
caption Heritage health benefit expenses used in our Consolidated Statements
of Operations refers to costs of benefits the Company provides as the result of several
different government regulations and programs as previously discussed, contractually
agreed benefits, past and current, and standard benefits provided voluntarily to attract
and retain employees. The components of these expenses are:

|                             |                | 2005    |   | 2004   |   | 2003   
|---------------------------- | -------------- | ------- | - | ------ | - | -------
|                             | (in thousands)
|Health care benefits         | $              | 23,542  | $ | 22,819 | $ | 24,117 
|Combined benefit fund        |                | 4,560   |   | 5,390  |   | 9,674  
|Workers' compensation        |                | 2,472   |   | 3,354  |   | 1,010  
|Black lung benefits (credit) |                | (3,050) |   | 1,550  |   | 1,431  
|UMWA 1974 pension plan       |                | -       |   | -      |   | (6,310)
|                             |                |         |   |        |   |        
|Total                        | $              | 27,524  | $ | 33,113 | $ | 29,922 
|                             |                |         |   |        |   |        

Health
care benefit costs are the most significant component of Heritage Health Benefit
Expenses and include net periodic health benefit costs for our former eastern mining
operation employees as well as other administrative costs associated with providing those
benefits.

|7. |  | WORKERSCOMPENSATION
BENEFITS
|-- |  | -----------------------------

The
Company was self-insured for workers compensation benefits prior to and through
December 31, 1995. Beginning in 1996, the Company purchased third party insurance for new
workers compensation claims. Based on updated actuarial and claims data, $2.5
million, $3.4 million, and $1.0 million were charged to operations in 2005, 2004 and 2003,
respectively. There was a $2.7 million benefit (as restated, see note 2) recorded in 2005
for a change in accounting principle as more fully described in Note 1 above. The cash
payments for workers compensation benefits were $1.3 million, $1.9 million and $2.3
million in 2005, 2004 and 2003, respectively.

The
Company was required to obtain surety bonds in connection with its self-insured
workers compensation plan. The Companys surety bond underwriters required
collateral for such bonding. As of December 31, 2005 and 2004, $5.3 million and $5.0
million respectively, were held in the collateral accounts.



|8. |  | PNEUMOCONIOSIS
(BLACK LUNG) BENEFITS
|-- |  | ------------------------------------

The
Company is self-insured for federal and state pneumoconiosis benefits for former employees
and has established an independent trust to pay these benefits.

The
following table sets forth the funded status of the Companys obligation:

|December 31,                                           |   | 2005           |   | 2004  
|------------------------------------------------------ | - | -------------- | - | ------
|                                                       |   |                |   |       
|                                                       |   | (in thousands)
|Actuarial present value of benefit obligation:         |   |                |   |       
|Expected claims from terminated employees              | $ | 1,556          | $ | 1,431 
|Claimants                                              |   | 15,323         |   | 20,324
|                                                       |   |                |   |       
|Total present value of benefit obligation              |   | 16,879         |   | 21,755
|Plan assets at fair value, primarily government-backed |   |                |   |       
|securities                                             |   | 24,342         |   | 26,218
|                                                       |   |                |   |       
|Excess of trust assets over pneumoconiosis benefit     |   |                |   |       
|obligation                                             | $ | 7,463          | $ | 4,463 
|                                                       |   |                |   |       

The
discount rates used in determining the accumulated pneumoconiosis benefit obligation at
December 31, 2005 and 2004 were 5.65% and 5.75%, respectively.

|9. |  | POSTRETIREMENT
MEDICAL AND LIFE INSURANCE BENEFITS
|-- |  | --------------------------------------------------

# Single-Employer Plans

The
Company and its subsidiaries provide certain health care and life insurance benefits for
retired employees and their dependents either voluntarily or as a result of the Coal Act.
Substantially all of the Companys current employees may also become eligible for
these benefits if certain age and service requirements are met at the time of termination
or retirement as specified in the plan document. The majority of these benefits are
provided through self-insured programs. The Company adopted Statement of Financial
Accounting Standards No. 106  Employers Accounting for Postretirement
Benefits Other than Pensions, or SFAS 106, effective January 1, 1993 and elected to
amortize its unrecognized, unfunded accumulated postretirement benefit obligation over a
20-year period.



The
following table sets forth the actuarial present value of postretirement medical and life
insurance benefit obligations and amounts recognized in the Companys financial
statements:

|December 31,                                |   | 2005           |   | 2004     
|------------------------------------------- | - | -------------- | - | ---------
|                                            |   |                |   |          
|                                            |   | (in thousands)
|Assumptions:                                |   |                |   |          
|Discount rate                               |   | 5.55%          |   | 5.75%    
|                                            |   |                |   |          
|Change in benefit obligation:               |   |                |   |          
|Net benefit obligation at beginning of year | $ | 259,776        | $ | 237,554  
|Service cost                                |   | 534            |   | 482      
|Interest cost                               |   | 14,612         |   | 14,837   
|Plan amendments                             |   | -              |   | (7,181)  
|Plan participant contributions              |   | 113            |   | 78       
|Actuarial losses                            |   | 16,000         |   | 30,797   
|Gross benefits paid                         |   | (16,988)       |   | (16,791) 
|                                            |   |                |   |          
|Net benefit obligation at end of year       |   | 274,047        |   | 259,776  
|                                            |   |                |   |          
|Change in plan assets:                      |   |                |   |          
|Employer contributions                      |   | 16,875         |   | 16,713   
|Plan participant contributions              |   | 113            |   | 78       
|Gross benefits paid                         |   | (16,988)       |   | (16,791) 
|                                            |   |                |   |          
|Fair value of plan assets at end of year    |   | -              |   | -        
|                                            |   |                |   |          
|Funded status at end of year                |   | (274,047)      |   | (259,776)
|Unrecognized net actuarial loss             |   | 110,365        |   | 92,745   
|Unrecognized prior service costs            |   | (1,896)        |   | -        
|Unrecognized net transition obligation      |   | 23,672         |   | 32,802   
|                                            |   |                |   |          
|Net amount recognized at end of year        | $ | (141,906)      | $ | (134,229)
|                                            |   |                |   |          

The
present value of our actuarially determined liability for postretirement medical costs
increased over $14.0 million between December 31, 2004 and 2005, principally because of
the decrease in discount rate and use of updated mortality tables. The discount rate is
adjusted annually to reflect current settlement rates which are highly correlated with
investment grade long-term bond yields.



The
components of net periodic postretirement benefit cost are as follows:

|                                                                      |   |        |   |        |   |       
|--------------------------------------------------------------------- | - | ------ | - | ------ | - | ------
|Year ended December 31,                                               |   | 2005   |   | 2004   |   | 2003  
|                                                                      |   |        |   |        |   |       
|Assumptions:                                                          |   |        |   |        |   |       
|Discount rate                                                         |   | 5.75%  |   | 6.25%  |   | 6.75% 
|                                                                      |   |        |   |        |   |       
|Components of net periodic benefit   cost (in
            thousands): |   |        |   |        |   |       
|Service cost                                                          | $ | 534    | $ | 482    | $ | 446   
|Interest cost                                                         |   | 14,612 |   | 14,837 |   | 15,693
|Amortization of:                                                      |   |        |   |        |   |       
|Transition obligation                                                 |   | 3,381  |   | 4,100  |   | 4,100 
|Prior service cost                                                    |   | (106)  |   | -      |   | -     
|Actuarial loss                                                        |   | 6,124  |   | 4,278  |   | 4,532 
|                                                                      |   |        |   |        |   |       
|Total net periodic benefit  cost                                      | $ | 24,545 | $ | 23,697 | $ | 24,771
|                                                                      |   |        |   |        |   |       

Of
the total net periodic benefit cost, $23.2 million, $22.3 million and $23.4 million,
relates to the Companys former eastern mining operations and is included in heritage
health benefit costs in 2005, 2004 and 2003, respectively. The remainder of $1.3 million,
$1.4 million and $1.4 million, respectively, relates to current operations.

|Sensitivity of retiree
                     welfare results (in thousands):                             |   |         
|------------------------------------------------------------------------------------------------------- | - | --------
|                                                                                                        |   |         
|Effect of a one percentage point increase in  assumed
                  ultimate health care cost trend |   |         
|                                                                                                        |   |         
| on total service and interest cost
                      components                                   | $ | 1,828   
| on postretirement benefit obligation                                                                  | $ | 32,142  
|                                                                                                        |   |         
|Effect of a one percentage point decrease in                                                            |   |         
|assumed ultimate health care cost trend                                                                 |   |         
|                                                                                                        |   |         
| on total service and interest cost
                      components                                   | $ | (1,543) 
| on postretirement benefit obligation                                                                  | $ | (27,121)

The
health care cost trend assumed on covered charges was 10.00%, 11.00% and 8.50% for 2005,
2004 and 2003, respectively, decreasing to an ultimate trend of 5.0% in 2011 and beyond.

Based
on the same assumptions used in measuring the Companys benefit obligation at
December 31, 2005, the Company expects to pay benefits in each year from 2006 to 2010 of
$17.3 million, $18.5 million, $19.3 million, $20.0 million and $20.5 million,
respectively. The aggregate benefits expected to be paid in the five-years from 2011 to
2015 are $95.6 million.

The
Company was required to obtain surety bonds in connection with certain health care and
life insurance premium plans. The Companys surety bond underwriters required
collateral for such bonding. As of December 31, 2005 and 2004, $4.2 million and $4.1
million respectively, were held in the collateral accounts.



One
of the estimates we have made relates to the implementation of the Medicare Prescription
Drug Improvement and Modernization Act of 2003 (Medicare Reform Act). As
provided for under that Act, we recognized a benefit to our anticipated future
prescription drug costs for retirees and their dependents in 2003 based on a coordinated
implementation of the Medicare Reform Act and our existing benefit programs, including the
UMWA 1992 Plan. In 2005, the government issued regulations which made the subsidy approach
the only practical alternative given our existing programs. In October 2005, we adopted
the subsidy approach for 2006. The subsidy approach will limit our annual benefit to 28%
(to a maximum of $1,330/participant) of actual costs. A revised actuarial analysis reduced
the projected net present value benefit to us from the Medicare Reform Act and caused a
higher resultant future annual expense of approximately $1.3 million than we had
anticipated with a coordinated benefits approach.

# Multiemployer Plan
(Combined Benefit Fund)

The
Company makes payments to the UMWA Combined Benefit Fund (CBF), which is a
multiemployer health plan neither controlled nor administered by the Company. The CBF is
designed to pay benefits to UMWA workers (and dependents) who retired prior to 1976. The
Company is required by the Coal Act to make monthly premium payments into the CBF. These
payments are based on the number of beneficiaries assigned to the Company, the
Companys UMWA employees who retired prior to 1976 and the Companys pro-rata
assigned share of UMWA retirees whose companies are no longer in business. The net present
value of the Companys future cash payments is estimated to be approximately $34.1
million at December 31, 2005. The nature of this legal obligation does not require a
provision, so the Company expenses payments to the CBF when they are due. Payments are
generally made on the due date. Payments in 2005, 2004 and 2003 were $3.6 million, $9.4
million and $5.3 million, respectively. As discussed elsewhere, the Company may recover
excessive premium payments from past years. See Item 3  Legal Proceedings and Note
21 to the Consolidated Financial Statements for additional information.

|10. |  | RETIREMENT
PLANS
|--- |  | ----------------

# Defined Benefit Pension
Plans

The
Company provides defined benefit pension plans for its full-time employees. Benefits are
generally based on years of service and the employees average annual compensation
for the highest five continuous years of employment as specified in the plan agreement.
The Companys funding policy is to contribute annually the minimum amount prescribed,
as specified by applicable regulations. Prior service costs and actuarial gains and losses
are amortized over plan participants expected future period of service using the
straight-line method.

# Supplemental Executive
Retirement Plan

The
Company maintains a Supplemental Executive Retirement Plan (SERP). The SERP is
an unfunded non-qualified deferred compensation plan which provides benefits to certain
employees that are not eligible under the Companys defined benefit pension plan
beyond the maximum limits imposed by the Employee Retirement Income Security Act
(ERISA) and the Internal Revenue Code.



The
following table provides a reconciliation of the changes in the plans benefit
obligations and fair value of plan assets for the years ended December 31, 2005 and 2004
and the amounts recognized in the Companys financial statements for both the defined
benefit pension and SERP Plans:

|                                                                   |   | Qualified Pension Benefits |   | SERP Benefits
|------------------------------------------------------------------ | - | -------------------------- | - | -------------
|                                                                   |   |                            |   |              
|December 31,                                                       |   | 2005                       |   | 2004         
|                                                                   |   |                            |   |              
|                                                                   |   | (in thousands)            
|Assumptions:                                                       |   |                            |   |              
|                                                                   |   |                            |   |              
|Discount rate                                                      |   | 5.70%                      |   | 6.00%        
|Expected return on plan assets                                     |   | 8.50%                      |   | 8.50%        
|Rate of compensation increase                                      |   | 4.20%                      |   | 4.50%        
|                                                                   |   |                            |   |              
|Change in benefit obligation:                                      |   |                            |   |              
|                                                                   |   |                            |   |              
|Net benefit obligation at beginning of year                        | $ | 55,955                     | $ | 47,777       
|Service cost                                                       |   | 2,622                      |   | 2,407        
|Interest cost                                                      |   | 3,468                      |   | 3,174        
|Actuarial loss                                                     |   | 4,571                      |   | 3,091        
|Gross benefits paid                                                |   | (700)                      |   | (494)        
|                                                                   |   |                            |   |              
|Net benefit obligation at end of year                              |   | 65,916                     |   | 55,955       
|                                                                   |   |                            |   |              
|Change in plan assets:                                             |   |                            |   |              
|                                                                   |   |                            |   |              
|Fair value of plan assets at beginning of    year                  |   | 39,103                     |   | 32,848       
|Actual return on plan assets                                       |   | 2,527                      |   | 3,318        
|Employer contributions                                             |   | 1,613                      |   | 3,431        
|Gross benefits paid                                                |   | (700)                      |   | (494)        
|                                                                   |   |                            |   |              
|Fair value of plan assets at end of year                           |   | 42,543                     |   | 39,103       
|                                                                   |   |                            |   |              
|Funded status at end of year                                       |   | (23,373)                   |   | (16,852)     
|Unrecognized net actuarial (gain) loss                             |   | 20,868                     |   | 16,355       
|Unrecognized prior service cost                                    |   | 4                          |   | 54           
|Accrued benefit cost                                               |   | (2,501)                    |   | (443)        
|                                                                   |   |                            |   |              
|Amounts recognized in the  accompanying balance  sheet consist of: |   |                            |   |              
|                                                                   |   |                            |   |              
|Accrued benefit cost                                               |   | (2,501)                    |   | (443)        
|Minimum pension liability                                          |   | (11,297)                   |   | (7,959)      
|                                                                   |   |                            |   |              
|Net amount recognized at end of year                               | $ | (13,798)                   | $ | (8,402)      
|                                                                   |   |                            |   |              



The
components of net periodic pension cost (benefit) are as follows:

|                                         |   | Qualified Pension Benefits |   | SERP Benefits
|---------------------------------------- | - | -------------------------- | - | -------------
|                                         |   |                            |   |              
|Year ended December 31,                  |   | 2005                       |   | 2004         
|                                         |   |                            |   |              
|                                         |   | (in thousands)            
|Assumptions:                             |   |                            |   |              
|                                         |   |                            |   |              
|Discount rate                            |   | 6.00%                      |   | 6.25%        
|Expected return on plan assets           |   | 8.50%                      |   | 8.50%        
|Rate of compensation increase            |   | 4.50%                      |   | 4.50%        
|                                         |   |                            |   |              
|Components of net periodic  benefit cost |   |                            |   |              
|                                         |   |                            |   |              
|Service cost                             | $ | 2,622                      | $ | 2,407        
|Interest cost                            |   | 3,468                      |   | 3,174        
|Expected return on plan assets           |   | (3,400)                    |   | (2,774)      
|Amortization of:                         |   |                            |   |              
|Transition asset                         |   | 0                          |   | (4)          
|Prior service cost                       |   | 50                         |   | 50           
|Actuarial (gain) loss                    |   | 930                        |   | 851          
|                                         |   |                            |   |              
|Total net periodic pension cost          | $ | 3,670                      | $ | 3,704        
|                                         |   |                            |   |              

The
weighted-average asset allocation of the Companys qualified pension trusts at
December 31, 2005 and 2004 was as follows:

|                     | Allocation of Plan Assets atDecember 31 |      | 
|-------------------- | --------------------------------------- | ---- | 
|                     |                                         |      | 
|                     | 2005                                    | 2004 | 
|                     |                                         |      | 
|Asset Category       |                                         |      | 
|Cash and equivalents | 1%                                      | 0%   | 
|Equity securities    | 70%                                     | 70%  | 
|Debt securities      | 27%                                     | 28%  | 
|Other                | 2%                                      | 2%   | 
|                     |                                         |      | 
|Total                | 100%                                    | 100% | 
|                     |                                         |      | 

The
Companys investment goals are to maximize returns subject to specific risk
management policies. We set the expected return on plan assets based on historical trends
and forecasts provided by our third-party fund managers. Its risk management policies
permit investments in mutual funds, and prohibit direct investments in debt and equity
securities and derivative financial instruments. The Company addresses diversification by
the use of mutual fund investments whose underlying investments are in domestic and
international fixed income securities and domestic and international equity securities.
These mutual funds are readily marketable and can be sold to fund benefit payment
obligations as they become payable.

The
Company expects to contribute $1.4 million to its qualified pension plans and $76,000 to
its SERP in 2006.



The
benefits expected to be paid in each year from 2006 to 2010 are $0.9 million, $1.2
million, $1.5 million, $1.8 million and $2.3 million, respectively. The aggregate benefits
expected to be paid in the five years from 2011 to 2015 are $17.1 million. The expected
benefits are based on the same assumptions used to measure the Companys benefit
obligation at December 31 and include estimated future employee service.

# 1974 UMWA Pension Plan

The
Company was required under the 1993 Wage Agreement to pay amounts based on hours worked or
tons processed (depending on the source of the coal) in the form of contributions to the
1974 UMWA Pension Plan with respect to UMWA represented employees. The 1974 UMWA Pension
Plan is a multiemployer plan under ERISA.

Under
the Multiemployer Pension Plan Act (MPPA), a company contributing to a
multiemployer plan is liable for its share of unfunded vested liabilities upon withdrawal
from the plan. That withdrawal occurred for the Company with the cessation of eastern
mining operations, its only operations at that time which utilized UMWA employees. In
1996, the Company recorded its withdrawal liability, which was estimated by the 1974 UMWA
Pension Plan at $13.8 million. The Company disputed the amount of this obligation through
arbitration. In accordance with MPPA, the Company amortized this withdrawal liability,
with interest, during the arbitration process by making payments of approximately $172,500
per month. The final phase of the arbitration was scheduled for April 2004. On March 8,
2004, the Company reached a settlement agreement with the 1974 UMWA Pension Plan whereby
its obligation was considered fully repaid after making the monthly payment in February
2004. As a result, the Company reduced the recorded amount of its obligation and reduced
the amount of its heritage health benefit expense for 2003 by $6.3 million. No further
contributions will be required.

|11. |  | INCOME
TAXES
|--- |  | ------------

Income
tax expense attributable to net loss before income taxes consists of:

|                   | 2005           | 2004  | 2003
|------------------ | -------------- | ----- | ----
|                   | As Restated   
|                   |                |       |     
|                   | (In thousands)
|Current:           |                |       |     
|Federal            | $              | 144   | $   
|State              |                | 2,523 |     
|                   |                |       |     
|                   |                | 2,667 |     
|Deferred:          |                |       |     
|Federal            |                | -     |     
|State              |                | -     |     
|                   |                |       |     
|                   |                | -     |     
|                   |                |       |     
|                   |                |       |     
|Income tax expense | $              | 2,667 | $   
|                   |                |       |     



Income
tax expense attributable to net loss before income taxes differed from the amounts
computed by applying the statutory Federal income tax rate of 34% to pre-tax income as a
result of the following:

|                                                          | 2005           | 2004    | 2003
|--------------------------------------------------------- | -------------- | ------- | ----
|                                                          | As Restated   
|                                                          |                |         |     
|                                                          | (In thousands)
|                                                          |                |         |     
|Computed tax benefit at statutory rate                    | $              | (1,111) | $   
|Increase (decrease) in tax expense resulting from:        |                |         |     
|Tax depletion in excess of book                           |                | (2,816) |     
|Minority interest adjustment                              |                | 323     |     
|State income taxes, net                                   |                | 1,672   |     
|Change in valuation allowance for net deferred tax assets |                | 5,363   |     
|Change in effective tax rate                              |                | (823)   |     
|Other, net                                                |                | 59      |     
|                                                          |                |         |     
|Income tax expense                                        | $              | 2,667   | $   
|                                                          |                |         |     

The
tax effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2005 and 2004 are
presented below:

|                                                                                | 2005           | 2004     
|------------------------------------------------------------------------------- | -------------- | ---------
|                                                                                | As Restated   
|                                                                                |                |          
|                                                                                | (In thousands)
|Deferred tax assets:                                                            |                |          
|Federal net operating loss carryforwards                                        | $              | 63,334   
|State net operating loss carryforwards                                          |                | 10,559   
|Alternative minimum tax credit carryforwards                                    |                | 3,026    
|Accruals for the following:                                                     |                |          
|Workers' compensation                                                           |                | 3,643    
|Postretirement benefit and pension obligations                                  |                | 57,027   
|Asset retirement obligations                                                    |                | 21,138   
|Other accruals                                                                  |                | 6,280    
|                                                                                |                |          
|Total gross deferred assets                                                     |                | 165,007  
|Less valuation allowance                                                        |                | (115,362)
|                                                                                |                |          
|Net deferred tax assets                                                         |                | 49,645   
|                                                                                |                |          
|Deferred tax liabilities:                                                       |                |          
|Investment in independent power projects                                        |                | (15,123) 
|Property, plant and equipment, differences due to depreciation and amortization |                | (31,611) 
|Excess of trust assets over pneumoconiosis benefit obligation                   |                | (2,911)  
|                                                                                |                |          
|Total gross deferred tax liabilities                                            |                | (49,645) 
|                                                                                |                |          
|Net deferred tax asset                                                          | $              | -        
|                                                                                |                |          



As
of December 31, 2005, the Company has available Federal net operating loss carryforwards
to reduce future regular taxable income which expire as follows:

|                |   |            
|--------------- | - | -----------
|Expiration Date |   | Regular Tax
|                |   |            
|               
|2010            | $ | 45,297     
|2011            |   | 36,479     
|2012            |   | 449        
|2018            |   | 28         
|2019            |   | 88,429     
|after 2019      |   | 14,556     
|                |   |            
|Total           | $ | 185,238    
|                |   |            

Current
tax expense results from federal alternative minimum taxes and estimated state income
taxes payable.

The
Company has alternative minimum tax credit carryforwards of $3.0 million which are
available indefinitely to offset future regular Federal taxes payable. For alternative
minimum tax purposes, the Company has net operating loss carryforwards of approximately
$15.1 million as of December 31, 2005. As of December 31, 2005, the Company also has
available an estimated $14.5 million in net operating loss carryforwards in Colorado to
reduce future taxable income.

|12. |  | CAPITAL
STOCK
|--- |  | -------------

Each
Depositary Share represents one-quarter of a share of Westmorelands Series A
Convertible Exchangeable Preferred Stock. Dividends at a rate of 8.5% per annum were
previously paid quarterly but were last suspended in the third quarter of 1995 pursuant to
the requirements of Delaware law, described below, as a result of recognition of net
losses, the violation of certain bank covenants, and a subsequent shareholders
deficit. The full amount of the quarterly dividend is $2.125 per preferred share or $0.53
per Depositary Share. Westmoreland resumed payment of dividends to preferred shareholders
on October 1, 2002 as described below. The quarterly dividends which are accumulated but
unpaid through and including January 1, 2006 amount to $17.2 million in the aggregate
($84.03 per preferred share or $21.01 per Depositary Share). Common stock dividends may
not be declared until the preferred stock dividends that are accumulated but unpaid are
made current.

There
are statutory restrictions limiting the payment of preferred stock dividends under
Delaware law, the state in which Westmoreland is incorporated. Under Delaware law,
Westmoreland is permitted to pay preferred stock dividends only: (1) out of surplus,
surplus being the amount of shareholders equity in excess of the par value of
Westmorelands two classes of stock; or (2) in the event there is no surplus, out of
net profits for the fiscal year in which a preferred stock dividend is declared (and/or
out of net profits from the preceding fiscal year), but only to the extent that
shareholders equity exceeds the par value of the preferred stock (which par value
was $205,000 at December 31, 2005). The par value of all outstanding shares of preferred
stock and shares of common stock aggregated $21.2 million at December 31, 2005. Upon
completion of the restatement of its prior period financial statements, as described in
this Amendment No. 1 to the 2005 Annual Report on Form 10-K, the Company is currently
reporting a deficit in shareholders equity of $10.2 million. As a result, the
Company is prohibited from paying preferred stock dividends in the future.

The
Board of Directors regularly reviews the subjects of current preferred stock dividends and
the accumulated unpaid preferred stock dividends, and is committed to meeting its
obligations to the preferred shareholders in a manner consistent with the best interests
of all shareholders. Quarterly dividends of $0.15 per Depositary Share were paid beginning
October 1, 2002, increased to $0.20 per Depositary Share beginning October 1, 2003 and
further increased to $0.25 per Depositary Share beginning October 1, 2004.



On
August 9, 2002, our Board of Directors authorized the repurchase of up to 10% of the
outstanding Depositary Shares on the open market or in privately negotiated transactions
with institutional and accredited investors between then and the end of 2004. The timing
and amount of Depositary Shares repurchased was determined by our management based on its
evaluation of our capital resources, the price of the Depositary Shares offered to us and
other factors. We converted acquired Depositary Shares into shares of Series A Convertible
Exchangeable Preferred Stock and retired the preferred shares. During the Depositary Share
purchase program, we purchased a total of 14,500 Depositary Shares for an aggregate
consideration of $457,000, including 7,000 shares purchased in 2003 for $213,000.

|13. |  | INCENTIVE
STOCK OPTION AND STOCK APPRECIATION RIGHTS PLANS
|--- |  | ----------------------------------------------------------

# Incentive Stock Options

The
Company applies the intrinsic-value-based method of accounting prescribed by Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations, to account for its stock options. Under this
method, compensation expense is recorded on the date of grant only if the current market
price of the underlying stock exceeded the exercise price. SFAS No. 123, Accounting for
Stock-Based Compensation, established accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based employee compensation plans. As
allowed under SFAS No. 123, the Company has elected to continue to apply the
intrinsic-value-based method of accounting described above, and has adopted only the
disclosure requirements of SFAS No. 123. The following table illustrates the effect on net
income and net income per share as if the compensation cost for the Companys stock
options had been determined based on the fair value at the grant dates consistent with
SFAS No. 123:

|                                                           |                                       | 2005    |   | 2004    |   | 2003   
|---------------------------------------------------------- | ------------------------------------- | ------- | - | ------- | - | -------
|                                                           | (As Restated, note 2)                
|                                                           |                                       |         |   |         |   |        
|                                                           | (In thousands, except per share data)
|Net income (loss) applicable to common shareholders:       |                                       |         |   |         |   |        
|As reported                                                | $                                     | (7,678) | $ | (8,991) | $ | (2,773)
|Pro forma                                                  | $                                     | (7,855) | $ | (9,739) | $ | (3,548)
|                                                           |                                       |         |   |         |   |        
|Income (loss) per share applicable to common shareholders: |                                       |         |   |         |   |        
|As reported, basic                                         | $                                     | (0.93)  | $ | (1.11)  | $ | (0.36) 
|Pro forma, basic                                           | $                                     | (0.95)  | $ | (1.20)  | $ | (0.45) 
|As reported, diluted                                       | $                                     | (0.93)  | $ | (1.11)  | $ | (0.36) 
|Pro forma, diluted                                         | $                                     | (0.95)  | $ | (1.20)  | $ | (0.45) 
|                                                           |                                       |         |   |         |   |        

The
fair value of each option grant was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used for options
granted in 2004 and 2003. No stock options were granted during 2005. The weighted average
fair value of options granted in 2004 and 2003 was $11.41 and $8.81, respectively.



|Options Granted | Dividend Yield | Volatility | Risk-Free Rate | Expected Life
|--------------- | -------------- | ---------- | -------------- | -------------
|                |                |            |                |              
|2004            | None           | 100%       | 4.05%          | 10 years     
|2003            | None           | 100%       | 4.17%          | 10 years     

As
of December 31, 2005, the Company had options outstanding from three shareholder-approved
Incentive Stock Option (ISO) Plans for employees and three Incentive Stock
Option Plans for directors.

The
employee plans provide for the granting of ISOs, non-qualified options under certain
circumstances, stock appreciation rights and restricted stock. ISOs generally vest
over two or three years, expire ten years from the date of grant, and may not have an
option price that is less than the market value of the stock on the date of grant. The
maximum number of shares that could be issued or granted under these plans is 1,150,000,
and as of December 31, 2005, 212,568 shares are available for future issue or grant.

The
non-employee director plans generally allow the grant of options for 20,000 shares when
elected or appointed, and options for 10,000 shares after each annual meeting. Beginning
in 2003, rather than the grant of 10,000 options, each non-employee director was granted
$30,000 worth of common shares which are restricted for one year from the date of grant.
The maximum number of shares that could be issued or granted under these plans is 900,000,
and as of December 31, 2005, 19,176 shares are available for future issue or grant.

During
2005 and 2004, the Company granted 246,100 and 178,927 stock appreciation rights (SARs),
respectively to selected officers and managers. The exercise price of each SAR is equal to
the fair value of a share of the Companys common stock on the date of the grant.
After the SARs have vested, the holders may exercise the SARs and be paid value in shares
of common stock based on the increase in the value of the common stock between the grant
date and the exercise date. On December 30, 2005 the Company accelerated the vesting of
all unvested SARs, essentially all of which were in the money, resulting in additional
expense of $0.5 million. This decision will reduce future expense. Based on the value of
the Companys common stock as of December 31, 2005, the value of the SARs was
estimated to be $1.0 million, which would be equivalent to 44,321 shares.



Information
for 2005, 2004 and 2003 with respect to both the employee and director Plans is as
follows:

|                                 | Issue PriceRange | StockOptionShares | WeightedAverageExercisePrice
|-------------------------------- | ---------------- | ----------------- | ----------------------------
|                                 |                  |                   |                             
|Outstanding at December 31, 2002 | $  2.63-18.19    | 998,050           | $    7.17                   
|Granted in 2003                  | 10.48-18.08      | 189,350           | 17.08                       
|Exercised in 2003                | 2.81-12.86       | (114,700)         | 3.56                        
|Expired or forfeited in 2003     | 12.86-18.19      | (23,300)          | 15.11                       
|                                 |                  |                   |                             
|Outstanding at December 31, 2003 | 2.63-18.19       | 1,049,400         | 9.22                        
|Granted in 2004                  | 22.86            | 10,000            | 22.86                       
|Exercised in 2004                | 2.81-18.19       | (131,300)         | 6.58                        
|Expired or forfeited in 2004     | 12.86            | (2,100)           | 12.86                       
|                                 |                  |                   |                             
|Outstanding at December 31, 2004 | 2.63-22.86       | 926,000           | 9.74                        
|Granted in 2005                  | -                | -                 | -                           
|Exercised in 2005                | 2.63-18.19       | (171,848)         | 6.36                        
|Expired or forfeited in 2005     | 12.86-18.19      | (36,202)          | 16.54                       
|                                 |                  |                   |                             
|Outstanding at December 31, 2005 | $  2.81-22.86    | 717,950           | $  10.20                    
|                                 |                  |                   |                             

Information
about stock options outstanding as of December 31, 2005 is as follows:

|Range ofExercisePrice | NumberOutstanding | Weighted-AverageRemainingContractualLife (Years) | Weighted-AverageExercisePrice | NumberExercisable | Weighted-AverageExercisePrice
|--------------------- | ----------------- | ------------------------------------------------ | ----------------------------- | ----------------- | -----------------------------
|                      |                   |                                                  |                               |                   |                              
|$      2.81-5.00      | 326,650           | 3.2                                              | $   2.95                      | 326,650           | $   2.95                     
|5.01-10.00            | -                 | -                                                | -                             | -                 | -                            
|10.01-15.00           | 101,435           | 6.3                                              | 12.35                         | 91,435            | 11.94                        
|15.01-22.86           | 289,865           | 6.8                                              | 17.61                         | 215,892           | 17.62                        
|                      |                   |                                                  |                               |                   |                              
|$    2.81-22.86       | 717,950           | 5.1                                              | $ 10.20                       | 633,977           | $   9.33                     
|                      |                   |                                                  |                               |                   |                              



|14. |  | BUSINESS
SEGMENT INFORMATION
|--- |  | ----------------------------

The
Companys operations have been classified into two segments: coal and independent
power operations. The coal segment includes the production and sale of coal from Montana,
North Dakota and Texas. The independent power operations include the ownership of
interests in cogeneration and other non-regulated independent power plants, and business
development expenses. The Corporate classification noted in the tables
represents all costs not otherwise classified, including corporate office expenses, and
heritage health benefit expenses. Corporate assets consist primarily of cash, bonds and
deposits required for Heritage Health Benefits. Summarized financial information by
segment for 2005, 2004 and 2003 is as follows:

Year ended December 31, 2005

|                                                   |   | Coal                  |   | Independent Power |   | Corporate |   | Total  
|-------------------------------------------------- | - | --------------------- | - | ----------------- | - | --------- | - | -------
|                                                   |   |                       |   |                   |   |           |   |        
|                                                   |   | (As Restated, note 2)
|                                                   |   | (In thousands)       
|Revenues:                                          |   |                       |   |                   |   |           |   |        
|Coal                                               | $ | 361,017               | $ | -                 | $ | -         | $ | 361,017
|                                                   |   |                       |   |                   |   |           |   |        
|Equity in earnings                                 |   | -                     |   | 12,727            |   | -         |   | 12,727 
|                                                   |   |                       |   |                   |   |           |   |        
|                                                   |   | 361,017               |   | 12,727            |   | -         |   | 373,744
|Costs and expenses:                                |   |                       |   |                   |   |           |   |        
|Cost of sales  coal                               |   | 288,728               |   | -                 |   | -         |   | 288,728
|                                                   |   |                       |   |                   |   |           |   |        
|Depreciation, depletion and amortization           |   | 21,316                |   | 24                |   | 263       |   | 21,603 
|Selling and administrative                         |   | 22,286                |   | 1,956             |   | 10,861    |   | 35,103 
|                                                   |   |                       |   |                   |   |           |   |        
|Heritage health benefit expenses                   |   | -                     |   | -                 |   | 27,524    |   | 27,524 
|Loss on sales of  assets                           |   | 177                   |   | -                 |   | (110)     |   | 67     
|                                                   |   |                       |   |                   |   |           |   |        
|Operating income (loss) from continuing operations | $ | 28,510                | $ | 10,747            | $ | (38,538)  | $ | 719    
|                                                   |   |                       |   |                   |   |           |   |        
|                                                   |   |                       |   |                   |   |           |   |        
|Capital expenditures                               | $ | 18,214                | $ | 52                | $ | 78        | $ | 18,344 
|                                                   |   |                       |   |                   |   |           |   |        
|                                                   |   |                       |   |                   |   |           |   |        
|Total assets                                       | $ | 417,325               | $ | 38,508            | $ | 40,038    | $ | 495,871
|                                                   |   |                       |   |                   |   |           |   |        



# Year ended December 31,
2004

|                                                      |   | Coal                  |   | Independent Power |   | Corporate |   | Total  
|----------------------------------------------------- | - | --------------------- | - | ----------------- | - | --------- | - | -------
|                                                      |   |                       |   |                   |   |           |   |        
|                                                      |   | (As Restated, note 2)
|                                                      |   | (In thousands)       
|Revenues:                                             |   |                       |   |                   |   |           |   |        
|Coal                                                  | $ | 319,648               | $ | -                 | $ | -         | $ | 319,648
|                                                      |   |                       |   |                   |   |           |   |        
|Equity in earnings                                    |   | -                     |   | 12,741            |   | -         |   | 12,741 
|                                                      |   |                       |   |                   |   |           |   |        
|                                                      |   | 319,648               |   | 12,741            |   | -         |   | 332,389
|Costs and expenses:                                   |   |                       |   |                   |   |           |   |        
|Cost of sales  coal                                  |   | 249,131               |   | -                 |   | -         |   | 249,131
|                                                      |   |                       |   |                   |   |           |   |        
|Depreciation, depletion and amortization              |   | 18,244                |   | 19                |   | 146       |   | 18,409 
|Selling and administrative                            |   | 19,021                |   | 981               |   | 10,850    |   | 30,852 
|                                                      |   |                       |   |                   |   |           |   |        
|Heritage health benefit expenses                      |   | -                     |   | -                 |   | 33,113    |   | 33,113 
|Gain on sales of assets                               |   | (77)                  |   | -                 |   | -         |   | (77)   
|                                                      |   |                       |   |                   |   |           |   |        
|Operating income (loss)
   from continuing operations | $ | 33,329                | $ | 11,741            | $ | (44,109)  | $ | 961    
|                                                      |   |                       |   |                   |   |           |   |        
|                                                      |   |                       |   |                   |   |           |   |        
|Capital expenditures                                  | $ | 17,710                | $ | 47                | $ | 567       | $ | 18,324 
|                                                      |   |                       |   |                   |   |           |   |        
|                                                      |   |                       |   |                   |   |           |   |        
|Total assets                                          | $ | 383,280               | $ | 35,303            | $ | 44,147    | $ | 462,730
|                                                      |   |                       |   |                   |   |           |   |        

# Year ended December 31, 2003

|                                                   |   | Coal                  |   | Independent Power |   | Corporate |   | Total  
|-------------------------------------------------- | - | --------------------- | - | ----------------- | - | --------- | - | -------
|                                                   |   |                       |   |                   |   |           |   |        
|                                                   |   | (As Restated, note 2)
|                                                   |   | (In thousands)       
|Revenues:                                          |   |                       |   |                   |   |           |   |        
|Coal                                               | $ | 294,892               | $ | -                 | $ | -         | $ | 294,892
|                                                   |   |                       |   |                   |   |           |   |        
|Equity in earnings                                 |   | -                     |   | 15,824            |   | -         |   | 15,824 
|                                                   |   |                       |   |                   |   |           |   |        
|                                                   |   | 294,892               |   | 15,824            |   | -         |   | 310,716
|Costs and expenses:                                |   |                       |   |                   |   |           |   |        
|Cost of sales  coal                               |   | 228,369               |   | -                 |   | -         |   | 228,369
|                                                   |   |                       |   |                   |   |           |   |        
|Depreciation, depletion and amortization           |   | 15,324                |   | 22                |   | 126       |   | 15,472 
|Selling and administrative                         |   | 23,626                |   | 1,013             |   | 8,747     |   | 33,386 
|                                                   |   |                       |   |                   |   |           |   |        
|Heritage health benefit expenses                   |   | -                     |   | -                 |   | 29,922    |   | 29,922 
|Gain on sales of assets                            |   | (194)                 |   | -                 |   | (451)     |   | (645)  
|                                                   |   |                       |   |                   |   |           |   |        
|Operating income (loss) from continuing operations | $ | 27,767                | $ | 14,789            | $ | (38,344)  | $ | 4,212  
|                                                   |   |                       |   |                   |   |           |   |        
|                                                   |   |                       |   |                   |   |           |   |        
|Capital expenditures                               | $ | 13,110                | $ | 1                 | $ | 129       | $ | 13,240 
|                                                   |   |                       |   |                   |   |           |   |        
|                                                   |   |                       |   |                   |   |           |   |        
|Total assets                                       | $ | 356,639               | $ | 24,556            | $ | 42,891    | $ | 424,086
|                                                   |   |                       |   |                   |   |           |   |        



The
Company derives its coal revenues from a few key customers. The customers from which more
than 10% of total revenue has been derived and the percentage of total revenue is
summarized as follows:

|                            | 2005      | 2004           | 2003    
|--------------------------- | --------- | -------------- | --------
|                            |           | (in thousands)
|Customer  A                 | $ 111,224 | $ 83,196       | $ 99,688
|Customer  B                 | 75,750    | 70,909         | 70,431  
|Customer C                  | 39,146    | 50,951         | 28,681  
|                            |           |                |         
|Percentage of total revenue | 61%       | 62%            | 64%     
|                            |           |                |         

|15. |  | COMPREHENSIVE
INCOME
|--- |  | --------------------

The
ROVA partnership is party to an interest rate swap agreement on the long-term debt
relating to the Roanoke Valley I independent power project. The Companys interest in
the ROVA partnership is accounted for under the equity method of accounting. The Company
has reflected the difference between its 50% share of the fair value of this interest rate
swap agreement and its carrying value as a separate component of shareholders
equity. The swap agreement exchanged variable interest rates on a notional amount of debt
for a fixed rate. Because market interest rates have declined below those provided for in
the swap agreement, the fair value of the swap agreement has decreased. The unrealized
loss attributable to the change in the fair value of the interest rate swap, accounted for
as a hedge, is a component of the Companys total comprehensive income. If interest
rates remain at their current levels, the Company will recognize its share of the loss in
future periods as a reduction in equity in earnings of independent power projects.

During
2005, 2004 and 2003, the Company also recognized an additional minimum pension liability
as a result of the accumulated pension benefit obligation exceeding the fair value of
pension plan assets at these dates. This additional minimum liability is shown as a
separate component of shareholders equity, and totaled $3.4 million, $1.2 million
and $1.2 million (all as restated, note 2) in 2005, 2004, and 2003, respectively.

|16. |  | EARNINGS
PER SHARE
|--- |  | ------------------

Basic
earnings per share is computed by dividing net income available to common shareholders by
the weighted average number of common shares outstanding during the period. Diluted
earnings per share are determined on the same basis except that the weighted average
shares outstanding are increased to include additional shares for the assumed exercise of
stock options, if dilutive. The number of additional shares is calculated by assuming that
outstanding stock options were exercised and that the proceeds from such exercises were
used to acquire shares of common stock at the average market price during the reporting
period.



The
following table provides a reconciliation of the number of shares used to calculate basic
and diluted earnings per share (EPS):

|                                                                                                                                                                                         | 2005                     | 2004  | 2003 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------ | ----- | -----
|                                                                                                                                                                                         |                          |       |      
|                                                                                                                                                                                         | (in thousands of shares)
|Weighted average number of common shares outstanding:                                                                                                                                    |                          |       |      
|Basic                                                                                                                                                                                    | 8,280                    | 8,099 | 7,799
|Effect of dilutive instruments                                                                                                                                                           | 588                      | 563   | 539  
|                                                                                                                                                                                         |                          |       |      
|Diluted                                                                                                                                                                                  | 8,868                    | 8,662 | 8,338
|                                                                                                                                                                                         |                          |       |      
|Number of shares not included in dilutive EPS that would have been antidilutive because the exercise or conversion price was greater
than the average market price of the common shares. | -                        | 10    | 374  
|                                                                                                                                                                                         |                          |       |      

|17. |  | RESTRICTED
NET ASSETS OF WESTMORELAND MINING LLC
|--- |  | ------------------------------------------------

WML
was formed for the purpose of facilitating the financing of two separate acquisitions
completed effective April 30, 2001. The agreements governing the line of credit and term
notes entered into by WML for that purpose restrict the cash and other assets available
for distribution or dividend to the parent company or other entities in the consolidated
group. See Note 5 for a more detailed discussion of the restrictions and the amount of
cash that is available for general use.

During
the years ended December 31, 2005, 2004 and 2003, WML paid dividends and management fees
to Westmoreland of $2.3 million, $11.9 million and $14.7 million, respectively. In
addition, WML paid Westmoreland $9.1 million in 2005 and $19.3 million in 2004 to reduce
its inter-company payable.



The
following are the condensed consolidated financial statements of WML and its subsidiaries
as of and for the years ended December 31, 2005 and 2004 (in thousands):

|Condensed Consolidated Balance Sheets          
|-----------------------------------------------
|                                               
|                                               
|                                               
|                                               
|Cash and cash equivalents                      
|Accounts receivable, net                       
|Deferred overburden removal costs              
|Other current assets                           
|Property, plant and equipment, net             
|Restricted cash                                
|Reclamation deposits                           
|Contractual third party reclamation obligations
|Deferred income tax assets                     
|Other assets                                   
|                                               
|Total Assets                                   
|                                               
|                                               
|Accounts payable and accrued expenses          
|Payable to parent                              
|Long-term debt and line of credit              
|Asset retirement obligations                   
|Deferred income tax liability                  
|Other liabilities                              
|Member's equity                                
|                                               
|Total Liabilities and Member's Equity          
|                                               

|Condensed Consolidated Statements of Operations                                        
|---------------------------------------------------------------------------------------
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Coal revenues                                                                          
|Cost of sales  coal                                                                   
|Depreciation and amortization expense                                                  
|Selling and administrative expense                                                     
|Management fees to parent                                                              
|                                                                                       
|                                                                                       
|Operating income                                                                       
|Interest expense                                                                       
|Interest and other income                                                              
|                                                                                       
|                                                                                       
|Income before income taxes and cumulative effect      of change in accounting principle
|Income tax expense                                                                     
|                                                                                       
|Net income                                                                             
|                                                                                       



|Condensed Consolidated Statements of Cash Flows
|-----------------------------------------------
|                                               
|                                               
|                                               
|                                               
|                                               
|Net income                                     
|Depreciation and amortization expense          
|Deferred income tax expense (benefit)          
|Changes in operating assets and liabilities    
|                                               
|Cash provided by operating activities          
|Fixed asset additions                          
|Increase in restricted cash                    
|Proceeds from asset sales                      
|                                               
|Cash used in investing activities              
|Proceeds from borrowings of long-term debt     
|Repayment of long-term debt                    
|Dividends to parent                            
|                                               
|Cash used in financing activities              
|                                               
|                                               
|Net increase in cash and cash equivalents      
|Cash and cash equivalents, beginning of year   
|                                               
|Cash and cash equivalents, end of year         
|                                               

|18. |  | TRANSACTIONS
WITH AFFILIATED COMPANIES
|--- |  | --------------------------------------

WRI
has a coal mining contract with WGI, its 20% stockholder. Mining costs incurred under the
contract were $22.7 million, $22.3 million and $20.5 million in 2005, 2004 and 2003,
respectively.

|19. |  | INVESTMENT
IN DOMINION TERMINAL ASSOCIATES (DTA)
|--- |  | ------------------------------------------------

Prior
to June 30, 2003, the Company had a 20% interest in DTA, a partnership which operates a
coal-storage and vessel-loading facility in Newport News, Virginia. Due to declining
export business, the Companys original investment in DTA was written down from $17.6
million to $5.5 million in 1998. The Company recognized a further non-cash impairment
charge equal to the remaining book value of its investment in DTA during the third quarter
of 2002 as a result of the terminals continuing operating losses and the terms of an
agreement by one of the terminals other owners to dispose of its interest in DTA,
but the Company continued to share in cash operating expenses and recognize losses until
the sale of its own interest was completed.

Effective
June 30, 2003, a subsidiary of Dominion Resources, Inc. purchased for $10.5 million the
Companys 20% partnership interest in DTA and its industrial revenue bonds. Under the
terms of the Purchase and Sale Agreement, the Company guaranteed throughput at the
terminal for a period of three years from the effective date of the sale. To secure the
throughput commitment, $6.0 million of the purchase price was deposited into an escrow
account as collateral for a stand-by letter of credit for the benefit of the purchaser.
The Company does not expect to be able to deliver the minimum throughput. The Company also
provided customary representations and warranties. The Company has guaranteed its
obligations under the Purchase and Sale Agreement for a period of five years.



With
the closing of this transaction the Company no longer incurs DTA-related operating losses,
which were $1.0 million in 2003. The Company also recognized a $4.5 million pretax gain in
the second quarter of 2003.

As
a result of the sale of the Companys investment, the financial results relating to
DTA have been presented as Discontinued Operations in the accompanying Consolidated
Statements of Operations. The basic income per share from these discontinued operations,
including the gain on sale, was $.27 for the year ended December 31, 2003. The diluted
income per share from these discontinued operations was $.25 per share for 2003.

|20. |  | QUARTERLY
FINANCIAL DATA (UNAUDITED)
|--- |  | ------------------------------------

As
described in Note 1 above, effective January 1, 2005 the Company changed its method of
accounting for its workers compensation obligation to report the obligation on a
discounted basis. The previously reported amounts reflected in the quarterly reports Form
10-Qs were prepared on an undiscounted basis. The effect of this change, including
the cumulative effect recorded in the quarter ended March 31, 2005, was to increase net
income and diluted net income per share for the quarter ended March 31, 2005 by $2.6
million and $0.30, respectively and to increase net loss for each of the quarters ended
June 30, 2005 and September 30, 2005 by approximately $0.1 million with no impact on net
loss per share. Summarized quarterly financial data for 2005 and 2004 are as follows:

|                                                                                                                     |   | Three Months Ended                  
|-------------------------------------------------------------------------------------------------------------------- | - | ------------------------------------
|                                                                                                                     |   |                                     
|                                                                                                                     |   | March 31                            
|                                                                                                                     |   | As Restated, note 2                 
|                                                                                                                     |   | (In thousands except per share data)
|2005                                                                                                                 |   |                                     
|Revenues                                                                                                             | $ | 91,032                              
|Costs and expenses                                                                                                   |   | 87,308                              
|                                                                                                                     |   |                                     
|Operating income (loss)                                                                                              |   | 3,724                               
|Income (loss) from continuing operations before income taxes and cumulative effect of change in accounting principle |   | 1,522                               
|Income tax benefit (expense)                                                                                         |   | (1,492)                             
|Cumulative effect of change in accounting principle                                                                  |   | 2,662                               
|Net income (loss)                                                                                                    |   | 2,692                               
|Less preferred stock dividend requirements                                                                           |   | 436                                 
|                                                                                                                     |   |                                     
|Net income (loss) applicable to common shareholders                                                                  | $ | 2,256                               
|                                                                                                                     |   |                                     
|Net income (loss) per share applicable to common shareholders:                                                       |   |                                     
|Basic                                                                                                                | $ | 0.28                                
|Diluted                                                                                                              |   | 0.25                                
|                                                                                                                     |   |                                     
|Weighted average number of common and common equivalent shares outstanding:                                          |   |                                     
|Basic                                                                                                                |   | 8,192                               
|Diluted                                                                                                              |   | 8,874                               
|                                                                                                                     |   |                                     



|                                                                            |   | Three Months Ended                  
|--------------------------------------------------------------------------- | - | ------------------------------------
|                                                                            |   |                                     
|                                                                            |   | March 31                            
|                                                                            |   | As Restated, note 2                 
|                                                                            |   | (In thousands except per share data)
|2004                                                                        |   |                                     
|Revenues                                                                    | $ | 82,376                              
|Costs and expenses                                                          |   | 79,550                              
|                                                                            |   |                                     
|Operating income (loss)                                                     |   | 2,826                               
|Income (loss) before income taxes                                           |   | 691                                 
|Income tax (expense)                                                        |   | (160)                               
|Net income (loss)                                                           |   | 531                                 
|Less preferred stock dividend requirements                                  |   | 436                                 
|                                                                            |   |                                     
|Net income (loss) applicable to common shareholders                         | $ | 95                                  
|                                                                            |   |                                     
|Net income per share applicable to common shareholders:                     |   |                                     
|Basic                                                                       | $ | 0.01                                
|Diluted                                                                     |   | 0.01                                
|                                                                            |   |                                     
|Weighted average number of common and common equivalent shares outstanding: |   |                                     
|Basic                                                                       |   | 8,009                               
|Diluted                                                                     |   | 8,503                               
|                                                                            |   |                                     

|21. |  | COMMITMENTS
AND CONTINGENCIES
|--- |  | -----------------------------

# Protection of the
Environment

As
of December 31, 2005 the Company has reclamation bonds in place for its active mines in
Montana, North Dakota and Texas and for inactive mining sites in Virginia which are now
awaiting final bond release. These government-required bonds assure that coal mining
operations comply with applicable Federal and State regulations relating to the
performance and completion of final reclamation activities. The Company estimates that the
cost of final reclamation for its mines when they are closed in the future will total
approximately $396.1 million, with a present value of $158.4 million, and that the Company
is financially responsible for reclamation obligations with a present value of $64.9
million. The contractual third party reclamation obligations of certain customers and a
contract mine operator are discussed below. The amount of the Companys bonds exceeds
the amount of its share of estimated final reclamation obligations as of December 31,
2005.

At
the Rosebud Mine, certain customers were contractually obligated under a coal supply
agreement to pay the final reclamation costs for a specific area of the mine. They
satisfied that obligation by pre-funding their respective portions of those costs. The
funds are invested in cash equivalents and government-backed interest-bearing securities.
As of December 31, 2005, the value of those funds, classified as reclamation deposits on
the Consolidated Balance Sheets, was $55 million. One customer under the same coal supply
agreement elected not to pre-fund its obligation but in 2003 began to fund a separate
reclamation account over the remaining term of the coal contract to satisfy the contract
provisions. The balance in that account was $3.8 million and the present value of that
customers obligation was $3.8 million as of December 31, 2005 and is classified as
contractual third party reclamation obligations on the Consolidated Balance Sheets.



Also
at the Rosebud Mine, all of the owners of the Colstrip Station are contractually required
to reimburse the Company for contemporaneous reclamation costs as they are incurred. As of
December 31, 2005, the total amount of such costs outstanding was $3.0 million, which
amount is included in other receivables on the Consolidated Balance Sheets.

At
the Jewett Mine, the customer is contractually responsible for all post-production
reclamation obligations and has provided a $50.0 million corporate guarantee to the
Railroad Commission of Texas to assure performance of such final reclamation. The present
value of the customers obligation was $20.9 million as of December 31, 2005, which
is classified as contractual third party reclamation obligations on the Consolidated
Balance Sheets.

At
the Absaloka Mine, the contract miner, Washington Group International (WGI),
is obligated to perform the vast majority of all reclamation activities, including all
final backfilling, regrading and seeding. Westmoreland Resources Inc. (WRI)
owns the Absaloka Mine, and Westmoreland owns 80% of WRI. WRI has a maximum financial
responsibility for these activities of $1.7 million, which amount has been pre-funded.
Once the contract miner has performed its final reclamation obligations, WRI will be
responsible for site maintenance and monitoring until final bond release. To assure
compliance, and as part of a settlement of several outstanding issues in 2002, the
contract miner has established an escrow account into which 6.5% of every contract mining
invoice payment is being deposited. The balance as of December 31, 2005 was $4.8 million.
The present value of the contract miners reclamation obligation was $6.8 million as
of December 31, 2005, and is classified as contractual third party reclamation obligations
on the Consolidated Balance Sheets.

# Royalty Claims

The
Company acquired WECO from Montana Power Company in 2001. WECO produces coal from the
Rosebud Mine, which includes federal leases, a state lease and some privately owned leases
near Colstrip, Montana. The Rosebud Mine supplies coal to the four units of the adjacent
Colstrip Power Plant. In the late 1970s, a consortium of six utilities, including
Montana Power, entered into negotiations with WECO for the long-term supply of coal to
Units 3 and 4 of the Colstrip Plant, which would not be operational until 1984 and 1985,
respectively. The parties could not reach agreement on all the relevant terms of the coal
price and arbitration was commenced. The arbitration panel issued its opinion in 1980. As
a result of the arbitration order, Western Energy and the Colstrip owners entered into a
Coal Supply Agreement and a separate Coal Transportation Agreement. Under the Coal Supply
Agreement, the Colstrip Owners pay a price for the coal F.O.B. mine. Under the Coal
Transportation Agreement, the Colstrip Owners pay a separate fee for the transportation of
the coal from the mine to Colstrip Units 3 and 4 on a conveyor belt that was designed and
constructed by WECO and has been continuously operated and maintained by WECO.

In
2002, the State of Montana, as agent for the Minerals Management Service (MMS)
of the U.S. Department of the Interior, conducted an audit of the royalty payments made by
WECO on the production of coal from the federal leases. The audit covered two periods:
October 1991 through December 1995, and January 1996 through 2001. Based on these audits,
the Office of Minerals Revenue Management (MRM) of the Department of the
Interior issued orders directing WECO to pay royalties in the amount of $7.0 million on
the proceeds received from the Colstrip owners under the Coal Transportation Agreement
during the two audit periods. Both orders claimed that the payments for transportation
were deemed to be payments for the production of coal. Only the costs paid for coal
production are subject to the federal royalty, not payments for transportation.



WECO
appealed the orders of the MRM to the Directors of MMS. On March 28, 2005, the MMS issued
a decision stating that payments to WECO for transportation across the conveyor belt were
part of the purchase price of the coal and therefore subject to the royalty charged by the
federal government under the federal leases. However, the MMS dismissed the royalty claims
for periods more than seven years before the date of the order on the basis that the
statute of limitations had expired.

On
June 17, 2005, WECO appealed the decision of the MMS on the transportation charges to the
United States Department of the Interior, Office of Hearings and Appeals, Interior Board
of Land Appeals (IBLA). On September 6, 2005, the MMS filed its answer to
WECOs appeal. This matter is still pending before the IBLA.

The
total amount of the MMS royalty claims through the end of 2003 was approximately $5.0
million, including interest through the end of 2003. This amount, if payable, is subject
to interest through the date of payment.

In
2003, the State of Montana Department of Revenue (DOR) assessed state taxes
for years 1997 and 1998 on the transportation charges collected by WECO from the Colstrip
3 and 4 owners. The taxes are payable only if the transportation charges are considered
payments for the production of coal. The DOR is relying upon the same arguments used by
the MMS in its royalty claims. WECO has disputed the state tax claims. It is anticipated
that the state tax claims will be resolved following the outcome of WECOs appeal of
the MMS royalty claims or subsequent proceedings in federal court. The total of the state
tax claims through the end of 2003 was approximately $3.6 million. If this amount is
payable it is subject to interest from the time the tax payment was due.

The
MMS has asserted two other royalty claims against WECO. In 2002, the MMS held that
take or pay payments received by WECO during the period from October 1, 1991
to December 31, 1995 from two Colstrip 3 and 4 owners were subject to the federal royalty.
The MMS is claiming that these take or pay payments are payments for the
production of coal, notwithstanding that no coal was produced. WECO filed a notice of
appeal with MMS on October 22, 2002, disputing this royalty demand. No ruling has yet been
issued by MMS. The total amount of the royalty demand, including interest through August
2003, is approximately $2.7 million.

In
2004, the MMS issued a demand for a royalty payment in connection with a settlement
agreement dated February 21, 1997 between WECO and one of the Colstrip owners, Puget Sound
Energy. This settlement agreement reduced the coal price payable by Puget Sound as a
result of certain inequities caused by the fact that the mine owner at the
time, Montana Power, was also one of the Colstrip customers. The MMS has claimed that the
coal price reduction is subject to the federal royalty. WECO has appealed this demand to
the MMS, which has not yet ruled on the appeal. The amount of the royalty demand, with
interest through mid-2003, is approximately $1.3 million.

Finally,
in May 2005 the State of Montana asserted a demand for unpaid royalties on the state lease
for the period from January 1, 1996 through December 31, 2001. This demand, which was for
$0.6 million, is based on the same arguments as those used by the MMS in its claim for
payment of royalties on transportation charges and the 1997 retroactive
inequities adjustment of the coal price payable to Puget Sound.



Neither
the MMS nor the DOR has made royalty or tax demands for all periods during which WECO has
received payments for transportation of coal. Presumably, the royalty and tax demands for
periods after the years in disputegenerally, 1997 to 2001and future years will
be determined by the outcome of the pending proceedings. However, if the MMS and DOR were
to make demands for all periods through the present, including interest, the total amount
claimed against WECO, including the pending claims and interest thereon through the
present, could exceed $40 million.

The
Company believes that WECO has meritorious defenses against the royalty and tax demands
made by the MMS and the DOR. The Company expects a favorable ruling from the IBLA,
although it could be a year or more before the IBLA issues its decision. If the outcome is
not favorable to Western Energy, the Company plans to seek relief in Federal district
court.

Moreover,
in the event of a final adverse outcome with DOR and MMS, the Company believes that
certain of the Companys customers are contractually obligated to reimburse the
Company for any royalties and taxes imposed on the Company for the production of coal sold
to the Colstrip owners, plus legal expenses.

# Tax Assessments

Halifax
County

The
ROVA Project is located in Halifax County, North Carolina and is the Countys largest
taxpayer. Currently, the ROVA partnership has outstanding personal property assessments
for years 2002 to 2005, including interest and penalties, in an aggregate amount of $3.6
million. The ROVA project has a reserve sufficient to cover this amount. The Company is
attempting to reach a settlement with Halifax County that would reduce the amount of the
outstanding assessments.

Rensselaer

Niagara
Mohawk Power Corporation (NIMO) was party to power purchase agreements with
independent power producers, including the Rensselaer project, in which we owned an
interest. In 1997, the New York Public Service Commission approved NIMOs plan to
terminate or restructure 29 power purchase contracts. The Rensselaer project agreed to
terminate its Power Purchase and Supply Agreement after NIMO threatened to seize the
project under its power of eminent domain. NIMO and the Rensselaer project executed a
settlement agreement in 1998 with a payment to the project. On February 11, 2003, the
North Carolina Department of Revenue notified us that it had disallowed the exclusion of
gain as non-business income from the settlement agreement between NIMO and the Rensselaer
project. The State of North Carolina assessed a current tax of $3.5 million, interest of
$1.3 million (through 2004), and a penalty of $0.9 million. We have filed a protest. The
North Carolina Department of Revenue held a hearing on May 28, 2003. In November 2003, we
submitted further documentation to the State to support our position. On January 14, 2005,
the North Carolina Department of Revenue concluded that the additional assessment is
statutorily correct. On July 27, 2005, the Company responded to the North Carolina
Department of Revenue providing additional information. On September 7, 2005, the
Department of Revenue responded and our analysis continues regarding possible settlement.
Unless an acceptable settlement can be reached, the Company may pursue a formal hearing
with the Department of Revenue and/or appeal the Departments assessment to the
Superior Court of North Carolina. During third quarter 2005, the Company accrued a reserve
of $2.1 million, which is the amount at which the Company believes a settlement of this
tax claim is likely.



# Other Contingencies

McGreevey
Litigation

In
late 2002, the Company was served with a complaint in a case styled McGreevey et al. v.
Montana Power Company et al. in a Montana State court. The plaintiffs are former
stockholders of Montana Power who filed their first complaint on August 16, 2001. This was
the Plaintiffs Fourth Amended Complaint; it added Westmoreland as a defendant to a
suit against Montana Power Company, various officers of Montana Power Company, the Board
of Directors of Montana Power Company, financial advisors and lawyers representing Montana
Power Company and the purchasers of some of the businesses formerly owned by Montana Power
Company and Entech, Inc., a subsidiary of Montana Power Company. The plaintiffs seek to
rescind the sale by Montana Power of its generating, oil and gas, and transmission
businesses, and the sale by Entech of its coal business or to compel the purchasers to
hold these businesses in trust for the shareholders. The Plaintiffs contend that they were
entitled to vote to approve the sale by Entech to the Company even though they were not
shareholders of Entech. Westmoreland has filed an answer, various affirmative defenses and
a counterclaim against the plaintiffs. Shortly after the Company was named as a defendant,
the litigation was transferred from Montana State Court to the U.S. District Court in
Billings, Montana.

There
has been no significant activity in the case involving Westmoreland for the past three
years. Settlement discussions between the plaintiffs and other defendants appear to have
been unsuccessful. We have never participated in settlement discussions with the
plaintiffs because we believe that the case against the Company is totally without merit.
Even if the plaintiffs could establish that shareholder consent was required for the sale
of Montana Powers coal business in 2001, there is virtually no legal support for the
argument that such a sale to a buyer acting in good faith and relying on the sellers
representations can be rescinded. Indeed, the practical issues relating to such rescission
would present a significant obstacle to such a result, particularly when the business has
been operated by the buyer for five years and the original seller is in bankruptcy and has
no means to complete a repurchase or operate the business following a repurchase.

The
Company has considered seeking a dismissal of the claims against it but is waiting for the
outcome of a matter under review in the bankruptcy proceedings in Delaware involving Touch
America (formerly Montana Power Company). In those proceedings, the unsecured creditors
have asserted that the claims originally filed by McGreevey in Montanathe claims
against the officers and directors which, if successful, would likely result in a payment
by the insurance carrier that provided D&O insurance to Montana Power
Companybelong to the creditors, not the shareholders who are the plaintiffs in the
McGreevey action. If the Delaware Bankruptcy Court holds that those claims are
derivative and thus belong to the corporation, then the unsecured creditors
own them. Although the Delaware Bankruptcy Court will not directly decide that issue with
respect to the claims against the various asset purchasers, including the Company, such a
decision would likely affect the analysis of the Montana District Court where our case is
pending.



Combined
Benefit Fund

Under
the Coal Act, we are required to provide postretirement medical benefits for certain UMWA
miners and their dependents by making payments into certain benefit plans, one of which is
the CBF.

The
Coal Act merged the UMWA 1950 and 1974 Benefit Plans into the CBF, and beneficiaries of
the CBF were assigned to coal companies across the country. Congress authorized the
Department of Health & Human Services (HHS) to calculate the amount of the
premium to be paid by each coal company to whom beneficiaries were assigned. Under the
statute, the premium was to be based on the aggregate amount of health care payments made
by the 1950 and 1974 Plans in the plan year beginning July 1, 1991, lessreimbursements, divided by the number of individuals covered. That amount is increased
each year by a cost of living factor.

Prior
to the creation of the CBF, the UMWA 1950 and 1974 Plans had an arrangement with HHS
pursuant to which they would pay the health care costs of retirees entitled to Medicare,
and would then seek reimbursement for the Medicare-covered portion of the costs from HHS.
The parties had numerous disputes over the years concerning the amount to be reimbursed,
which led them to enter into a capitation agreement in which they agreed that HHS would
pay the Plans a specified per-capita reimbursement amount for each beneficiary each year,
rather than trying to ascertain each year the actual amount to be reimbursed. The
capitation agreement was in effect for the plan year beginning July 1, 1991, the year
specified by the Coal Act as the baseline for the calculation of Coal Act premiums.

On
August 12, 2005, the United States District Court for the District of Maryland issued a
decision in a case filed by a large group of coal operators (including the Company)
against the Commissioner of the Social Security Administration (Social
Security), successor to HHS in this matter, and the Trustees of the UMWA Combined
Benefit Fund (the Trustees). The case concerns the calculation of premiums
payable to the CBF pursuant to the Coal Act. The dispute involves the proper definition of
the term reimbursements as used in the statutory provision describing how
premiums are to be calculated. The position of the coal operators is that
reimbursements means actual reimbursements received by the CBF pursuant to the
capitation agreement, whereas the Trustees have assessed the premiums based on the HHS
calculation using the amounts of Medicare-covered expenses,i.e., the amounts that
would be reimbursed to the CBF if the published reimbursement schedule for
Medicare-covered expenses were being applied. The method of assessing
reimbursements used by Social Security and the Trustees resulted in higher
premiums for coal operators than would have been the case if the actual reimbursements
received by the CBF had been used in the calculation of premiums.

This
issue has been in litigation for over ten years and in two different United States Circuit
Courts of Appeals. In 1995, the Court of Appeals for the Eleventh Circuit ruled, in a
victory for coal companies, that the meaning of the statute was clear, i.e., that
reimbursements meant the actual amount by which the CBF was reimbursed,
regardless of the amount of the CBFs Medicare-covered expenditures. In 2002, the
Court of Appeals for the District of Columbia Circuit ruled that the statute was
ambiguous, and remanded the case to the Commissioner of Social Security for an explanation
of its interpretation so that the court could evaluate whether the interpretation was
reasonable. In the August 2005 decision, the United States District Court for the District
of Maryland agreed with the Eleventh Circuit that the term reimbursements
unambiguously means the actual amount by which the CBF was reimbursed, and the Court
granted summary judgment to the coal operators.



The
difference in premium payments for Westmoreland is substantial. Pursuant to the holdings
of the Eleventh Circuit and the Federal District Court of Maryland, Westmoreland has
overpaid and expensed premiums by more than $6 million for the period from 1993 through
2005.

On
August 25, 2005, the Trustees filed a motion with the Maryland District Court asking the
court to clarify its order or grant a stay to prevent the coal operators from claiming a
refund or applying the overpayment against current premiums pending appeal of the
courts order. No decision has been issued on this motion. We expect it to be denied.
Subsequently, the Commissioner of Social Security and the Trustees appealed the decision
of the Maryland District Court to the United States Court of Appeals for the Fourth
Circuit. We believe that the decision of the District Court will not be overturned on
appeal.

Oral
arguments before the Fourth Circuit Court of Appeals have been scheduled for the week of
May 22, 2006.

On
December 2, 2005, the Maryland federal district court judge who granted summary judgment
in favor of the coal companies on the premium calculation issue, held a hearing on the
motion the CBF filed in August seeking an order barring the coal companies from offsetting
their plan year 2006 premiums by the amount of the premium overpayments at issue in the
case while the case is on appeal. The judge ruled that until the case is final, the CBF
can retain the premium overpayments. However, the judge applied the new premium
calculation prospectively.

The
Company now pays premiums to the CBF of approximately $332,000 per month, compared to
$396,000 per month prior to the Maryland District Court decision.

1992
UMWA Benefit Plan Surety Bond

On
May 11, 2005, XL Specialty Insurance Company and XL Reinsurance America, Inc. (together,
XL), filed in the U.S. District Court, Southern District of New York, a
Complaint for Declaratory Judgment against Westmoreland Coal Company and named
Westmoreland Mining LLC as a co-defendant. The Complaint asks the court to confirm
XLs right to cancel a $21.3 million bond that secures Westmorelands obligation
to pay premiums to the UMWA 1992 Plan, and also asks the court to direct Westmoreland pay
$21.3 million to XL to reimburse XL for the $21.3 million that would be drawn under the
bond by the 1992 Plan Trustees upon cancellation of the bond.

On
July 19, 2005, Westmoreland filed a motion to dismiss for lack of personal jurisdiction
and on the grounds of improper venue. XL filed a response on August 2, 2005. At a hearing
held on January 31, 2006, the judge changed the venue to the United States District Court
for New Jersey.

The
Company believes that it has no obligation to reimburse XL for draws under the bond unless
the draw is the result of a default by the Company under its obligations to the UMWA 1992
Plan. No default has occurred. The Company has not created a reserve for this matter
because it is not a contingent liability. If XL prevails on its claim, the Company will,
in effect, be required to provide cash collateral of $21.3 million for its obligations to
the 1992 Plan or, alternatively, put up a letter of credit in such amount.



Landowner
Claim

In
1998, Basin Resources Inc., a subsidiary of the Company, paid a landowner $48,000 to
settle a claim that Basins operations had caused subsidence that damaged his home.
On March 22, 2001, the landowner filed a second claim in Las Animas County Court,
Colorado, again alleging that Basins operations had caused subsidence that damaged
his home. Basin contested this claim. In December 2002, a judge of that court determined
that subsidence had occurred and awarded the landowner damages of $622,000 plus
attorneys fees. The Company believes that this award was excessive, in part because
the landowners own expert placed the cost of repair below $100,000. The Company also
believes the settlement in the first case bars the second claim. The Company appealed to
the Colorado Intermediate Court of Appeals, which affirmed the lower courts decision
on November 17, 2005. The Company filed a motion for reconsideration on December 1, 2005.
If the motion for reconsideration is denied, the Company intends to appeal to the Colorado
Supreme Court.

Derivative
Action brought by Washington Group International, Inc., in connection with sales agency
agreement

On
February 17, 2006, we were served with a complaint filed by Washington Group
International, Inc. in Colorado District Court, City and County of Denver. The defendants
in this legal action are Westmoreland Coal Company, Westmoreland Coal Sales Company,
Westmoreland Resources, Inc., and certain directors and officers of Westmoreland
Resources. Washington Group owns a 20% interest in Westmoreland Resources and the Company
owns the other 80%. This litigation relates to a coal sales agency agreement between
Westmoreland Resources and Westmoreland Coal Sales Company, a wholly owned subsidiary of
the Company that was entered into in January of 2002. Under this coal sales agency
agreement, Westmoreland Coal Sales Company agreed to act as agent for Westmoreland
Resources in marketing and selling Westmoreland Resources produced coal, in exchange
for an agency fee per ton sold. Washington Group objected to this fee and is now claiming
that the directors of Westmoreland Resources and its President breached their fiduciary
duty by granting an over-market agency fee to an affiliated company. The total amount in
dispute, if the fee were to be rescinded retroactively to 2002, is in the range of $1.2
million to $1.5 million. The Company intends to vigorously defend this action and strongly
believes that the directors and the President of Westmoreland Resources acted in good
faith and made a reasonable determination with respect to the agency fee. We further
believe that the sales agency fee reflected the market rate for marketing and selling
coal, as of 2002 and that Westmoreland Coal Sales Company provides significant value to
Westmoreland Resources for which it should be compensated at a market rate.

# ROVA Acquisition

On
August 25, 2004, we signed an Interest Purchase Agreement with a subsidiary of LG&E
Energy LLC to acquire the 50% interest in the ROVA project that we do not currently own.
LG&E Energy LLC is now a subsidiary of E.ON U.S. In November 2004, Dominion, the
purchaser of the electricity generated by the ROVA Project, asserted that the power
purchase agreement gives it the right of first refusal with respect to LG&E
Energys 50% interest. On March 24, 2005, Dominion filed a Petition for Declaratory
Judgment in Virginia in the Circuit Court of the City of Richmond seeking an order
validating its alleged right of first refusal under the power purchase agreement to
acquire LG&Es partnership interest in the ROVA Project. On April 29, 2005, the
ROVA Project filed a demurrer in the Circuit Court of the City of Richmond requesting the
Petition for Declaratory Judgment be denied.



On
September 2, 2005, the Richmond Circuit Court granted the Partnerships demurrer
motion, effectively denying Dominions claim that it has a right of first refusal
under the structure of the proposed acquisition. Dominion filed a motion for
reconsideration of the courts ruling and their motion was denied. Dominion can now
file a new Motion for Summary Judgment based on amendments to the acquisition agreement or
it can appeal the ruling on the Partnerships demurrer motion.

We
are currently in discussion with Dominion and LG&E in the hope that this dispute can
be resolved on business terms acceptable to all parties.

# Lease Obligations

The
Company leases certain of its coal reserves from third parties and pays royalties based on
either a per ton rate or as a percentage of revenues received. Royalties charged to
expense under all such lease agreements amounted to $27.4 million, $27.2 million and $24.2
million in 2005, 2004 and 2003, respectively.

The
Company has operating lease commitments expiring at various dates, primarily for real
property and equipment. Rental expense under operating leases during 2005, 2004 and 2003
totaled $4.3 million, $3.4 million and $2.9 million, respectively. Minimum future rental
obligations existing under these leases at December 31, 2005 are as follows (in
thousands):

|                    |         
|------------------- | --------
|Lease Obligations  
|                    |         
|2006                | $  3,235
|2007                | 2,250   
|2008                | 1,854   
|2009                | 1,014   
|2010 and thereafter | 185     



# Long-Term Sales
Commitments

The
following table presents estimated total sales tonnage under existing long-term contracts
for the next five years from the Companys existing mining operations. The prices for
all future tonnage are subject to revision and adjustments based upon market prices,
certain indices and/or cost recovery.

|                              |     
|----------------------------- | ----
|Projected Sales Tonnage Under
|Existing Long-Term Contracts 
|(in millions of tons)        
|                              |     
|2006                          | 28.5
|2007                          | 28.1
|2008                          | 24.5
|2009                          | 20.8
|2010                          | 16.6

The
tonnages in the table above represent estimated sales tonnage under existing, signed
contracts and generally exclude pending or anticipated contract renewals or new contracts.
These projections reflect customers scheduled major plant outages, if known. The
pending Heskett contract renewal is not included above.



Report of Independent
Registered Public Accounting Firm

The Board of Directors
and ShareholdersWestmoreland Coal Company:

We have audited the accompanying
consolidated balance sheets of Westmoreland Coal Company and subsidiaries as of December
31, 2005 and 2004, and the related consolidated statements of operations,
shareholders equity and comprehensive loss, and cash flows for each of the years
in the three-year period ended December 31, 2005. These consolidated financial statements
are the responsibility of the Companys management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
financial position of Westmoreland Coal Company and subsidiaries as of December 31, 2005
and 2004, and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2005, in conformity with U.S. generally
accepted accounting principles.

As discussed in Note 1 to the
consolidated financial statements, the Company changed its method of accounting for
workers compensation effective January 1, 2005 and adopted Statement of Financial
Accounting Standards No. 143, Accounting for Asset Retirement Obligations,as of
January 1, 2003.

We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over financial reporting as of
December 31, 2005, based on the criteria established in Internal Control-Integrated
Framework issued by the Committee of the Sponsoring Organizations of the Treadway
Commission, and our report dated March 24, 2006, except as to the fourth, fifth, sixth and
seventh paragraphs of managements report on internal control over financial
reporting (as restated), which are as of November 2, 2006, expressed an unqualified
opinion on managements assessment of, and an adverse opinion on the effective
operation of, internal control over financial reporting.

| |  | KPMG
LLP
| |  | --------

Denver, ColoradoMarch 24, 2006, except as to note 2
as to which the date is November 2,
2006



|ITEM 9 |  | CHANGES IN
AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------ | - | ------------------------------------------------------------------------------------

This item is not applicable.

|ITEM 9A |  | CONTROLS
AND PROCEDURES
|------- | - | -----------------------

# (a) Managements
Report on Internal Control Over Financial Reporting

Management is responsible for
establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of
1934, as amended. Internal control over financial reporting refers to a process designed
by, or under the supervision of, the Chief Executive Officer and Chief Financial Officer
and effected by the board of directors, management and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles, and includes those policies and procedures that:

| |  | pertain
to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of our assets;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------

| |  | provide
reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and
that our receipts and expenditures are being made only in accordance with authorizations
of our management and our board of directors; and
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of our assets that could have a material effect on our
financial statements.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Internal control over financial
reporting cannot provide absolute assurance of achieving financial reporting objectives
because of its inherent limitations. Internal control over financial reporting is a
process that involves human diligence and compliance and is subject to lapses in judgment
and breakdowns resulting from human failures. Internal control over financial reporting
also can be circumvented by collusion or improper management override. Because of such
limitations, there is a risk that material misstatements may not be prevented or detected
on a timely basis by internal control over financial reporting. However, these inherent
limitations are known features of the financial reporting process. Therefore, it is
possible to design into the process safeguards to reduce, though not eliminate, this risk.

Management evaluated the
effectiveness of our internal control over financial reporting as of December 31, 2005
using the framework set forth in the report of the Treadway Commissions Committee of
Sponsoring Organizations (COSO), Internal Control  Integrated Framework.
The Public Company Accounting Oversight Boards Auditing Standard No. 2 defines a
material weakness as a significant deficiency, or combination of significant deficiencies,
that result in more than a remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected. In conducting the
aforementioned evaluation, management identified two material weaknesses in the
Companys internal control over financial reporting. The two material weaknesses
were:



|1 |  | Controls
Over the Accounting for Income Taxes.Managements review of the income tax
provision was not operating effectively. This material weakness resulted in an
overstatement of income tax expense and an understatement of deferred tax benefit and
deferred tax assets. The Company corrected the errors prior to the issuance of the 2005
consolidated financial statements.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2 |  | Controls
Over the Accounting for Asset Retirement Obligations. Managements procedures
over accounting for the estimated cost of future reclamation at one of its operations
were not designed effectively. Specifically, the Company did not maintain adequate
controls to review the input of costs into the spreadsheet used to calculate future
reclamation costs and obligations. This material weakness resulted in an overstatement of
the capitalized asset retirement costs and the asset retirement obligations. The Company
corrected the errors prior to issuance of the Companys 2005 consolidated financial
statements.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Subsequent to the filing of the
original 2005 Form 10-K on March 31, 2006, management identified the following three
additional material weaknesses in internal control over financial reporting as of
December 31, 2005:

|3 |  | Lack
of Expertise in Accounting for Income Taxes.The Company lacks personnel with
adequate expertise in accounting for income taxes in accordance with U.S. GAAP. This
material weakness resulted in a material misstatement of the income tax benefit recorded
in 2005, 2004 and 2003. As a result of this material misstatement, the Company restated
its consolidated financial statements for 2005, 2004 and 2003, and each of the quarters
in 2005 and 2004.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4 |  | Controls
Over the Accounting for Revenue Recognition.The Companys policies and
procedures regarding coal sales contracts with its customers did not provide for a
sufficiently detailed, periodic management review of the accounting for payments
received. This material weakness resulted in a material overstatement of coal revenues
and an overstatement of amortization of capitalized asset retirement costs. As a result
of this material misstatement, the Company restated its financial statements for 2005,
2004 and 2003, and each of the quarters in 2005 and 2004.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5 |  | Controls
over the Review of Financial Statements.The Company identified a deficiency in the
design of internal control over financial reporting due to the absence of controls to
ensure proper classification of balance sheet accounts. Specifically, management does not
have sufficient policies and procedures in place to determine current and non-current
classification of assets and liabilities. This material weakness resulted in a material
overstatement of restricted cash and current assets. As a result of this material
misstatement, the Company restated its consolidated balance sheets at December 31, 2005
and 2004.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Subsequent to the filing of the
original 2005 Form 10-K, management also determined that the material weakness relating to
the effectiveness of managements review of the income tax provision resulted in a
material misstatement of state income tax expense. As a result of this material
misstatement, the Company restated its financial statements for 2005.



As a result of material weaknesses in
internal control over financial reporting identified in 1 and 2 above, management had
previously concluded that the Companys internal control over financial reporting was
not effective as of December 31, 2005. Management has determined that the material
weaknesses in internal control over financial reporting identified in 3, 4 and 5 above
also existed at December 31, 2005, and, accordingly has restated this report on internal
control over financial reporting to include these additional material weaknesses.

Managements assessment of the
effectiveness of our internal control over financial reporting as of December 31, 2005
has been audited by KPMG LLP, independent registered public accounting firm, as stated in
their report (as restated) which appears herein.

# (b) Changes in
Internal Control over Financial Reporting

Management has evaluated, with the
participation of the Chief Executive Officer and Chief Financial Officer, whether any
changes in our internal control over financial reporting that occurred during our last
fiscal quarter have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting. Based on the evaluation we conducted,
management has concluded that no such changes have occurred.

# (c) Remediation Efforts
in Response to Material Weaknesses

To remediate the material weaknesses
described above and enhance our internal control over financial reporting, subsequent to
year end management has implemented the following changes and will continue to pursue
improvements in these areas:

| |  |  |  | All
key information put into the spreadsheet used to calculate future reclamation costs and
obligations will be verified by someone other than the person who prepared the original
input.
| |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | A
detailed review of the tax provision prepared by staff will be completed by management
prior to recording the expense on the financial statements at year-end.
| |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | Increased
levels of discussion and documentation of tax matters by senior financial management.
| |  | - |  | -----------------------------------------------------------------------------------------------

| |  |  |  | The
engagement of outside tax advisors who will assist in the substantive review of our
income tax provision, and evaluate the adequacy and design of our provision preparation
process.
| |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | Initiated
a comprehensive review and re-design of our controls over reclamation accounting and
revenue recognition for contract changes.
| |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | Initiated
a comprehensive review and re-design of our controls over the financial statement review
process with respect to current versus non-current asset and liability classifications.
| |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | The
continued increase in the resources and capabilities of our corporate-level finance
department. Ten of the thirteen professional positions in our corporate-level finance and
accounting department have been filled by individuals who have joined the company in 2005
or 2006, including a new Chief Financial Officer, Principal Accounting Officer, Manager
of Internal Controls, and two Assistant Controllers.
| |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We will continue to focus on the
improvement of the internal controls and processes in our accounting for income taxes,
reclamation obligations, revenue recognition, classification of current versus non-current
assets and liabilities, and on an overall resolution of our material weaknesses.

# (d) Evaluation of
Disclosure Controls and Procedures

Management is required by Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 to evaluate, with the
participation of the Chief Executive Officer and Chief Financial Officer, the
effectiveness of disclosure controls and procedures as of the end of the period covered by
this report. Disclosure controls and procedures refer to controls and other procedures
designed to ensure that information required to be disclosed in the reports we file or
submit under the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the rules and forms of the Securities and Exchange Commission.
Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by us in our reports that we
file or submit under the Exchange Act is accumulated and communicated to management,
including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure. In designing and evaluating our disclosure
controls and procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management was required to apply its judgment in
evaluating and implementing possible controls and procedures.

As described above, material
weaknesses were identified in our internal control over financial reporting. As a result
of the material weakness, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of December 31, 2005, our disclosure controls and procedures were not
effective.

# (e) Report of
Independent Registered Public Accounting Firm

The Board of Directors
and ShareholdersWestmoreland Coal Company:

We have audited managements
assessment, included in the accompanying Managements Report on Internal Control over
Financial Reporting (as restated) in Item 9A(a), that Westmoreland Coal Company and
subsidiaries (the Company) did not maintain effective internal control over financial
reporting as of December 31, 2005, because of the effect of material weaknesses identified
in managements assessment (as restated), based on criteria established in
Internal Control  Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Westmoreland Coal Companys
management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on managements assessment and
an opinion on the effectiveness of the Companys internal control over financial
reporting based on our audit.



We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.

A companys internal control
over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.

Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.

A material weakness is a control
deficiency, or combination of control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial statements will
not be prevented or detected. The following material weaknesses have been identified and
included in managements assessment as of December 31, 2005:

|1. |  | Controls
Over the Accounting for Income Taxes.Managements review                of the
income tax provision was not operating effectively. This material                weakness
resulted in an overstatement of income tax expense and an                understatement
of deferred tax benefit and deferred tax assets.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. |  | Controls
Over the Accounting for Asset Retirement Obligations.               Managements
procedures over the accounting for the estimated cost of                future
reclamation at one of its operations were not designed effectively.
               Specifically, the Company did not maintain adequate controls to review the
               inputs of costs into the spreadsheet used to calculate future reclamation
costs                and obligations. This material weakness resulted in an overstatement
of the                capitalized asset retirement costs and the asset retirement
obligations.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Since the Companys original
2005 Form 10-K was filed on March 31, 2006, the Company identified three additional
material weaknesses in internal controls, as follows:

|3. |  | Lack
of Expertise in Accounting for Income Taxes.The Company lacks personnel with
adequate expertise in accounting for income
taxes in accordance with U.S. GAAP. This material weakness resulted in a material
misstatement of the income tax benefit recorded in 2005, 2004 and 2003. As a result of
this material misstatement, the Company restated its financial statements for 2005, 2004
and 2003, and each of the quarters in 2005 and 2004.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | Controls
Over the Accounting for Revenue Recognition.Managements
               policies and procedures regarding the review of the accounting treatment
for                payments received under coal sales contracts with its customers were
not                effective. Specifically, management did not maintain adequate controls
to                periodically review, at a sufficiently detailed level, the accounting
treatment                afforded amounts received under coal sales contracts. This
material weakness                resulted in a material overstatement of coal revenues
and an overstatement of                amortization of capitalized asset retirement
costs. As a result of this material                misstatement, the Company restated its
financial statements for 2005, 2004 and                2003, and each of the quarters in
2005 and 2004.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. |  | Controls
over the Review of Financial Statements.The Company identified                a
deficiency in the design of internal control over financial reporting due to
               the absence of controls to ensure proper classification of balance sheet
               accounts. Specifically, management does not have sufficient policies and
               procedures in place to determine current and non-current classification of
               assets and liabilities. This material weakness resulted in a material
               overstatement of restricted cash and current assets. As a result of this
               material misstatement, the Company restated its consolidated balance
sheets at                December 31, 2005 and 2004.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Westmoreland Coal Company and subsidiaries as of December
31, 2005 and 2004, and the related consolidated statements of operations,
shareholders equity and comprehensive income, and cash flows for each of the years
in the three-year period ended December 31, 2005. The aforementioned material weaknesses
were considered in determining the nature, timing, and extent of audit tests applied in
our audit of the December 31, 2005 consolidated financial statements, and this report does
not affect our report dated March 24, 2006, except as to note 2, as to which the date is
November 2, 2006, which expressed an unqualified opinion on those consolidated financial
statements. In our opinion, managements assessment that Westmoreland Coal Company
and subsidiaries did not maintain effective internal control over financial reporting as
of December 31, 2005, is fairly stated, in all material respects, based on criteria
established in Internal ControlIntegrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion,
because of the effect of the material weaknesses described above on the achievement of the
objectives of the control criteria, Westmoreland Coal Company and subsidiaries have not
maintained effective internal control over financial reporting as of December 31, 2005,
based on criteria established in Internal ControlIntegrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).



Management and we previously
concluded that the Company did not maintain effective internal control over financial
reporting as of December 31, 2005 because of the material described in 1 and 2
above. Subsequently, management determined that the material weaknesses in internal
control over financial reporting described in 3, 4, and 5 above also existed as of
December 31, 2005. Accordingly, management and we have restated our respective
reports on internal control over financial reporting to include these additional material
weaknesses.

/s/ KPMG LLP

Denver, Colorado
March 24, 2006, except as to the fourth, fifth, sixth and seventh paragraphs
     of
Managements Report on Internal Control
     Over Financial Reporting (as restated),
     which
are as of November 2, 2006

|ITEM 9B |  | OTHER
INFORMATION
|------- | - | -----------------

All reports on Form 8-K that were
required were filed during the fourth quarter of 2005.



---

|ITEM 10 |  | DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
|------- | - | --------------------------------------------------

The Company has adopted a code of
ethics that applies to its directors, officers and employees. This code of ethics, known
as the Code of Business Conduct, is available in the Investor Relations section of the
Companys Internet website, www.westmoreland.com, under Corporate
Governance.

|ITEM 11 |  | EXECUTIVE
COMPENSATION
|------- | - | ----------------------

|ITEM 12 |  | SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|------- | - | ----------------------------------------------------------------------------------------------

|ITEM 13 |  | CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|------- | - | ----------------------------------------------

For Items 10-13, inclusive, except
for information set forth in Item 10 above and information concerning executive officers
of Westmoreland included as an unnumbered item in Part I above, reference is hereby made
to Westmorelands definitive proxy statement filed April 17, 2006 in accordance with
Regulation 14A pursuant to Section 14(a) of the Securities Exchange Act of 1934, which is
incorporated herein by reference thereto.

|ITEM 14 |  | PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|------- | - | --------------------------------------

Reference is hereby made to
Westmorelands definitive proxy statement filed April 17, 2006 in accordance with Regulation
14A pursuant to Section 14(a) of the Securities Exchange Act of 1934, which is
incorporated herein by reference thereto.



---

|ITEM 15 |  | EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|------- | - | ---------------------------------------

|a) 1. |  | The
financial statements filed herewith are: the Consolidated Balance Sheets
               of the Company and subsidiaries as of December 31, 2005 and December 31,
2004,                and the related Consolidated Statements of Operations, Shareholders Equity
               and Cash Flows for each of the years in the three-year period ended
December 31,                2005 together with the Summary of Significant Accounting
Policies and Notes to                Consolidated Financial Statements, which are
contained in Item 8.
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. |  | The
following financial statement schedule is filed herewith:
|-- |  | -------------------------------------------------------------

| | Schedule
I                Condensed Financial Statements of Parent Company
| | ---------------------------------------------------------------------------

| | Schedule
II  Valuation                Accounts
| | -----------------------------------------------

| |  | The following
financial statements of subsidiaries not consolidated and 50 percent or less owned
persons are filed herewith:
| |  | ----------------------------------------------------------------------------------------------------------------------------

| | Financial
statements of Westmoreland-LG&E Partners as of December 31, 2005 and 2004 and for
each of the years in the three year period ended December 31, 2005 with the Independent
Auditors Report thereon.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. |  | The
exhibits listed in the Exhibit Index immediately preceding such exhibits are
               filed with or incorporated by reference in this report.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



---

|                           | **WESTMORELAND COAL COMPANY**
|-------------------------- | -----------------------------
|                           |                              
|Date:   
 November 3, 2006 | By:  /s/ David J. Blair      
|                           | David J. Blair               
|                           | Chief Financial Officer      
|                           | (A Duly Authorized Officer)  

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.

|Signature                 | Title                                 | Date            
|------------------------- | ------------------------------------- | ----------------
|                          |                                       |                 
|                          | Chairman of the Board, President, and |                 
|/s/ Christopher K. Seglem | Chief Executive Officer               | November 3, 2006
|Christopher K. Seglem     |                                       |                 
|                          |                                       |                 
|                         
|/s/ David J. Blair        | Chief Financial Officer               | November 3, 2006
|David J. Blair            |                                       |                 
|                          |                                       |                 
|                          |                                       |                 
|                          | Principal Accounting Officer          |                 
|/s/ Kevin A. Paprzycki    | and Controller                        | November 3, 2006
|Kevin A. Paprzycki        |                                       |                 
|                         
|                          |                                       |                 
|/s/ Michael Armstrong     | Director                              | November 3, 2006
|Michael Armstrong         |                                       |                 
|                          |                                       |                 
|                         
|/s/ Thomas J. Coffey      | Director                              | November 3, 2006
|Thomas J. Coffey          |                                       |                 
|                          |                                       |                 
|                         
|/s/ Robert E. Killen      | Director                              | November 3, 2006
|Robert E. Killen          |                                       |                 
|                          |                                       |                 
|                         
|/s/ Richard M. Klingaman  | Director                              | November 3, 2006
|Richard M. Klingaman      |                                       |                 
|                          |                                       |                 
|                         
|/s/ Thomas W. Ostrander   | Director                              | November 3, 2006
|Thomas W. Ostrander       |                                       |                 
|                          |                                       |                 
|                         
|/s/ William M. Stern      | Director                              | November 3, 2006
|William M. Stern          |                                       |                 
|                         
|/s/ Donald A. Tortorice   | Director                              | November 3, 2006
|Donald A. Tortorice       |                                       |                 



---

The Board of Directors
and ShareholdersWestmoreland Coal Company:

Under date of March 24, 2006, except
as to note 2 as to which the date is November 2, 2006, we reported on the consolidated
balance sheets of Westmoreland Coal Company and subsidiaries as of December 31, 2005 and
2004, and the related consolidated statements of operations, shareholders equity and
comprehensive loss, and cash flows for each of the years in the three-year period ended
December 31, 2005, which are included in Amendment No. 1 to the December 31, 2005 Annual
Report on Form 10-K of Westmoreland Coal Company and subsidiaries. In connection with our
audits of the aforementioned consolidated financial statements, we also audited the
related consolidated financial statement schedules I and II. These financial statement
schedules are the responsibility of the Companys management. Our responsibility is
to express an opinion on these financial statement schedules based on our audits.

In our opinion, such financial
statement schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the information set
forth therein.

KPMG LLP Denver, Colorado March 24, 2006, except as to Schedule I
as to which the date is November 2, 2006



# WESTMORELAND COAL
COMPANY

# SCHEDULE I

# CONDENSED FINANCIAL
INFORMATION OF REGISTRANT (Parent Company
Information  See Notes to Consolidated Financial Statements)

# CONDENSED BALANCE SHEET (Parent Company Only)(Amounts in thousands)

|                                                                                           | December 31,2005 |           | December 31,2004
|------------------------------------------------------------------------------------------ | ---------------- | --------- | ----------------
|                                                                                           |                  |           |                 
|Assets                                                                                     |                  |           |                 
|Current assets:                                                                            |                  |           |                 
|Cash and cash equivalents                                                                  | $                | 692       |                 
|Receivables:                                                                               |                  |           |                 
|Other                                                                                      |                  | 92        |                 
|                                                                                           |                  |           |                 
|                                                                                           |                  | 92        |                 
|Other current assets                                                                       |                  | 398       |                 
|                                                                                           |                  |           |                 
|Total current assets                                                                       |                  | 1,182     |                 
|                                                                                           |                  |           |                 
|Property, plant and equipment:                                                             |                  |           |                 
|Plant and equipment                                                                        |                  | 4,686     |                 
|                                                                                           |                  |           |                 
|                                                                                           |                  | 4,686     |                 
|Less accumulated depreciation, depletion and amortization                                  |                  | 3,783     |                 
|                                                                                           |                  |           |                 
|Net property, plant and equipment                                                          |                  | 903       |                 
|                                                                                           |                  |           |                 
|Investment in subsidiaries and independent power projects, including intercompany balances |                  | 161,863   |                 
|Other assets                                                                               |                  | 20,541    |                 
|                                                                                           |                  |           |                 
|Total Assets                                                                               | $                | 184,489   |                 
|                                                                                           |                  |           |                 
|                                                                                           |                  |           |                 
|Liabilities and Shareholders' Deficit                                                      |                  |           |                 
|Current liabilities:                                                                       |                  |           |                 
|Accounts payable and accrued expenses:                                                     |                  |           |                 
|Trade                                                                                      |                  | 5,792     |                 
|Intercompany payable                                                                       |                  | 50,610    |                 
|                                                                                           |                  |           |                 
|Total current liabilities                                                                  |                  | 56,402    |                 
|                                                                                           |                  |           |                 
|Revolving lines of credit                                                                  |                  | 5,500     |                 
|Workers' compensation, less current portion                                                |                  | 8,396     |                 
|                                                                                           |                  |           |                 
|Postretirement medical costs, less current portion                                         |                  | 124,990   |                 
|Other liabilities                                                                          |                  | 7,424     |                 
|Shareholders' equity:                                                                      |                  |           |                 
|Preferred stock                                                                            |                  | 205       |                 
|Common stock                                                                               |                  | 21,043    |                 
|Other paid-in capital                                                                      |                  | 75,344    |                 
|Accumulated other comprehensive loss                                                       |                  | (37)      |                 
|Retained earnings                                                                          |                  | (114,778) |                 
|                                                                                           |                  |           |                 
|Total shareholders' deficit                                                                |                  | (18,223)  |                 
|                                                                                           |                  |           |                 
|Total Liabilities and Shareholders' Deficit                                                | $                | 184,489   |                 
|                                                                                           |                  |           |                 



# WESTMORELAND COAL
COMPANY

# SCHEDULE I

# CONDENSED FINANCIAL
INFORMATION OF REGISTRANT (Parent Company
Information  See Notes to Consolidated Financial Statements)

# CONDENSED STATEMENT OF
OPERATIONS (Parent Company Only)(Amounts in thousands)

|                                                                 |   | Year Ended December 31,
|---------------------------------------------------------------- | - | -----------------------
|                                                                 |   | 2005                   
|                                                                 |   |                        
|Operating costs and expenses:                                    |   |                        
|Depreciation and amortization                                    | $ | 263                    
|Selling and administrative                                       |   | 7,024                  
|Heritage health benefit expenses                                 |   | 27,524                 
|                                                                 |   |                        
|                                                                 |   | 34,811                 
|                                                                 |   |                        
|Operating loss                                                   |   | (34,811)               
|Other income (expense):                                          |   |                        
|Interest expense                                                 |   | (465)                  
|Interest income                                                  |   | 334                    
|Minority interest                                                |   | -                      
|Other income                                                     |   | 2,662                  
|                                                                 |   |                        
|                                                                 |   | 2,531                  
|                                                                 |   |                        
|Loss before income taxes and income of consolidated subsidiaries |   | (32,280)               
|Equity  in income of subsidiaries, net                           |   | 23,761                 
|                                                                 |   |                        
|Loss from continuing operations before income taxes              |   | (8,519)                
|Income tax expense                                               |   | (179)                  
|                                                                 |   |                        
|Net loss                                                         | $ | (8,698)                
|                                                                 |   |                        



# WESTMORELAND COAL
COMPANY

# SCHEDULE I

# CONDENSED FINANCIAL
INFORMATION OF REGISTRANT (Parent Company
Information  See Notes to Consolidated Financial Statements)

# CONDENSED STATEMENT OF
CASH FLOWS (Parent Company Only)(Amounts in thousands)

|                                                                                |   | Year Ended December 31,
|------------------------------------------------------------------------------- | - | -----------------------
|                                                                                |   | 2005                   
|                                                                                |   |                        
|Cash flows from operating activities:                                           |   |                        
|Net loss                                                                        | $ | (8,698)                
|Adjustments to reconcile net loss to net cash provided by operating activities: |   |                        
|Equity in earnings of consolidated subsidiaries, net                            |   | (23,761)               
|Depreciation, depletion and amortization                                        |   | 263                    
|Stock compensation expense                                                      |   | 1,719                  
|Changes in assets and liabilities:                                              |   |                        
|Receivables, net                                                                |   | 400                    
|Accounts payable and accrued expenses                                           |   | 3,912                  
|Other assets and liabilities                                                    |   | (1,123)                
|                                                                                |   |                        
|Net cash used by operating activities                                           |   | (27,288)               
|                                                                                |   |                        
|Cash flows from investing activities:                                           |   |                        
|Dividends received from subsidiaries                                            |   | 4,318                  
|Additions to property, plant and equipment                                      |   | (491)                  
|                                                                                |   |                        
|Net cash provided by investing activities                                       |   | 3,827                  
|                                                                                |   |                        
|Cash flows from financing activities:                                           |   |                        
|Net borrowings (repayments) on revolving lines of credit                        |   | 5,500                  
|Repurchase of preferred shares                                                  |   | -                      
|Advances from subsidiaries                                                      |   | 18,383                 
|Proceeds from exercise of stock options                                         |   | 1,094                  
|Dividends on preferred shares                                                   |   | (820)                  
|                                                                                |   |                        
|Net cash provided by financing activities                                       |   | 24,157                 
|                                                                                |   |                        
|Net increase (decrease) in cash and cash equivalents                            |   | 696                    
|Cash and cash equivalents, beginning of year                                    |   | (4)                    
|                                                                                |   |                        
|Cash and cash equivalents, end of year                                          | $ | 692                    
|                                                                                |   |                        



Schedule II

# WESTMORELAND COAL
COMPANY AND SUBSIDIARIES

---

|                                |   | Balance at beginning of year | Deductions credited to earnings | Other additions |   | Balance at end of year |    
|------------------------------- | - | ---------------------------- | ------------------------------- | --------------- | - | ---------------------- | ---
|                                |   |                              |                                 |                 |   |                        |    
|Year ended December 31, 2005:   |   |                              |                                 |                 |   |                        |    
|                                |   |                              |                                 |                 |   |                        |    
|Allowance for doubtful accounts | $ | 2,441                        | -                               | -               | $ | 2,441                  | (A)
|                                |   |                              |                                 |                 |   |                        |    
|Year ended December 31, 2004:   |   |                              |                                 |                 |   |                        |    
|                                |   |                              |                                 |                 |   |                        |    
|Allowance for doubtful accounts | $ | 2,441                        | -                               | -               | $ | 2,441                  | (A)
|                                |   |                              |                                 |                 |   |                        |    
|Year ended December 31, 2003:   |   |                              |                                 |                 |   |                        |    
|                                |   |                              |                                 |                 |   |                        |    
|Allowance for doubtful accounts | $ | 2,441                        | -                               | -               | $ | 2,441                  | (A)
|                                |   |                              |                                 |                 |   |                        |    

| | Amounts above include current and
non-current valuation accounts.
| | -----------------------------------------------------------------

|(A) | Includes reserves related to the uncollectibility of notes receivable reported
               as a reduction of other assets in the Companys Consolidated Balance
               Sheets.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



# WESTMORELAND-LG&E PARTNERS

---

|                                         |  |  |   | 2005        |   |   | 2004        |  
|---------------------------------------- |  |  | - | ----------- | - | - | ----------- | -
|ASSETS                                   |  | 
|                                        
|CURRENT ASSETS:                          |  | 
|Cash and cash equivalents                |  |  | $ | 21,429,618  |   | $ | 23,547,318  |  
|Accounts receivable                      |  |  |   | 22,843,387  |   |   | 20,262,811  |  
|Fuel inventories                         |  |  |   | 1,689,289   |   |   | 2,740,403   |  
|Prepaid expenses                         |  |  |   | 495,344     |   |   | 558,600     |  
|                                         | 
|Total current assets                     |  |  |   | 46,457,638  |   |   | 47,109,132  |  
|                                        
|PROPERTY, PLANT, AND EQUIPMENTNet       |  |  |   | 228,322,765 |   |   | 237,342,746 |  
|                                        
|LOAN ORIGINATION FEESNet                |  |  |   | 3,023,022   |   |   | 3,731,454   |  
|                                        
|RESTRICTED ASSETS                        |  |  |   | 22,848,995  |   |   | 22,554,540  |  
|                                        
|OTHER ASSETS                             |  |  |   | 387         |   |   | 10,771      |  
|                                         | 
|TOTAL                                    |  |  | $ | 300,652,807 |   | $ | 310,748,643 |  
|                                         | 
|                                        
|LIABILITIES AND PARTNERS CAPITAL        |  | 
|                                        
|CURRENT LIABILITIES:                     |  | 
|Accounts payable and accrued liabilities |  |  | $ | 18,143,384  |   | $ | 10,170,100  |  
|Interest payable                         |  |  |   | 1,744,469   |   |   | 1,692,665   |  
|Current portion of long-term debt        |  |  |   | 25,593,595  |   |   | 22,155,937  |  
|                                         | 
|Total current liabilities                |  |  |   | 45,481,448  |   |   | 34,018,702  |  
|                                        
|LONG TERM DEBT                           |  |  |   | 158,002,192 |   |   | 183,595,787 |  
|                                        
|OTHER NONCURRENT LIABILITIES             |  |  |   | 526,440     |   |   | 1,513,430   |  
|                                         | 
|Total liabilities                        |  |  |   | 204,010,080 |   |   | 219,127,919 |  
|                                         | 
|COMMITMENTS AND CONTINGENCIES            |  | 
|                                        
|PARTNERS CAPITAL:                       |  | 
|Westmoreland-Roanoke Valley L.P.         |  |  |   | 50,932,116  |   |   | 48,906,389  |  
|LG&E-Roanoke Valley L.P.                 |  |  |   | 45,836,745  |   |   | 43,853,646  |  
|Unrealized loss on derivative instrument |  |  |   | (126,134    | ) |   | (1,139,311  | )
|                                         | 
|Total partners capital                  |  |  |   | 96,642,727  |   |   | 91,620,724  |  
|                                         | 
|TOTAL                                    |  |  | $ | 300,652,807 |   | $ | 310,748,643 |  
|                                         | 

See notes to financial statements.



# WESTMORELAND-LG&E PARTNERS

---

|                                         |  |  |  
|---------------------------------------- |  |  | -
|                                         |  |  |  
|                                        
|ENERGY REVENUES                          |  |  | $
|                                        
|COST OF REVENUES                         |  |  |  
|                                         | 
|GROSS PROFIT                             |  |  |  
|                                         | 
|OPERATING EXPENSES:                      |  | 
|Operating and maintenance                |  |  |  
|Depreciation                             |  |  |  
|Amortization                             |  |  |  
|General and administrative               |  |  |  
|                                         | 
|Total operating expenses                 |  |  |  
|                                         | 
|OPERATING INCOME                         |  |  |  
|                                         | 
|OTHER INCOME (EXPENSE):                  |  | 
|Interest income                          |  |  |  
|Interest expense                         |  |  |  
|Other                                    |  |  |  
|                                         | 
|Total other income (expense)net         |  |  |  
|                                         | 
|INCOME BEFORE CUMULATIVE EFFECT OF       |  | 
|A CHANGE IN ACCOUNTING PRINCIPLE         |  |  |  
|                                        
|CUMULATIVE EFFECT OF A CHANGE IN         |  | 
|ACCOUNTING PRINCIPLE                     |  |  |  
|                                         | 
|NET INCOME                               |  |  | $
|                                        
|OTHER COMPREHENSIVE INCOME              |  | 
|Unrealized gain on derivative instrument |  |  |  
|                                         | 
|TOTAL COMPREHENSIVE INCOME               |  |  | $
|                                         | 

See notes to financial statements.



# WESTMORELAND-LG&E PARTNERS

---

|                                         | Westmoreland-RoanokeValley L.P. | LG&E-RoanokeValley L.P. | Unrealized Losson DerivativeInstrument | Total      
|---------------------------------------- | ------------------------------- | ----------------------- | -------------------------------------- | -----------
|                                        
|BALANCE--January 1, 2003                 |                                 |                         | $                                      | 35,198,215 
|                                        
|Net income                               |                                 |                         |                                        | 15,106,139 
|                                        
|Partner distributions                    |                                 |                         |                                        | (11,047,111
|                                        
|Unrealized gain on derivative instrument |                                 |                         |                                        | --         
|                                         |                                
|BALANCE--December 31, 2003               |                                 |                         |                                        | 39,257,243 
|                                        
|Net income                               |                                 |                         |                                        | 12,559,078 
|                                        
|Partner distributions                    |                                 |                         |                                        | (2,909,932 
|                                        
|Unrealized gain on derivative instrument |                                 |                         |                                        | --         
|                                         |                                
|BALANCE--December 31, 2004               |                                 |                         |                                        | 48,906,389 
|                                        
|Net income                               |                                 |                         |                                        | 12,271,862 
|                                        
|Partner distributions                    |                                 |                         |                                        | (10,246,135
|                                        
|Unrealized gain on derivative instrument |                                 |                         |                                        | --         
|                                         |                                
|BALANCE--December 31, 2005               |                                 |                         | $                                      | 50,932,116 
|                                         |                                

See notes to financial statements.



# WESTMORELAND-LG&E PARTNERS

---

|                                                                | 2005 | 2004 | 2003
|--------------------------------------------------------------- | ---- | ---- | ----
|OPERATING ACTIVITIES:                                           |      |      |     
|Net income                                                      |      |      | $   
|Adjustments to reconcile net income to net cash                 |      |     
|provided by operating activities:                               |      |     
|Cumulative effect of a change in accounting principle           |      |      |     
|Depreciation                                                    |      |      |     
|Amortization                                                    |      |      |     
|Ash monofill amortization                                       |      |      |     
|Decrease (increase) in accounts receivable                      |      |      |     
|Decrease (increase) in fuel inventories                         |      |      |     
|Decrease (increase) in prepaid expenses                         |      |      |     
|Increase (decrease) in accounts payable and accrued liabilities |      |      |     
|Increase (decrease) in interest payable                         |      |      |     
|                                                                |     
|Net cash provided by operating activities                       |      |      |     
|                                                                |     
|                                                                |     
|INVESTING ACTIVITIES:                                           |      |     
|Purchases of property, plant, and equipment                     |      |      |     
|Increase in restricted assets                                   |      |      |     
|                                                                |     
|Net cash used in investing activities                           |      |      |     
|                                                                |     
|                                                                |     
|FINANCING ACTIVITIES:                                           |      |     
|Repayment of notes payable                                      |      |      |     
|Partner distributions                                           |      |      |     
|                                                                |     
|Net cash used in financing activities                           |      |      |     
|                                                                |     
|                                                                |     
|NET INCREASE (DECREASE) IN CASH AND                             |      |     
|CASH EQUIVALENTS                                                |      |      |     
|                                                                |     
|CASH AND CASH EQUIVALENTS--Beginning of year                    |      |      |     
|                                                                |     
|CASH AND CASH EQUIVALENTS--End of year                          |      |      | $   
|                                                                |     
|                                                                |     
|SUPPLEMENTAL DISCLOSURE OF CASH                                 |      |     
|FLOW INFORMATION                                               |      |     
|Cash paid during the year for interest                          |      |      | $   

See notes to financial statements.



# WESTMORELAND-LG&E
PARTNERS

# NOTES TO FINANCIAL
STATEMENTS

---

|1. |  | SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|-- |  | ------------------------------------------

| | OrganizationWestmoreland-LG&E
Partners (the Venture), a Virginia general partnership, was formed to own and
operate two cogeneration facilities (the Facilities) located in Weldon, North
Carolina. The first facility (ROVA I) is a 180 megawatt facility and the
second facility (ROVA II) is a 50 megawatt facility adjacent to ROVA I. The
Facilities share certain coal handling, electrical distribution, and administrative
equipment. The Facilities produce electric power and steam by burning coal. The steam is
sold to a local industrial plant for use in its manufacturing process. ROVA I and ROVA II
operate as exempt wholesale generators as determined by the Federal Energy Regulatory
Commission (FERC). ROVA I commenced commercial operation on May 29, 1994
(Commercial Operations Date). ROVA II commenced commercial operation on June 1, 1995
(Commercial Operations Date).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
partners in the Venture are Westmoreland-Roanoke Valley, L.P. (Westmoreland L.P.),
a limited partnership between Westmoreland Energy, LLC. (WEI), as the sole
limited partner, and WEI-Roanoke Valley, Inc., a wholly owned subsidiary of WEI, as the
sole general partner, and LG&E Roanoke Valley L.P. (LG&E L.P.), a
limited partnership between LG&E Power Roanoke Incorporated, an indirect wholly owned
subsidiary of LG&E Power Inc. (LPI), as the sole limited partner, and LG&E
Power 16 Incorporated, an indirect wholly owned subsidiary of LPI, as the sole general
partner. Under the terms of the General Partnership Agreement (Partnership Agreement),
after priority allocations to Westmoreland L.P., all income, loss, tax deductions and
credits, and cash distributions are allocated approximately 50% to Westmoreland L.P. and
50% to LG&E L.P.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | TermsTerms
used herein are defined in Section 1.1 of the Amended and Restated Construction and Term
Loan Agreement (the Credit Agreement).
| | ---------------------------------------------------------------------------------------------------------------------------------------------

| | Power
Sales AgreementThe Venture has entered into two Power Purchase and
Operating Agreements (Power Agreements) with North Carolina Power Company, a
division of Dominion Virginia Power Company (DVP), for the sale of all energy
produced by the Facilities. Each Power Agreement is for an initial term of 25 years from
the respective Commercial Operations Date. Revenue is recognized for these Power
Agreements as amounts are invoiced.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Under
the terms of the ROVA I Power Agreement, the energy price consists of an Energy Purchase
Price (ROVA I Energy Price) and a Purchased Capacity Unit Price (ROVA I
CUP). The ROVA I Energy Price is billed for each kilowatt-hour delivered and is
comprised of a Base Fuel Compensation Price (ROVA I Fuel Price) and an
Operating and Maintenance Price (ROVA I O&M Price). The ROVA I Fuel Price
is adjusted quarterly and the ROVA I O&M Price is adjusted annually based upon the
Gross Domestic Product Implicit Price Deflator Index (GDPIPD). The ROVA I CUP
is determined by dividing the sum of the applicable capacity components (the Fixed
Capacity Component and the O&M Capacity Component) by a three-year rolling average
capacity factor (Average Capacity Factor) expressed in cents per
kilowatt-hour. Annually, on April 1, the O&M Capacity Component is adjusted by the
percentage change in the GDPIPD. The Venture recognizes revenue based on the billed ROVA
I Energy Price and the ROVA I Delivered Capacity expressed in kilowatt-hours multiplied
by the ROVA I CUP. In addition, a notional, off-balance sheet account (the Tracking
Account) has been established to accumulate differences in actual capacity versus
the three-year rolling average capacity to facilitate calculation of Capacity Purchase
Payment Adjustments. If the Actual Capacity Factor for any year is less than the Average
Capacity Factor, the Tracking Account is decreased and the Venture will recognize
additional revenue from the Capacity Purchase Payment Adjustment to the extent of the
positive balance in the Tracking Account. If the Actual Capacity Factor for any year is
greater than the Average Capacity Factor, the Tracking Account is increased, but no
additional revenue is recognized. As of December 31, 2005 and December 31, 2004, the
Tracking Account contained a positive balance of $829,022 and $1,168,971, respectively,
which is not included in the financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the terms of the ROVA II Power Agreement, the energy price consists of an Energy Purchase
Price (ROVA II Energy Price) and a Purchased Capacity Price (ROVA II
Capacity Price). The ROVA II Energy Price is billed for each kilowatt-hour
delivered, reduced by 2.25% for line losses, and is comprised of a Base Fuel Compensation
Price (ROVA II Fuel Price) and an Operating and Maintenance Price (ROVA
II O&M Price). The ROVA II Fuel Price is adjusted quarterly and the ROVA II O&M
Price is adjusted annually based upon the GDPIPD. The ROVA II Capacity Price is based on
the Dispatch Level, Dependable Capacity, and Net Electrical Output, and is comprised of a
fixed amount per kilowatt-hour plus a variable amount per kilowatt-hour, which is
adjusted annually based upon the GDPIPD. The Venture recognizes revenue based on the
billed ROVA II Energy Price and ROVA II Capacity Price.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Energy
Services AgreementThe Venture has entered into an Energy Services
Agreement (Energy Agreement) with Patch Rubber Company for the sale of steam
produced by the Facilities. The Energy Agreement is for an initial term of 15 years from
the later of the ROVA I Initial Delivery Date or the ROVA II Initial Delivery Date with
three five-year renewal options. Under the terms of the Energy Agreement, the volume of
steam delivered determines payments to the Venture. The prices of delivered steam will be
increased annually based upon the Gross National Product Implicit Price Deflator Index (GNPIPD)
beginning January 1, 1991, except that such increase shall not exceed 3% per year.
The Venture recognizes revenue on steam sales based on the volume of steam delivered.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cash
EquivalentsThe Venture considers all highly liquid securities
purchased with an original maturity of three months or less to be cash equivalents.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | Fuel
InventoriesFuel inventories, which consist primarily of coal, are
valued at the lower of cost or market. Cost is determined by the moving weighted average
method.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Property,
Plant, and EquipmentDepreciation is provided on a straight-line
method over the estimated useful lives of the assets except for the ash monofills. The
ash monofills are amortized on a cost per ton basis multiplied by tons sent to each
monofill. The ash monofills were built as disposal sites for the ash generated during
operations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Balance
of property, plant, and equipment, at cost, as of December 31, 2005 and 2004, is as
follows:
| | ----------------------------------------------------------------------------------------------------

|                                                     | 2005 | 2004 | Useful livesin Years
|---------------------------------------------------- | ---- | ---- | --------------------
|                                                     |      |     
|Land                                                 |      |      | $                   
|Land improvements                                    |      |      |                     
|Plant and related equipment, including               |      |     
|capitalized interest of $34,486,000 in 2005 and 2004 |      |      |                     
|Office equipment                                     |      |      |                     
|Ash monofills                                        |      |      |                     
|Construction-in-progress                             |      |      |                     
|Asset retirement obligation                          |      |      |                     
|Transportation equipment                             |      |      |                     
|                                                     |      |     
|Total cost                                           |      |      |                     
|Less accumulated depreciation                        |      |      |                     
|                                                     |      |     
|Property, plant, and equipment--net                  |      |      | $                   
|                                                     |      |     

| | Loan
Origination FeesLoan origination fees incurred in conjunction with
obtaining the construction and term loan, institutional loan, and bond financing have
been capitalized. These costs are being amortized by the straight-line method over the
lives of the notes and bonds. Accumulated amortization at December 31, 2005 and 2004
was $9,149,105 and $8,440,671, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Restricted
AssetsRestricted assets represent cash deposits to the Debt
Protection Account (DPA), the Ash Reserve Account (Ash) and the
Repair and Maintenance Account (R&M) as required by the Credit Agreement.
At December 31, 2005 and 2004, the DPA balance was fully funded at $21,724,657 and
$20,408,247, respectively. The maximum Ash balance is $600,000, of which $606,009 and
$603,276 has been funded by the Venture at December 31, 2005 and 2004, respectively,
in accordance with the terms of the Credit Agreement. The maximum R&M balance is
$2,200,000 through January 31, 2004, and $2,600,000 thereafter until January 31, 2010, of
which $518,330 and $1,543,017 has been funded by the Venture at December 31, 2005
and 2004, respectively, in accordance with the terms of the Credit Agreement. The
remaining R&M balance will be funded incrementally on each distribution date until
such time as it is fully funded. See Note 3, Long-Term Debt.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Intangible
AssetThe Venture paid $215,973 to construct a chiller system
physically located on the property of Patch Rubber Company. The Venture has rights to use
the system through October 2006. These costs have been amortized on a straight-line basis
over the period of nine years. Accumulated amortization was $215,973 and $205,589 at
December 31, 2005 and 2004, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Major
MaintenanceThe Venture expenses major maintenance costs as incurred.
| | ---------------------------------------------------------------------------

| | Income
TaxesThe Venture is a partnership and, as such, does not record or
pay income taxes. Each Venture partner reports its respective share of the Ventures
taxable income or loss for income tax purposes.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | DerivativesStatement
of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments andHedging Activities, as amended by SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain HedgingActivities,
SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, requires that all derivatives be recognized in the financial statements
as either assets or liabilities and that they be measured at fair value. Changes in fair
value are recorded as adjustments to the assets or liabilities being hedged in Other
Comprehensive Income (Loss), or in current earnings, depending on whether the derivative
is designated and qualifies for hedge accounting, the type of hedge transaction
represented and the effectiveness of the hedge.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
connection with the adoption of SFAS No.133, SFAS No. 138 and SFAS No.149, the
Venture classified its Interest Rate Exchange Agreements (Swap Agreements) as
cash flow hedges. At December 31, 2005 and 2004, the fair value of the Swap
Agreements is recorded as a noncurrent liability of $126,134 and $1,139,311,
respectively. The change in fair value is recorded as a component of Other Comprehensive
Loss.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Asset
Retirement ObligationIn August 2001, FASB issued Statement No. 143,
Accounting for Asset Retirement Obligations, and the Venture adopted this
statement effective January 1, 2003. Statement No. 143 addresses financial
accounting for legal obligations associated with the retirement of long-lived assets.
Upon adoption of this statement, the Venture recorded $326,770 of asset retirement
obligations in the balance sheet primarily representing the current estimated fair value
of the Ventures obligation to perform various clean-up and monitoring activities
when the power plants are closed in the future. Of this original amount, $136,822 was
recorded as an incremental cost of the underlying property, plant, and equipment. The
cumulative effect on earnings of adopting this new statement was a charge to earnings of
$189,948, representing the cumulative amounts of depreciation and depletion expenses and
changes in the asset retirement obligation due to the passage of time for historical
accounting periods. The adoption of the new standard did not have a significant impact on
income before cumulative effect of a change in accounting principle for the year ended
December 31, 2003.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | As
of December 31, 2005 and 2004, the Ventures obligation recorded in Other Noncurrent
Liabilities was $400,307 and $374,119, respectively. Changes in the Ventures asset
retirement obligations for the years ended December 2005 and 2004 were:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                | 2005 | 2004
|----------------------------------------------- | ---- | ----
|                                                |     
|Asset retirement obligation - beginning of year |      |     
|Accretion                                       |      |     
|                                                |     
|Asset retirement obligation - end of year       |      |     
|                                                |     

| | In
March 2005, FASB issued FASB Interpretation No. 47 (FIN 47), Accounting
for Conditional Asset Retirement Obligations an interpretation of FASB
Statement 143.FIN 47 clarifies that a legal obligation to perform an asset
retirement activity that is conditional on a future event is within the scope of SFAS No.
143. It also clarifies the meaning of the term conditional asset retirement
obligation as a legal obligation to perform an asset retirement activity in which
the timing and (or) method of settlement are conditional on a future event that may or
may not be within the control of the entity. Accordingly, an entity is required to
recognize a liability for the fair value of an asset retirement obligation that is
conditional on a future event if the liability is reasonably estimated. The
interpretation also clarifies when the entity would have sufficient information to
reasonably estimate the fair value of an asset retirement obligation. The adoption of FIN
47 had no material impact on the Ventures financial position or results of
operations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Use
of EstimatesFinancial statements prepared in conformity with
accounting principles generally accepted in the United States of America require
management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ReclassificationCertain
prior period amounts have been reclassified to conform to the current period
presentation.
| | -------------------------------------------------------------------------------------------------------------------

|2. |  | FINANCIAL
INSTRUMENTS
|-- |  | ---------------------

| | The
Venture is a party to financial instruments with off-balance sheet risk. The counter
parties relating to financial instruments anticipate no losses due to nonperformance.
Pursuant to SFAS No. 107, Disclosures about Fair Value ofFinancial
Instruments, the Venture is required to disclose the fair value of financial
instruments where practicable. The carrying amounts of cash equivalents, accounts
receivable, and accounts payable reflected on the balance sheets approximate the fair
value of these instruments due to the short duration to maturity. The fair value of
long-term debt is based on the interest rates available to the Venture for debt with
similar terms and maturities. The fair value of interest rate swaps is based on the
quoted market price as provided by the financial institution, which is the counter party
to the swap. The fair value of the Institutional Debt is based on the present value of
the underlying cash flows using the market interest rate for similar instruments at
December 31, 2005 and 2004.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The
cost and estimated fair value of the Ventures financial instruments as of December 31,
2005 and 2004, are as follows:
| | --------------------------------------------------------------------------------------------------------------------------

|                    | 2005 | 2004
|------------------- | ---- | ----
|
|
|                   
|Long-term debt      |      |     
|                   
|Interest rate swaps |      |     

|3. |  | LONG-TERM
DEBT
|-- |  | --------------

|                     | 2005 | 2004
|-------------------- | ---- | ----
|                    
|Notes payable        |      |     
|Bonds payable        |      |     
|                     |     
|Total                |      |     
|Less current portion |      |     
|                     |     
|Total long-term debt |      |     
|                     |     

| | On
December 18, 1991, the Venture entered into the Credit Agreement (Tranche A)
with a consortium of banks (the Banks) and an Institutional Lender for the
financing and construction of the ROVA I facility. On December 1, 1993, the Credit
Agreement was amended and restated (Tranche B) to allow for the financing and
construction of the ROVA II facility. Under the terms of the Credit Agreement, the
Venture is permitted to borrow up to $229,887,000 from the Banks (Bank Borrowings),
$120,000,000 from an Institutional Lender, and $36,760,000 in tax-exempt facility revenue
bonds (Bond Borrowings) under two Indenture Agreements with the Halifax
County, North Carolina, Industrial Facilities and Pollution Control Financing Authority (Financing
Authority). The borrowings are evidenced by promissory notes and are secured by
land, the Facilities, the Ventures equipment, inventory, accounts receivable,
certain other assets and the assignment of all material contracts. Bank Borrowings
amounted to $73,071,787 and $90,791,724 at December 31, 2005 and 2004, respectively
and mature in 2008. The Credit Agreement requires interest on the Bank Borrowings at
rates set at varying margins in excess of the Banks base rate, London Interbank
Offering Rate (LIBOR) or certificate of deposit rate (CD), for
various terms from one day to one year in length, each to be selected by the Venture when
amounts are borrowed. Interest payments for all elections are generally due at the end of
the applicable interest period. However, if such interest period extends beyond a
Quarterly Date, then interest is due on each Quarterly Date and at the end of the
applicable interest period. During 2005 and 2004, the weighted average interest rate for
the outstanding Bank Borrowings was 4.80% and 2.90%, respectively. The interest rate at
December 31, 2005 and 2004 was 5.86% and 3.85%, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | At
the Tranche A Conversion Date (January 31, 1995), Westmoreland L.P. and LG&E
L.P. contributed a combined total of $8,571,224 (Tranche A Equity Funding) to
the Venture to reduce the principal amount of the outstanding Tranche A Bank Borrowings.
The remaining principal balance of the Tranche A Bank Borrowings converted into a term
loan (Tranche A Term Loan). Principal payments under the Tranche A Term Loan
are based upon fixed percentages, ranging from 0.75% to 7.55% of the Tranche A Term Loan,
and are paid in 38 semiannual installments.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
the Tranche B Conversion Date (October 19, 1995), Westmoreland L.P. and LG&E
L.P. contributed a combined total of $9,222,152 (Tranche B Equity Funding) to
the Venture to reduce the principal amount of the outstanding Tranche B Bank Borrowings.
The remaining principal balance of the Tranche B Bank Borrowings converted into a term
loan (Tranche B Term Loan). Principal payments under the Tranche B Term Loan
are based upon fixed percentages, ranging from 0.68% to 7.87% of the Tranche B Term Loan,
and are paid in 40 semiannual installments.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the terms of the Credit Agreement, interest on the Tranche A Institutional Borrowings is
fixed at 10.42% and interest on the Tranche B Institutional Borrowings is fixed at 8.33%.
For the combined Institutional Borrowings, the weighted average interest rate for
December 31, 2005 and 2004, was 9.78% and 9.73%, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Credit Agreement requires repayment of the Tranche A Institutional Borrowings in 38
semiannual installments ranging from $850,000 to $4,250,000. The Credit Agreement
requires repayment of the Tranche B Institutional Borrowings in 40 semiannual
installments ranging from $294,000 to $6,510,000. At December 31, 2005 and 2004,
Institutional Borrowings amounted to $73,764,000 and $78,200,000, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with the Indenture Agreement, the Financing Authority issued $29,515,000 of
1991 Variable Rate Demand Exempt Facility Revenue Bonds (1991 Bond Borrowings)
and $7,245,000 of 1993 Variable Rate Demand Exempt Facility Revenue Bonds (1993
Bond Borrowings), the proceeds of which were deposited with the respective Trustee
pending reimbursement to the Venture for qualified expenditures. The 1991 Bond Borrowings
and the 1993 Bond Borrowings are secured by irrevocable letters of credit in the amounts
of $30,058,400 and $7,378,387, respectively, which were issued to the respective Trustee
by the Banks. The fees associated with the letters of credit totaled $781,424, $751,449
and $727,053 for the years ended December 31, 2005, 2004 and 2003, respectively. The
weighted average interest rate for the outstanding Bond Borrowings was 2.43% and 1.24%
for the years ended December 31, 2005 and 2004, respectively. The interest rate at
December 31, 2005 and 2004 was 3.10% and 1.62%, respectively. The 1991 Bond
Indenture Agreement requires repayment of the 1991 Bond Borrowings in four semi-annual
installments of $1,180,600, $1,180,600, $14,757,500, and $12,396,300. The first
installment of the 1991 Bond Borrowings is due in January 2008. The 1993 Indenture
Agreement requires repayment of the 1993 Bond Borrowings in three semi-annual
installments of $1,593,900, $1,811,250, and $3,839,850. The first installment is due in
January 2009.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | On
January 17, 1992, the Venture entered into Interest Rate Exchange Agreements (Swap
Agreements) with the Banks, which were created for the purpose of securing a fixed
interest rate of 8.03% on approximately 63.3% of the Tranche A Bank Borrowings. These
Swap Agreements have been classified as cash flow hedges. In return, the Venture receives
a variable rate based on LIBOR, which averaged 3.3% and 1.46% during 2005 and 2004,
respectively. Under the terms of the Swap Agreements, the difference between the interest
at the rate selected by the Venture at the time the funds were borrowed and the fixed
interest rate is paid or received quarterly. Swap interest incurred under this agreement
was $947,958, $2,229,660 and $3,191,956 for the years ended December 31, 2005, 2004
and 2003.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | To
ensure performance under the Power Agreement, irrevocable letters of credit in the
amounts of $4,500,000 and $1,476,000 were issued to DVP by the Banks on behalf of the
Venture for ROVA I and ROVA II, respectively. The fees associated with the letters of
credit totaled $89,640, $86,258 and $97,888 for the years ended December 31, 2005,
2004 and 2003, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
debt agreements contain various restrictive covenants primarily related to construction
of the Facilities, maintenance of the property, and required insurance. Additionally, the
financial covenants include restrictions on incurring additional indebtedness and
property liens, paying cash distributions to the partners, and incurring various
commitments without lender approval. At December 31, 2005 and 2004, the Venture was
in compliance with the various covenants.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to the terms of the Credit Agreement, the Venture must maintain a debt protection account
(DPA). On November 30, 2000, Amendment 6 to the Credit Agreement (Amendment
6) was negotiated with the Banks and the full funding level was increased to
$22,000,000 and an additional $2,000,000 was funded. Beginning in 2002, additional
funding of $1.1 million per year is required through 2008. In 2009, $6.7 million of the
$9.7 million contributed from 2000-2008 will be available for partnership distribution.
In 2010, the remaining $3 million will be available for partnership distribution and the
full funding level reverts back to $20,000,000. At year end, the DPA consists of
$21,724,657 in cash (see Note 1, Restricted Assets) and a letter of credit in the
amount of $5,000,000.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Balances
held in the DPA are available to be used to meet shortfalls of debt service requirements.
If the balance in the DPA falls below the required balance, the cash flow from the
Facilities must be paid into the DPA until the deficiency is corrected. There were no
deficiencies at December 31, 2005 and 2004.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Credit Agreement requires the Venture to maintain an R&M account. Pursuant to
Amendment 6, the Venture was required to increase its maximum funding level from $1.5
million to $2.2 million by January 31, 2004. See Note 1, Restricted Assets.
The maximum funding level increased to $2.6 million from January 31, 2004 through
January 31, 2010, after which date it reverts back to $2.2 million.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Under
the terms of the Credit Agreement, the Venture must maintain an Ash Reserve Account.
Pursuant to Amendment 6, the funding level of the Ash Reserve Account was reduced from
$1,000,000 to $600,000. See Note 1, Restricted Assets. Also, a provision was made
for the funds to be used for debt protection after the funds in the DPA and R&M are
exhausted. Should the funds be used for debt protection, or should the Venture receive
written notice from the Banks independent engineer that construction of a new ash
monofill will be required, the funding level will immediately increase to $1,000,000.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Future
principal payments on long-term debt at December 31, 2005, are as follows:
| | ---------------------------------------------------------------------------------

|Year       | Total
|---------- | -----
|           |      
|2006       |      
|2007       |      
|2008       |      
|2009       |      
|2010       |      
|Thereafter |      
|           |      
|           |      
|           |      

|4. |  | COMMITMENTS
AND CONTINGENCIES
|-- |  | -----------------------------

| | Coal
Supply AgreementThe Venture has entered into two Coal Supply
Agreements (Coal Agreements) with TECO Coal Corporation (TECO).
Under the terms of the Coal Agreements, TECO entered into a subcontract with Kentucky
Criterion Coal Company (KCCC), an affiliate of WEI, to provide 79.5% of the
coal requirements under the Coal Agreements. On December 16, 1994, WEI sold the assets of
KCCC to Consol of Kentucky, Inc. (Consol). TECO consented to the assignment
of the subcontract with KCCC to Consol. Each Coal Supply Agreement is for an initial term
of 20 years from the respective Commercial Operations Date with two five-year renewal
options. Under the terms of the Coal Agreements, the Venture must purchase a combined
minimum of 512,500 tons of coal each contract year (Minimum Quantity). In the
event the Venture fails to purchase the Minimum Quantity in any contract year, the
Venture may be liable for actual and direct damages incurred by TECO, up to a maximum of
$5 per ton for each ton short for ROVA I or 20% of the current Base Price for each ton
short for ROVA II. The Base Price is comprised of the Subject Coal and Subject
Transportation and is adjusted annually on July 1 of each contract year based upon the
GNPIPD. The average coal cost per ton, including transportation cost, for the years ended
December 31, 2005, 2004 and 2003 was $48.59, $49.37 and 48.86, respectively. Coal
purchases from TECO for the years ended December 31, 2005, 2004 and 2003 were
$20,304,811, $21,049,907 and $20,364,430, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Lime
Supply AgreementThe Venture has entered into two Lime Supply
Agreements (Lime Agreements) with O. N. Minerals (Chemstone) Corporation. The
Lime Agreements were for an initial term of five years from the respective commercial
operations dates and have been extended through December 31, 2008. Under the terms
of the Lime Agreements, the Venture must purchase the greater of 100% of the Facilitys
requirement or 10,000 tons of pebble lime per year for ROVA I and 4,500 tons of hydrated
lime per year for ROVA II. The base price is increased annually over the life of the Lime
Agreements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The
average lime cost per ton, including transportation cost, for the years ended December
31, 2005, 2004 and 2003 was $86.70, $86.12 and $83.33, respectively. Total purchases and
transportation under the agreements were $1,597,170 and $2,067,817 and $1,840,646,
respectively, for the years ended December 31, 2005, 2004 and 2003. See Rail
TransportationAgreement below for information about contract terms and
conditions.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Rail
Transportation AgreementThe Coal Rail Transportation Agreement (Coal
Rail Agreement) is for an initial term of 20 years from the commercial date of ROVA
I, with two five-year renewal options. Under the terms of the Coal Rail Agreement, the
base rate per ton is adjusted annually for the life of the Coal Rail Agreement.
Additionally, the Venture must utilize CSX Transportation (CSX) for up to 95%
of the coal received by the Facility on an annual basis. Failure to comply with this
requirement may result in liquidated damages based on the difference between the 95%
contract requirement and tons actually received. Total charges under the Coal Rail
Agreement for the years ended December 31, 2005, 2004 and 2003 were $10,564,729,
$12,270,821 and $11,071,622, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Venture has entered into a Rail Transportation Agreement for the transportation of lime
to the Facilities with CSX. The Lime Rail Transportation Agreement (Lime Rail
Agreement), as amended, extends through June 10, 2008. Under the terms of the Lime
Rail Agreement, the base rate per ton is adjusted annually, as determined in the Lime
Rail Agreement, each June 11. Additionally, the Venture must utilize CSX for up to 95% of
the lime received by ROVA I on an annual basis. Failure to comply with this requirement
may result in liquidated damages based on the difference between the 95% contract
requirement and the tons actually received. See Lime Supply Agreementabove.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Property
Tax Audit The Venture is located in Halifax County, North Carolina
and is the Countys largest taxpayer. In 2002, the County hired an independent
consultant to review and audit personal property tax returns for the previous five years.
In May 2002, the County advised the Venture that its returns were being scrutinized for
potential underpayment and undervaluation of the property subject to tax. The Venture
responded that its valuation was consistent with an agreement reached with the County in
1996. On November 5, 2002, the County assessed the Venture $4.6 million for the
years 1997 to 2001. The Venture filed a protest with the Property Tax Commission. On May 26,
2004, the Tax Commission denied the Ventures protest and issued an order consistent
with the Countys assessment. The Venture appealed the Tax Commissions
decision to the North Carolina Court of Appeals on June 24, 2004. In December 2005,
the Venture received an adverse ruling from the North Carolina Court of Appeals. The
Venture did not appeal this ruling. At December 31, 2005, the Venture has recorded a
liability of $10.6 million for this contingency in accounts payable and accrued
liabilities on the balance sheet for the tax years 1996 to 2005. The Venture subsequently
paid $7.1 million, including penalties and interest, for the 1996 to 2001 tax years. The
Venture continues to pursue a challenge of the additional assessment for the remaining
tax years.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. |  | RELATED-PARTY
TRANSACTIONS
|-- |  | --------------------------

| | The
Venture entered into an operating agreement with LG&E Power Services LLC, (the Operator),
an affiliate of LPI, for the operation and maintenance of the Facility and administration
of the Ventures day-to-day operations expiring 25 years after the Commencement
Date. The agreement provides for the reimbursement of payroll and other direct costs
incurred by the Operator in performance of the agreement, reimbursement of the Operators
overhead and general and administrative costs based on stated percentages of the
reimbursable payroll costs, and a fixed fee. Reimbursed costs and fees incurred under the
agreement were $7,176,792, $6,220,711 and $6,494,789 for the years ended December 31,
2005, 2004 and 2003. At December 31, 2005, 2004 and 2003, $393,313, $372,153 and
$1,024,307, respectively, were owed to the Operator and are included in accounts payable
in the accompanying financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Venture incurred various costs that were paid to LPI and its affiliates, primarily
relating to venture management fees, financial management, engineering, environmental
services, and internal legal fees on behalf of the Venture. Fees incurred totaled
$575,149, $580,993 and $415,300, respectively, for the years ended December 31,
2005, 2004 and 2003. At December 31, 2005, 2004 and 2003, $104,994, $131,358 and
$129,640, respectively, were owed to LPI and are included in accounts payable in the
accompanying financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Venture incurred various costs that were paid to WEI primarily relating to venture
accounting fees and cost accounting services. Fees paid totaled $276,628, $236,500 and
$258,000 for the years ended December 31, 2005, 2004 and 2003, respectively. At
December 31, 2005, 2004 and 2003, $14,000, $0 and $0, respectively, were owed to WEI
and are included in accounts payable in the accompanying financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The
Venture incurred maintenance costs, which were paid to Westmoreland Technical Services,
Inc. (WTS). These costs totaled $2,268,902, $2,416,306 and $1,199,437 for the
years ended December 31, 2005, 2004 and 2003. At December 31, 2005, 2004 and
2003, $40,053, $319,380 and $8,540, respectively, were owed to WTS and are included in
accounts payable in the accompanying financial statements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6. |  | SALE
OF VENTURE
|-- |  | ---------------

| | An
Interest Purchase Agreement (Agreement) is being negotiated between the two
partners of the Venture which would provide that an affiliate of Westmoreland L.P. would
acquire LG&E L.P.s 50% interest in the Venture (the Acquisition).
The Agreement has been objected to by DVP. The Venture and DVP have reached an agreement
in principle, and are currently negotiating a definitive agreement, by which, in exchange
for a payment in cash by the Venture, DVP would consent to the Acquisition. The finality
of this agreement and the closing date of this transaction are currently unknown.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

INDEPENDENT
AUDITORS REPORT

To the Partners ofWestmoreland-LG&E
PartnersLouisville, Kentucky

We have audited the accompanying
balance sheets of Westmoreland-LG&E Partners (the Venture) as of December
31, 2005, and 2004, and the related statements of income and comprehensive income,
partners capital, and cash flows for each of the three years in the period ended
December 31, 2005.  These financial statements are the responsibility of the
Ventures management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance
with auditing standards generally accepted in the United States of America.  Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement.  An audit
includes consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Ventures internal
control over financial reporting.  Accordingly, we express no such
opinion.  An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.  We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, such financial
statements present fairly, in all material respects, the financial position of the Venture
as of December 31 2005, and 2004 and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2005 in conformity with
accounting principles generally accepted in the United States of America.

Deloitte & Touch LLPIndianapolis,
 Indiana March 10, 2006



---

|              |            
|------------- | -----------
|ExhibitNumber | Description

| |  | (2) |  | Plan
of acquisition, reorganization, arrangement, liquidation or succession
| |  | --- |  | ---------------------------------------------------------------------------

| |  |  | (a) |  | Westmorelands
Plan of Reorganization was confirmed by an order of the           United States
Bankruptcy Court for the District of Delaware on December 16,           1994, and upon
complying with the conditions of the order, Westmoreland emerged           from
bankruptcy on December 22, 1994. A copy of the confirmed Plan of           Reorganization
was filed as an Exhibit to Westmorelands Current Report on           Form 8-K filed
December 30, 1994, which is incorporated herein by reference           thereto (SEC File
#001-11155).
| |  |  | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (3) | (a) |  | Articles of Incorporation: Restated Certificate of Incorporation of
          Westmoreland Coal Company (filed as Exhibit 3.1 to Westmorelands
          Registration Statement on Form S-1 (Registration No. 333-117709) filed July 28,
          2004 and incorporated herein by reference).
| |  | --- | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (b) |  | Certificate
of Correction to the Restated Certificate of Incorporation of           Westmoreland Coal
Company filed as Exhibit 3.1 to Westmorelands Current           Report on Form 8-K
filed October 21, 2004, which Exhibit is incorporated herein           by reference (SEC
File #001-11155).
| |  |  | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (c) |  | Bylaws,
as amended on June 18, 1999, and filed as Exhibit (3)(b) to           Westmorelands
Current Report on Form 8-K filed June 21, 1999, which           Exhibit is incorporated
herein by reference (SEC File #001-11155).
| |  |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (4) |  | Instruments
defining the rights of security holders
| |  | --- |  | ---------------------------------------------------

| |  |  | (a) |  | Certificate
of Designation of Series A Convertible Exchangeable Preferred Stock           of the
Company defining the rights of holders of such stock, filed July 8, 1992           as an
amendment to the Companys Certificate of Incorporation, and filed as
          Exhibit 3(a) to Westmorelands Form 10-K for 1992, which Exhibit is
          incorporated herein by reference (SEC File #001-11155).
| |  |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (b) |  | Indenture
between Westmoreland and Fidelity Bank, National Association, as           Trustee
relating to the Exchange Debentures (filed as Exhibit 4.2 to           Westmorelands
Registration Statement on Form S-1 (Registration No.           333-117709) filed July 28,
2004 and incorporated herein by reference).
| |  |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (c) |  | Form
of Exchange Debenture (filed as Exhibit 4.3 to Westmorelands           Registration
Statement on Form S-1 (Registration No. 333-117709) filed July 28,           2004 and
incorporated herein by reference).
| |  |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (d) |  | Deposit
Agreement among Westmoreland, First Chicago Trust Company of New York,           as
Depository and the holders from time to time of the Depository Receipts           (filed
as Exhibit 4.4 to Westmorelands Registration Statement on Form S-1
          (Registration No. 333-117709) filed July 28, 2004 and incorporated herein by
          reference).
| |  |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | (e) |  | Specimen
certificate representing the Common Stock of Westmoreland, filed as           Exhibit
4(c) to Westmorelands Registration Statement on Form S-2,           Registration
No. 33-1950, filed December 4, 1985, which Exhibit is incorporated           herein by
reference.
| |  |  | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (f) |  | Specimen
certificate representing the Preferred Stock. Reference is hereby made           to
Exhibit 4.6 to Form S-2 Registration No. 33-47872 filed May 13, 1992, and
          Amendments 1 through 4 thereto, which Exhibit is incorporated herein by
          reference.
| |  |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (g) |  | Form
of Depository Receipt. Reference is hereby made to Exhibit 4.5 to           Westmorelands
Registration Statement on Form S-1 (Registration No.           333-117709) filed July 28,
2004, which Exhibit is incorporated herein by           reference.
| |  |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (h) |  | Amended
and Restated Rights Agreement, dated as of February 7, 2003, between
          Westmoreland Coal Company and EquiServe Trust Company, N.A. Reference is hereby
          made to Exhibit 4.1 to Westmorelands Form 8-K filed February 7, 2003,
          which Exhibit is incorporated herein by reference (SEC File #001-11155).
| |  |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (i) |  | In
accordance with paragraph (b)(4)(iii) of Item 601 of Regulation S-K,
          Westmoreland hereby agrees to furnish to the Commission, upon request, copies
of           all other long-term debt instruments.
| |  |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (10) |  | Material
Contracts
| |  | ---- |  | ------------------

| |  |  | (a) |  | In
1990, the Board of Directors established an Executive Severance Policy for
               certain executive officers, which provides a severance award in the event
of                termination of employment. The Executive Severance Policy was filed as
Exhibit                10.2 to Westmorelands Registration Statement on Form S-1
(Registration No.                333-117709) filed July 28, 2004 and is incorporated
herein by reference.
| |  |  | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (b) |  | Westmoreland
Coal Company 1991 Non-Qualified Stock Option Plan for Non-Employee           Directors is
incorporated herein by reference to Exhibit 10(i) to           Westmorelands Annual
Report on Form 10-K for 1990 (SEC File #0-752).
| |  |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (c) |  | Supplemental
Executive Retirement Plan, effective January 1, 1992, for certain
               executive officers and other key individuals, to supplement Westmorelands
               Retirement Plan is incorporated herein by reference to Exhibit 10(d) to
               Westmorelands Annual Report on Form 10-K for 2000 (SEC File
#001-11155).
| |  |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (d) |  | Amended
Coal Lease Agreement between Westmoreland Resources, Inc. and Crow           Tribe of
Indians, dated November 26, 1974, as further amended in 1982, is           incorporated
herein by reference to Exhibit 10(a) to Westmorelands           Quarterly Report on
Form 10-Q for the quarter ended March 31, 1992 (SEC File           #0-752).
| |  |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | (e) |  | Westmoreland
Coal Company 1995 Long-Term Incentive Stock Plan is incorporated           herein by
reference to Appendix 3 to Westmorelands Definitive Schedule 14A           filed
April 28, 1995 (SEC File #0-752).
| |  |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (f) |  | Master
Agreement, dated as of January 4, 1999 between Westmoreland Coal           Company,
Westmoreland Resources, Inc., Westmoreland Energy, Inc., Westmoreland           Terminal
Company, and Westmoreland Coal Sales Company, the UMWA 1992 Benefit           Plan and
its Trustees, the UMWA Combined Benefit Fund and its Trustees, the UMWA           1974
Pension Trust and its Trustees, the United Mine Workers of America, and the
          Official Committee of Equity Security Holders in the chapter 11 case of
          Westmoreland Coal and its official members is incorporated herein by reference
          to Exhibit No. 99.2 to Westmorelands Form 8-K filed February 4, 1999 (SEC
          File #001-11155).
| |  |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (g) |  | Westmoreland
Coal Company 1996 Directors Stock Incentive Plan is                incorporated
herein by reference to Exhibit 10(i) to Westmorelands Annual                Report
on Form 10-K for year ended December 31, 2000 (SEC File #001-11155).
| |  |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (h) |  | Westmoreland
Coal Company 2000 Nonemployee Directors Stock Incentive Plan                is
incorporated herein by reference to Exhibit 10(j) to Westmorelands
               Annual Report on Form 10-K for year ended December 31, 2000 (SEC File
               #001-11155).
| |  |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (i) |  | Westmoreland
Coal Company 2000 Long-Term Incentive Stock Plan is incorporated                herein by
reference to Annex A to Westmorelands Definitive Schedule 14A                filed
April 20, 2000 (SEC File #001-11155).
| |  |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (j) |  | Westmoreland
Coal Company 2001 Directors Compensation Policy is incorporated                herein by
reference to Exhibit 10.11 to Westmorelands Registration                Statement
on Form S-1 (Registration No. 333-117709) filed July 28, 2004.
| |  |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (k) |  | Amended
and Restated Coal Supply Agreement dated August 24, 1998, by and among                The
Montana Power Company, Puget Sound Energy, Inc., The Washington Water Power
               Company, Portland General Electric Company, PacifiCorp and Western Energy
               Company is incorporated herein by reference to Exhibit 10.1 to
               Westmorelands Quarterly Report on Form 10-Q for the quarter ended
June 30,                2001 (SEC File #001-11155).
| |  |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (l) |  | Coal
Transportation Agreement dated July 10, 1981, by and among the Montana
               Power Company, Puget Sound Power & Light Company, Puget Colstrip
               Construction Company, The Washington Water Power Company, Portland General
               Electric Company, Pacific Power & Light Company, Basin Electric Power
               Cooperative, and Western Energy Company is incorporated herein by
reference to                Exhibit 10.2 to Westmorelands Quarterly Report on Form
10-Q for the                quarter ended June 30, 2001 (SEC File #001-11155).
| |  |  | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (m) |  | Amendment
No. 1 to the Coal Transportation Agreement dated September 14, 1987,                by
and among The Montana Power Company, Puget Sound Power & Light Company,
               Puget Colstrip Construction Company, The Washington Water Power Company,
               Portland General Electric Company, Pacific Power & Light Company and
Western                Energy Company is incorporated herein by reference to Exhibit 10.3
to                Westmorelands Quarterly Report on Form 10-Q for the quarter ended
June 30,                2001 (SEC File #001-11155).
| |  |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | (n) |  | Amendment
No. 2 to the Coal Transportation Agreement dated August 24, 1998, by                and
among The Montana Power Company, Puget Sound Power & Light Company,
               Puget Colstrip Construction Company, The Washington Water Power Company,
               Portland General Electric Company, Pacific Power & Light Company,
Basin                Electric Power Cooperative, and Western Energy Company is
incorporated herein by                reference to Exhibit 10.4 to Westmorelands
Quarterly Report on Form 10-Q                for the quarter ended June 30, 2001 (SEC
File #001-11155).
| |  |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (o) |  | Lignite
Supply Agreement dated August 29, 1979, between Northwestern Resources                Co.
and Utility Fuels Inc. is incorporated herein by reference to Exhibit 10.5
               to Westmorelands Quarterly Report on Form 10-Q for the quarter ended
June                30, 2001 (SEC File #001-11155).
| |  |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (p) |  | Settlement
Agreement and Amendment of Existing Contracts dated August 2, 1999,
               between Northwestern Resources Co. and Reliant Energy, Incorporated is
               incorporated herein by reference to Exhibit 10.6 to Westmorelands
               Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 (SEC
File                #001-11155).
| |  |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (q) |  | Term
Loan Agreement dated as of April 27, 2001 by and among Westmoreland Mining
               LLC, WCCO-KRC Acquisition Corp., Dakota Westmoreland Corporation, Western
Energy                Company, Northwestern Resources Co., the other entities from time
to time party                thereto as guarantors, and the purchasers named in Schedule
A thereto is                incorporated herein by reference to Exhibit 99.2 to
Westmorelands Current                Report on Form 8-K filed May 15, 2001 (SEC
File #001-11155).
| |  |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (r) |  | Credit
Agreement dated as of April 27, 2001 by and among Westmoreland Mining                LLC,
WCCO-KRC Acquisition Corp., Dakota Westmoreland Corporation, Western Energy
               Company, Northwestern Resources Co., the other entities from time to time
party                thereto as guarantors, the banks party thereto, and PNC Bank,
National                Association, in its capacity as agent for the banks is
incorporated herein by                reference to Exhibit 99.3 to Westmorelands
Current Report on Form 8-K                filed May 15, 2001 (SEC File #001-11155).
| |  |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (s) |  | First
Amendment to Credit Agreement dated as of August 15, 2001 among
               Westmoreland Mining LLC, the Loan Parties under the Credit Agreement, the
Banks                under the Credit Agreement, and PNC Bank, National Association, as
Agent, is                incorporated herein by reference to Exhibit 10.7 to Westmorelands
               Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 (SEC
File                #001-11155).
| |  |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (t) |  | First
Amendment to Note Purchase Agreement dated as of August 15, 2001 among
               Westmoreland Mining LLC, the other Obligors under the Agreement, the
Purchasers                under the Agreement, and PNC Capital Markets, Inc., as lead
arranger, is                incorporated herein by reference to Exhibit 10.8 to
Westmorelands                Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001 (SEC File                #001-11155).
| |  |  | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | (u) |  | Amendment
No. 2 to Credit Agreement dated February 27, 2002 among Westmoreland
               Mining LLC, the Loan Parties under the Credit Agreement, the Banks under
the                Credit Agreement, and PNC Bank, National Association, as Agent, is
incorporated                herein by reference to Exhibit 10(w) to Westmorelands
Annual Report on                Form 10-K for the year ended December 31, 2001 (SEC File
#001-11155).
| |  |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (v) |  | Second
Amendment to Term Loan Agreement dated February 27, 2002 among
               Westmoreland Mining LLC, the other Obligors under the Agreement, the
Purchasers                under the Agreement, and PNC Capital Markets, Inc., as lead
arranger, is                incorporated herein by reference to Exhibit 10(x) to
Westmorelands Annual                Report on Form 10-K for the year ended December
31, 2001 (SEC File #001-11155).
| |  |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (w) |  | Third
Amendment to Term Loan Agreement dated March 8, 2004 among Westmoreland
               Mining LLC, the other Obligors under the Agreement, the Purchasers under
the                Agreement, and PNC Capital Markets, Inc., as lead arranger, is
incorporated                herein by reference to Exhibit 10.1 to Westmorelands
Current Report on                Form 8-K filed March 10, 2004 (SEC File #001-11155).
| |  |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (x) |  | Third
Amendment to Credit Agreement dated March 8, 2004 among Westmoreland
               Mining LLC, the Loan Parties under the Credit Agreement, the Banks under
the                Credit Agreement, and PNC Bank, National Association, as Agent, is
incorporated                herein by reference to Exhibit 10.2 to Westmorelands
Current Report on                Form 8-K filed March 10, 2004 (SEC File #001-11155).
| |  |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (y) |  | Fourth
Amendment to Credit Agreement dated December 21, 2005 among Westmoreland
               Mining LLC, the Loan Parties under the Credit agreement, the Banks under
the                Credit Agreement, and PNC Bank, National Association, as Agent, is
incorporated                herein by reference to Exhibit 10.1 to Westmorelands
Current Report on                Form 8-K filed on December 22, 2005 (SEC File
#001-11155)
| |  |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (z) |  | Loan
Agreement dated as of December 14, 2001 between Westmoreland Coal Company,
               a Delaware corporation, and First Interstate Bank, a Montana corporation,
is                incorporated herein by reference to Exhibit 10.1 to Westmorelands
Current                Report on Form 8-K filed December 19, 2001 (SEC File #001-11155).
| |  |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (aa) |  | First
Amendment dated as of December 24, 2002 to Loan Agreement dated December
               14, 2001 between Westmoreland Coal Company, a Delaware corporation, and
First                Interstate Bank, a Montana corporation, is incorporated herein by
reference to                Exhibit 10.1 to Westmorelands Current Report on Form
8-K filed January 28,                2003 (SEC File #001-11155).
| |  |  | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (bb) |  | Second
Amendment dated as of January 24, 2003 to Loan Agreement dated December
               14, 2001 between Westmoreland Coal Company, a Delaware corporation, and
First                Interstate Bank, a Montana corporation, is incorporated herein by
reference to                Exhibit 10.2 to Westmorelands Current Report on Form
8-K filed January 28,                2003 (SEC File #001-11155).
| |  |  | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | (cc) |  | Third
Amendment effective as of June 24, 2004 to Loan Agreement dated December
               14, 2001 between Westmoreland Coal Company, a Delaware corporation, and
First                Interstate Bank, a Montana corporation, is incorporated herein by
reference to                Exhibit 10.1 to Westmorelands Current Report on Form
8-K filed June 30,                2004 (SEC File #011-11155).
| |  |  | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (dd) |  | Pledge
Agreement dated as of April 27, 2001, by and among Westmoreland Coal
               Company, Westmoreland Mining LLC, the other entities from time to time
party                thereto as pledgors, and Firstar Bank, N.A., as collateral agent for
the                purchasers in connection with the Term Loan Agreement, is incorporated
herein by                reference to Exhibit 99.4 to Westmorelands Current Report
on Form 8-K                filed May 15, 2001 (SEC File #001-11155).
| |  |  | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (ee) |  | Pledge
Agreement dated as of April 27, 2001, by and among Westmoreland Coal
               Company, Westmoreland Mining LLC, the other entities from time to time
party                thereto as pledgors, and Firstar Bank, N.A., as collateral agent for
the banks                in connection with the Revolving Credit Agreement, is
incorporated herein by                reference to Exhibit 99.5 to Westmorelands
Current Report on Form 8-K                filed May 15, 2001 (SEC File #001-11155).
| |  |  | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (ff) |  | Continuing
Agreement of Guaranty and Suretyship dated as of April 27, 2001, by                and
among WCCO-KRC Acquisition Corp., Dakota Westmoreland Corporation, Western
               Energy Company, Northwestern Resources Co., and each of the other persons
which                becomes a guarantor thereunder, in favor of the purchasers under the
Term Loan                Agreement, is incorporated herein by reference to Exhibit 99.6
to                Westmorelands Current Report on Form 8-K filed May 15, 2001 (SEC
File                #001-11155).
| |  |  | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (gg) |  | Continuing
Agreement of Guaranty and Suretyship dated as of April 27, 2001, by                and
among WCCO-KRC Acquisition Corp., Dakota Westmoreland Corporation, Western
               Energy Company, Northwestern Resources Co., and each of the other persons
which                becomes a guarantor thereunder, in favor of PNC Bank, National
Association, as                agent for the banks in connection with that Credit
Agreement, is incorporated                herein by reference to Exhibit 99.7 to
Westmorelands Current Report on                Form 8-K filed May 15, 2001 (SEC
File #001-11155).
| |  |  | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (hh) |  | Security
Agreement dated as of April 27, 2001, by and among Westmoreland Mining
               LLC, WCCO-KRC Acquisition Corp., Dakota Westmoreland Corporation, Western
Energy                Company, Northwestern Resources Co., and each of the other persons
which becomes                a guarantor under the Term Loan Agreement and Firstar Bank,
N.A., as collateral                agent for the purchasers under the Term Loan
Agreement, is incorporated herein                by reference to Exhibit 99.8 to
Westmorelands Current Report on Form 8-K                filed May 15, 2001 (SEC
File #001-11155).
| |  |  | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (ii) |  | Stock
Purchase Agreement dated as of September 15, 2000 by and between
               Westmoreland Coal Company and Entech, Inc. is incorporated herein by
reference                to Exhibit 99.1 to Westmorelands Current Report on Form
8-K filed February                5, 2001 (SEC File #001-11155).
| |  |  | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | (jj) |  | Westmoreland
Coal Company 2002 Long-Term Incentive Stock Plan is incorporated                herein by
reference to Annex A to Westmorelands Definitive Proxy Statement
               filed April 23, 2002 (SEC File #001-11155).
| |  |  | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (kk) |  | Letter
Agreement dated June 18, 2002, between Reliant-HL&P and Northwestern
               Resources Co. is incorporated herein by reference to Exhibit 10.1 to
               Westmorelands Quarterly Report on Form 10-Q for the quarter ended
June 30,                2002 (SEC File #001-11155).
| |  |  | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (ll) |  | Approved
Westmoreland Coal Company 2000 Performance Unit Plan, dated May 22,                2003,
is incorporated herein by reference to Exhibit 10.1 to Westmorelands
               Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (SEC
File                #001-11155).
| |  |  | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (mm) |  | First
Amendment to Westmoreland Coal Company 2000 Non-employee Directors               Stock
Incentive Plan, dated May 22, 2003, is incorporated herein by reference to
               Exhibit 10.2 to Westmorelands Quarterly Report on Form 10-Q for the
               quarter ended June 30, 2003 (SEC File #001-11155).
| |  |  | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (nn) |  | Termination
Agreement for Robert J. Jaeger, Chief Financial Officer, is                incorporated
herein by reference to Exhibit 10.3 to Westmorelands                Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003 (SEC File
               #001-11155)
| |  |  | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (oo) |  | Supplemental
Settlement Agreement and Amendment of Existing Contracts Between
               Northwestern Resources Company and NRGT, dated January 30, 2004, is
incorporated                herein by reference to Exhibit 10(nn) to Westmorelands
Annual Report on                Form 10-K for the year ended December 31, 2003 (SEC File
#001-11155).
| |  |  | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (pp) |  | Letter
Agreement Regarding Lignite Supply Agreement dated September 21, 2005
               between Texas Genco II, L.P. and Texas Westmoreland Coal Company, is
               incorporated herein by reference to Exhibit 10.1 to Westmorelands
               Quarterly Report Form 10-Q for the quarter ended September 30, 2005 (SEC
File                #001-11155).
| |  |  | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (18) |  | Preferability
Letter
| |  | ---- |  | --------------------

| |  | (21) |  | Subsidiaries
of the Registrant
| |  | ---- |  | ------------------------------

| |  | (23.1) |  | Consent
of KPMG LLP
| |  | ------ |  | -------------------

| |  | (23.2) |  | Consent
of Deloitte & Touche LLP
| |  | ------ |  | --------------------------------

| |  | (31) |  | Rule
13a-14(a)/15d-14(a) Certifications
| |  | ---- |  | ---------------------------------------

| |  | (32) |  | Certifications
pursuant to 18 U.S.C. Section 1350
| |  | ---- |  | -------------------------------------------------