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



FORM 10-K

(Mark One)    

ý

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the year ended December 31, 2009

or

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-13711

WALTER ENERGY, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  13-3429953
(IRS Employer
Identification No.)

4211 W. Boy Scout Boulevard
Tampa, Florida
(Address of principal executive offices)

 


33607

(Zip Code)

(813) 871-4811
Registrant's telephone number, including area code:

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

Title of each class 

 

Name of exchange on which registered
 
Common Stock, par value $0.01   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

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 Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller
reporting company)
  Smaller reporting
company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

The aggregate market value of voting stock held by non-affiliates of the registrant, based on the closing price of the Common Stock on June 30, 2009, the registrant's most recently completed second fiscal quarter, as reported by the New York Stock Exchange, was approximately $1.9 billion.

Number of shares of common stock outstanding as of January 31, 2010: 53,296,211

Documents Incorporated by Reference

Applicable portions of the Proxy Statement for the Annual Meeting of Stockholders of the Company to be held April 21, 2010 are incorporated by reference in Part III of this Form 10-K.



CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

        This report includes statements of our expectations, intentions, plans and beliefs that constitute "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 and are intended to come within the safe harbor protection provided by those sections. These statements, which involve risks and uncertainties, relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable and may also relate to our future prospects, developments and business strategies. We have used the words "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project," "should" and similar terms and phrases, including references to assumptions, in this report to identify forward-looking statements. These forward-looking statements are made based on expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed in or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to:

    Deteriorating conditions in the financial markets;

    Global economic crisis;

    Decline in global steel demand;

    Inaccessibility of coal needed for our cokemaking could impair our ability to fill customer orders;

    Prolonged decline in the price of coal;

    Our customers refusal to honor or renew contracts;

    Market conditions beyond our control;

    Title defects preventing us from (or resulting in additional costs for) mining our properties;

    Unavailability of cost-effective transportation for our coal;

    A significant increase in competitive pressures;

    Significant cost increases and delays in the delivery of purchased components;

    Availability of adequate skilled employees and other labor relations matters;

    Greater than anticipated costs incurred for compliance with environmental liabilities;

    Factors beyond our control could impact the accuracy of estimated coal reserves;

    Future regulations could increase our costs or limit our ability to produce coal;

    New laws and regulations to reduce greenhouse gas emissions could adversely impact the demand for our coal reserves;

    Postretirement benefit and pension obligations could be materially higher than estimated if our underlying assumptions are incorrect;

    Greater than expected workers' compensation and medical claims could reduce profitability;

    Adverse rulings in current or future litigation could impact our profitability;

    Inability to access needed capital could limit our ability to operate our business

    A downgrade in our credit rating could adversely impact our costs and expenses;

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    The anticipated loss of some of our executive officers and other key personnel as a result of the relocation of our corporate offices could harm our business;

    Concentration of our coal and gas producing properties in one area subjects us to risk;

    Our ability to attract and retain key personnel;

    Our ability to identify suitable acquisition candidates to promote growth;

    Volatility in the price of our common stock;

    Our ability to pay regular dividends to stockholders could be restricted;

    Potential suitors could be discouraged by our stockholder rights agreement;

    Our exposure to indemnification obligations;

    A former subsidiary may not be able to satisfy certain obligations to us and we could become liable for certain contingent obligations to them, which could become significant;

    Other factors, including the other factors discussed in Item 1A, "Risk Factors," as updated by any subsequent Form 10-Qs or other documents that are on file with the Securities and Exchange Commission.

        You should keep in mind that any forward-looking statement made by us in this Annual Report on Form 10-K or elsewhere speaks only as of the date on which we make it. New risks and uncertainties come up from time to time, and it is impossible for us to predict these events or how they may affect us. We have no duty to, and do not intend to, update or revise the forward-looking statements in this Annual Report on Form 10-K after the date of this Annual Report on Form 10-K, except as may be required by law. In light of these risks and uncertainties, you should keep in mind that any forward-looking statement made in this Annual Report on Form 10-K or elsewhere might not occur.

2



GLOSSARY OF SELECTED MINING TERMS

        Ash.    Impurities consisting of iron, alumina and other incombustible matter that are contained in coal. Since ash increases the weight of coal, it adds to the cost of handling and can affect the burning characteristics of coal.

        Assigned reserves.    Coal that is planned to be mined at an operation that is currently operating, currently idled, or for which permits have been submitted and plans are eventually to develop the operation.

        Bituminous coal.    A common type of coal with moisture content less than 20% by weight and heating value of 10,500 to 14,000 Btus per pound. It is dense and black and often has well-defined bands of bright and dull material.

        British thermal unit, or "Btu".    A measure of the thermal energy required to raise the temperature of one pound of pure liquid water one degree Fahrenheit at the temperature at which water has its greatest density (39 degrees Fahrenheit).

        Coal seam.    Coal deposits occur in layers. Each layer is called a "seam."

        Coke.    A hard, dry carbon substance produced by heating coal to a very high temperature in the absence of air. Coke is used in the manufacture of iron and steel. Its production results in a number of useful by-products.

        Compliance coal.    Coal which, when burned, emits 1.2 pounds or less of sulfur dioxide per million Btus, as required by Phase II of the Clean Air Act.

        Continuous miner.    A machine used in underground mining to cut coal from the seam and load onto conveyers or shuttle cars in a continuous operation. In contrast, a conventional mining unit must stop extracting in order to begin loading.

        Continuous mining.    A form of underground mining that cuts the coal from the seam and loads continuously, thus eliminating the separate cycles of cutting, drilling, shooting and loading.

        Hard coking coal.    Hard coking coal is a type of metallurgical coal that is a necessary input in the production of strong coke. It is evaluated based on the strength, yield and size distribution of coke produced which is dependent on rank and plastic properties of the coal. Hard coking coals trade at a premium to other coals due to their importance in producing strong coke and as they are of limited resources.

        Indicated (Probable) reserves.    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.

        Industrial coal.    Coal generally used as a heat source in the production of lime, cement, or for other industrial uses and is not considered steam coal or metallurgical coal.

        Longwall mining.    A form of underground mining that employs two rotating drums pulled mechanically back and forth across a long surface of the coal. A hydraulic system supports the roof of the mine while the drum is mining the coal. Chain conveyors move the loosened coal to an underground mine conveyor to transport to the surface. Longwall mining is the most efficient underground mining method in the United States.

        Measured (Proven) reserves.    Reserves for which: (a) quantity is computed from dimensions revealed in outcrops (part of a rock formation that appears at the surface of the ground), trenches,

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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.

        Metallurgical coal.    The various grades of coal suitable for carbonization to make coke for steel manufacture, including hard coking coal (see definition above), semi-soft coking coal (SSCC) and coal used for pulverized coal injection (PCI). Also known as "met" coal, its quality depends on four important criteria: (1) volatility, which affects coke yield; (2) the level of impurities including sulfur and ash, which affect coke quality; (2) composition, which affects coke strength; and (4) other basic characteristics that affect coke oven safety. Met coal typically has a particularly high Btu but low ash and sulfur content.

        Nitrogen oxide (NOx).    Produced as a gaseous by-product of coal combustion. It is a harmful pollutant that contributes to smog.

        Overburden.    Layers of earth and rock covering a coal seam. In surface mining operations, overburden is removed prior to coal extraction.

        Preparation plant.    Usually located on a mine site, although one plant may serve several mines. A preparation plant is a facility for crushing, sizing and washing coal to remove impurities and prepare it for use by a particular customer. The washing process has the added benefit of removing some of the coal's sulfur content.

        Recoverable reserves.    Tons of mineable coal which can be extracted and marketed after deduction for coal to be left in pillars, etc. and adjusted for reasonable preparation and handling losses.

        Reclamation.    The process of restoring land and the environment to their original state following mining activities. The process commonly includes "recontouring" or reshaping the land to its approximate original appearance, restoring topsoil and planting native grass and ground covers. Reclamation operations are usually underway before the mining of a particular site is completed. Reclamation is closely regulated by both state and federal law.

        Reserve.    That part of a mineral deposit that could be economically and legally extracted or produced at the time of the reserve determination.

        Roof.    The stratum of rock or other mineral above a coal seam; the overhead surface of a coal working place.

        Steam coal.    Coal used by power plants and industrial steam boilers to produce electricity, steam or both. It generally is lower in Btu heat content and higher in volatile matter than metallurgical coal.

        Sulfur.    One of the elements present in varying quantities in coal that contributes to environmental degradation when coal is burned. Sulfur dioxide is produced as a gaseous by-product of coal combustion.

        Surface mine.    A mine in which the coal lies near the surface and can be extracted by removing the covering layer of soil (see "Overburden"). About 67% of total U.S. coal production comes from surface mines.

        Tons.    A "short" or net ton is equal to 2,000 pounds. A "long" or British ton is equal to 2,240 pounds; a "metric" ton is approximately 2,205 pounds. Unless otherwise indicated, the short ton is the unit of measure referred to in this document. The international standard for quoting price per ton is based on the U.S. dollar per metric ton.

        Unassigned reserves.    Coal that is likely to be mined in the future, but which is not considered Assigned reserves.

        Underground mine.    Also known as a "deep" mine. Usually located several hundred feet or more below the earth's surface, an underground mine's coal is removed mechanically and transferred by shuttle car and conveyor to the surface. Underground mines account for about 33% of annual U.S. coal production.

4



PART I

Item 1.    Description of Business

Introduction

        We are a leading producer and exporter of metallurgical coal for the global steel industry and also produce steam coal, coal bed methane gas ("natural gas"), metallurgical coke and other related products. We trace our roots back to 1946 when Jim Walter began a homebuilding business in Tampa, Florida. Although we were focused on Homebuilding during our early years, we later branched out into many different businesses, including the development, in 1972, of four underground coal mines in the Blue Creek coal seam near Brookwood, Alabama. In 1987 a group of investors formed a new company, subsequently named Walter Industries, Inc. and engineered a leveraged buyout, successfully completed in 1988. In 1997, Walter Industries, Inc. began trading on the New York Stock Exchange. In 2009 we closed our Homebuilding business and spun off our Financing business. Our Homebuilding business was an on-your-lot homebuilder and our Financing business serviced non-conforming instalment notes and loans that were secured by mortgages and liens. With all of our businesses now concentrated in coal and natural gas, we changed our name to Walter Energy, Inc. in April 2009.

Overview

        Our primary business, the mining and exporting of hard coking coal for the steel industry, is included in our Underground Mining segment (comprised of Jim Walter Resources, Inc. or "JWR" and Blue Creek Coal Sales, Inc.). JWR, the country's southernmost Appalachian coal producer, mines high quality coal from Alabama's Blue Creek coal seam. JWR's mines are 1,500 to 2,200 feet underground, making them some of the deepest vertical shaft coal mines in North America. Metallurgical coal mined from the Blue Creek seam contains very low sulfur, has strong coking properties and high heat value making it ideally suited to the needs of steel makers as a coking coal and to utilities as a steam coal. In 2009, the Underground Mining segment produced 6.1 million tons of high quality metallurgical coal. Underground Mining has convenient access to the port of Mobile, Alabama through barge and by railroad allowing us to minimize our transportation costs.

        Underground Mining also extracts methane gas, principally from the Blue Creek coal seam. Our natural gas business represents one of the most extensive and comprehensive commercial programs for coal seam degasification in the country, producing approximately 19 million cubic feet of gas daily from our 400-plus wells.

        Through our Walter Coke segment, we manufacture furnace and foundry coke, collectively referred to as "metallurgical coke." Foundry coke is marketed to iron pipe plants and foundries producing castings. Furnace coke is primarily sold to the domestic steel industry for producing steel in blast furnaces. Walter Coke delivers product to its customers via rail (onsite rail facility), truck and barge.

        In our Surface Mining segment, we also mine steam coal for sale to industrial and electric utility markets through our Taft Coal Sales, Tuscaloosa Resources and Walter Minerals subsidiaries.

        The financial results of our industry segments is included in Note 16 of "Notes to Consolidated Financial Statements" included in this Form 10-K.

2009 Developments

        Spin-off and Merger of Financing Segment    On April 17, 2009, we completed the spin-off of our Financing business and the merger of that business with Hanover Capital Mortgage Holdings, Inc. to create Walter Investment Management Corp. ("Walter Investment"), which operates as a publicly traded real estate investment trust. The subsidiaries and assets that Walter Investment owned at the time of the spin-off included all assets of Financing except for those associated with the workers'

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compensation program and various other run-off insurance programs within Cardem Insurance Co., Ltd. See "Notes to Consolidated Financial Statements" included herein for further information.

        Corporate Name Change and Segment Revisions    On April 23, 2009, we changed our name from Walter Industries, Inc. to Walter Energy, Inc. ("Walter"). In addition, prior to the first quarter of 2009, our underground and surface coal mining operations were reported together as the Natural Resources segment. Beginning in 2009, we revised our reportable segments to separate the Natural Resources segment into Underground Mining and Surface Mining. Underground Mining includes our underground metallurgical coal operations from the No. 4 and No. 7 mines and our natural gas operations. Surface Mining includes our surface coal mining operations for Tuscaloosa Resources, Inc. ("TRI") and Taft Coal Sales & Associates, Inc. ("Taft") as well as Walter Minerals, Inc. (formerly known as United Land Corporation) results. In addition, during the second quarter of 2009, we changed the name of our metallurgical coke manufacturer from Sloss Industries Corporation to Walter Coke, Inc., ("Walter Coke"). See Note 16 of "Notes to Consolidated Financial Statements" included in this Form 10-K. for segment information.

        Share Repurchase Program    In 2009, we repurchased $34.2 million or 1.5 million shares of our outstanding stock under our Board of Directors approved $100.0 million share repurchase program. As of December 31, 2009, there was $20.6 million remaining under this program. Purchases are based on liquidity and market conditions. In addition, on April 23, 2009, shareholders voted to grant us the authority to issue 20,000,000 shares of Preferred Stock, par value $.01 per share. No preferred shares have been issued.

        Debt Amendment    On September 3, 2009, we amended the 2005 Walter Credit Agreement ("Credit Agreement") to extend the maturity date for our Revolving Credit Facility ("Revolver") from October 4, 2010 to July 2, 2012 and amend the size of the Revolver to $300.0 million that, subject to certain conditions, can be increased to $425.0 million. See Management's Discussion and Analysis for further information.

The Coal Industry

        Coal is one of the most available and important energy sources in the world, providing approximately 26% of the world's primary energy needs according to the World Coal Institute ("WCI"). Per the WCI, the most significant uses for coal are for electricity generation, steel production, cement manufacturing and as a liquid fuel. According to the WCI, approximately 41% of the world's electricity is generated from coal and this level is expected to increase to 44% by 2030. During 2008, coal was used to generate approximately 49% of the electricity in the United States according to the International Energy Agency ("IEA").

        Approximately 66% of global steel is produced in Basic Oxygen Furnaces according to the WCI. After metallurgical coal is converted to coke it is used in blast furnaces to smelt iron ore which is subsequently used to produce steel. Steel is critical to everyday life. For example, it is used in cars, buildings, trains, ships, bridges, medical equipment and refrigerators. Metallurgical coal is critical in making coke for steel manufacturing due to its characteristics: lower volatility, lower sulfur and ash content and favorable coking characteristics (higher coke strength). Additionally, metallurgical coal has a higher Btu value. A significant amount of steel is also produced in Electric Arc Furnaces, a process in which a large percentage of the electricity is generated from coal-fired power stations.

        Coal is mined in more than 50 countries in the world and used in more than 70 countries. Coal's appeal is that it is readily available from a wide variety of sources, its prices have been lower and more stable than oil and gas prices, and it is likely to remain the most affordable fuel for power generation in many developing and industrialized nations for several decades per the WCI. By contrast, at current

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production levels, proven coal reserves are estimated to last 122 years while oil and gas reserves are estimated to last approximately 42 and 60 years, respectively. The top five coal producing countries in the world are China, the United States, India, Australia and Russia. The largest exporters of coal in 2008 were Australia, Indonesia and Russia (the U.S. is 5th) according to the WCI. The leading exporters of metallurgical coal for coking, per the WCI, are Australia, the United States and Indonesia. Because coking (metallurgical) coal is more expensive than steam coal, exporters are able to afford the high freight rates involved in exporting coking coal worldwide.

Coal Characteristics

        Coal is generally classified by end use as either metallurgical coal or steam coal. Sulfur, ash and moisture content as well as coking characteristics are key attributes in grading metallurgical coal while heat value, ash and sulfur content are important variables in rating steam coal. We currently mine, process, market and transport coal with the characteristics described below.

        Sulfur Content (metallurgical and steam coal):    Although sulfur content can differ from seam to seam, our metallurgical sulfur content ranges from 0.65% to 0.8%, a low value which is preferred by customers. Coal produces undesirable sulfur dioxide when it burns, the amount of which depends on the concentration of sulfur in the coal as well as the chemical composition.

        Ash and Moisture (metallurgical and steam coal):    Ash residue is what remains after the combustion of coal. Low ash is desirable because businesses must dispose of ash after the coal is used. High moisture content decreases the heat value of the coal which is undesirable and increases the coal's weight which is also negative because higher weight increases transportation charges. Our metallurgical coal has a 9% ash rating which is desirable.

        Coking Characteristics (metallurgical coal):    Two important coking characteristics are coke strength and volatility. Measuring the expansion and contraction of coal when heated determines the strength of coke that could be produced from the coal. When coal is heated in the absence of air, the loss in mass less moisture is volatility. Volatility of metallurgical coal is used to determine the percentage of coal that becomes coke. This measure is known as coke yield. A low volatility results in a higher coke yield. Our metallurgical coal has both a high rating for coke strength as well as a low measure of volatility.

Description of Our Business

        We operate our business through three principal business segments-Underground Mining, Surface Mining and Walter Coke. Our industry segment financial information is included in Note 16 of "Notes to Consolidated Financial Statements" included herein. During 2009, we actively operated five mines. We operate two metallurgical coal mines in Southern Appalachia's Blue Creek coal seam, the No. 7 Mine (which includes No. 7 East) and the No. 4 Mine, both operated by Underground Mining, and three steam coal mines operated by Surface Mining, TRI's East Brookwood Mine, Walter Minerals' Highway 59 Mine and Taft's Choctaw Mine. The following map provides our Underground Mining, Surface Mining, and Walter Coke locations as of December 31, 2009. For a comprehensive summary of all of our coal properties and of our coal reserves and production levels, see the tables summarizing our coal reserves and production in "Item 2. Description of Property" in this Form 10-K.

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GRAPHIC

Underground Mining

        Our principal business segment, comprising more than 80% of our revenue and operating income, is our Underground Mining segment. Underground Mining includes the operations of our JWR subsidiary. Underground Mining is headquartered in Brookwood, Alabama and currently has approximately 140.4 million tons of recoverable reserves from our mines located in west central Alabama between the cities of Birmingham and Tuscaloosa. Operating at about 2,000 feet below the surface, the No. 4 and No. 7 mines are some of the deepest underground coal mines in North America. We extract coal primarily from Alabama's Blue Creek and Mary Lee seams, which contain high-quality bituminous coal. Blue Creek coal offers high coking strength with low coking pressure, low sulfur and low-to-medium ash content with high Btu values that can be sold either as metallurgical coal (used to produce coke) or as compliance steam coal (used by electric utilities because it meets current environmental compliance specifications).

        The coal from JWR's Mines No. 4 and 7 is currently sold as a high quality low- and mid-vol metallurgical coal. JWR has more than 1,400 active employees. At forecasted production levels, we estimate the current reserves to have a 15 to 17 year life. Mines No. 4 and No.7 are located near Brookwood, Alabama, and are serviced by CSX rail. Both mines have access to our barge load out facility on the Black Warrior River. Service via both rail and barge culminates in delivery to the Port of Mobile, whereby shipments are delivered to our international customers via ocean vessels. More than 97% of the metallurgical coal sales in our Underground Mining segment are sales to international customers. The coal producer is responsible for transporting the coal from the mine to the export coal-loading facility. Export coal is usually sold at the loading port, with the buyer responsible for further transportation to their plant.

        Since potential customers may choose a metallurgical coal supplier in large part based on transportation costs, this is a critical issue. We have the advantage of having our mines conveniently located near both barge load out facilities and railroad transportation (CSX rail) with direct access to the Port of Mobile, minimizing our transportation costs.

        Approximately 80% of JWR's metallurgical coal is mined using longwall extraction technology with development support from continuous miners. Underground mining with longwall technology drives greater production efficiency, improved safety, higher coal recovery and lower production costs. Historically, JWR has operated one longwall mining system in each mine for primary production and four to six continuous miner sections in each mine for the development of mains and longwall panel

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entries. As discussed in previous periods, we invested in our Mine No. 7 East Expansion such that the No. 7 mine now operates two longwall mining systems. JWR's optimal operating plan is a longwall/continuous miner production ratio of approximately 80% / 20%. By utilizing longwall mining, our full year 2009 production costs for metallurgical coal averaged $61.12 per ton.

        In longwall mining, mechanized shearers are used to cut and remove the coal from long rectangular blocks of medium or thick seams. After the coal is removed, it drops onto a chain conveyor, which moves it to a second conveyor that will ultimately take the coal to the surface. Temporary hydraulic-powered roof supports hold up the roof throughout the extraction process. This method of mining has proven to be more efficient than other mining methods, with a recovery rate of nearly 45 percent, but the equipment is more expensive than other conventional mining methods and cannot be used in all geological circumstances. In longwall mining, only the main tunnels are bolted. Most of the longwall panel is allowed to collapse behind the shields (which hold the roof as coal is excavated).

        Included in Underground Mining is our natural gas operation which is also headquartered in Brookwood, Alabama. This operation extracts and sells natural gas from the coal seams owned or leased by JWR, primarily through Black Warrior Methane Corp., an equal ownership joint venture with El Paso Production Co., a subsidiary of El Paso Corporation. The original motivation for the joint venture was to increase safety in JWR's Blue Creek mines by reducing natural gas concentrations with wells drilled in conjunction with the mining operations. There were approximately 400 wells producing approximately 6.1 billion cubic feet of natural gas in 2009. JWR also operates a wholly owned low quality gas ("LQG") facility. The degasification operation has improved mining operations and safety by reducing methane gas levels in the mines, and has been a profitable operation. We expect production of natural gas to be 6.0 to 6.3 billion cubic feet in 2010.

Surface Mining

        We are currently operating three surface mines in Alabama with planned production for 2010 of approximately 1.3 million to 1.4 million tons of coal. We mine steam and industrial coal principally for the industrial and electric utility markets. Our coal mines are convenient to our barge load out facility as well as two rail load out facilities. Our steam and industrial coal business currently represents approximately 10% of our total revenues.

        Taft's Choctaw Mine    The Choctaw Mine is located near Parrish in Walker County, Alabama and has an onsite rail facility serviced by Norfolk Southern rail. Access to Highway 269 provides delivery access to local customers via truck. The Choctaw Mine is a surface mine that primarily produces steam and industrial coal. Taft is able to blend coal to meet utility and industrial customers' needs.

        TRI's East Brookwood and Highway 59 Mines    TRI's East Brookwood and Highway 59 mines are located in Tuscaloosa County near Brookwood, Alabama. They both have access to our barge load out facility on the Black Warrior River. The East Brookwood and Highway 59 mines are surface mines that produce steam and industrial coal. Approximately half of TRI's coal is delivered via barges to a local power company. The remainder is delivered to customers via truck. As with Taft, TRI is able to blend coal to meet industrial utility customers' requirements.

        We also own two mines that are ready for operation and will be placed in service when market conditions permit. Taft's Reid School Mine is located in Blount County, Alabama and will have access to Highway 79 for delivery to local customers via truck. Walter Mineral's Flat Top Mine is located in Adamsville, Alabama near Highway 78 where coal will be delivered to local customers via truck.

9


Coal Preparation and Blending

        All of our coal mines are located in Alabama and we have coal preparation and blending facilities convenient to each of our mines. Using our facilities, we are able to efficiently blend our coal to meet our customers' specifications.

Marketing, Sales and Customers

        Coal prices are impacted by many factors and differ substantially by region. Factors impacting coal prices include the overall economy, the demand for electricity, the demand for steel, location, the market, quality and type of coal, mine operation costs and the cost of alternative fuels. The major factors influencing our business are the economy and the demand for steel. Our high quality Blue Creek coal is rated among the highest quality coals in the world and is preferred as a base coal in our customers' blends. Our marketing strategy is to focus on international markets mostly in Europe and South America where we have a significant transportation cost advantage and where our coal is in high demand.

        During 2009, approximately 59% of our hard coking coal shipments were to customers in Europe and approximately 26% to South America. We are the largest U.S. supplier of hard coking coal into South America. Further, we focus on long-term customer relationships where we have a competitive advantage. We sell most of our metallurgical coal under fixed price supply contracts, usually with a one year term, running principally from April through March or from July through June. Some sales of metallurgical coal can, however, occur in the spot market as dictated by available supply and market demand.

        During 2009, our Underground Mining segment's two largest customers represented approximately 17% and 16% of the Underground Mining segment's sales. Even in this challenging economy we believe that the loss of these customers would not have a material adverse effect on our results of operations as the loss of volume from these customers would be replaced with sales to other existing or new customers due to the demand for our metallurgical coal. Our outlook on the long-term prospects for growth and related demand for our product is very strong.

        Our Surface Mining segment markets its steam and industrial coal to customers in the United States, generally under long term contracts. Our customers for steam coal are electric utility and industrial customers.

        Our sales backlog of fixed-priced, fixed-quantity contracts was approximately 4.1 million tons as of December 31, 2009, which includes sales of both metallurgical and steam coal. This tonnage is expected to be delivered in 2010.

Trade Names, Trademarks and Patents

        The names of each of our subsidiaries are well established in the respective markets they serve. Management believes that customer recognition of such trade names is of significant importance. Our subsidiaries have numerous patents and trademarks. Management does not believe, however, that any one such patent or trademark is material to our individual segments or to the business as a whole.

Competition

        Substantially all of our metallurgical coal sales are exported. Our major competitors are businesses that sell into our core business areas of Europe and South America. In both Europe and South America, we primarily compete with producers of premium coking coal from Australia, Canada and North America. The principal areas in which we compete are coal prices at the port of shipment, coal quality and characteristics, customer relationships and the reliability of supply. The demand for our metallurgical coal is significantly dependent on the general economy and the worldwide demand for steel. Although there are significant challenges in this current difficult economy, we believe that we have competitive strengths in our business areas that provide us with distinct competitive advantages.

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Competitive Strengths

        We have a premium product.    Blue Creek Coal is recognized to be among the highest quality coals in the world. Its characteristics are very low sulfur, low ash and low volatility. These strong coking properties and high heat value make it ideally suited for steel makers as a coking coal and to utilities as a steam coal.

        We have a significant transportation advantage in shipping to our customers.    Our principal mines in Brookwood, Alabama are serviced by CSX rail. We also have access to our barge load out facility on the Black Warrior River. Service via rail or barge is a relatively short distance to the Port of Mobile. Since customers for our coal are primarily in Europe and South America we are able to ship our coal quickly and at a relatively favorable cost.

        We are a low-cost producer making our coal competitive on a delivered basis.    We primarily use longwall mining for our metallurgical coal, recognized as the most efficient underground mining method in the United States. We have invested in expanded longwall mining in our Mine No. 7 East expansion, which has added to our annual production capacity. We expect to increase annual production capacity from 6.0 million tons in 2009, increasing annually to an estimated 9.5 million tons of annual capacity achievable in 2012. With the East expansion, Mine No. 7 is the largest producer of low-vol metallurgical coal in the United States. By increasing our longwall mining capabilities, the cost per ton to mine our metallurgical coal has been reduced.

        We maintain excellent relationships with our customers.    Customers want good products, delivered on a timely basis at a fair price. Having a premium product and with our production and transportation efficiencies, we are able to deliver a premium product at a competitive price on a timely basis. As a result, we have maintained excellent relationships with our customers over many years.

        We have a strong balance sheet to meet unknown issues that may arise.    With the uncertain economy it is important to maintain access to credit and liquidity. We have a minimal amount of funded debt and zero borrowings under our revolving credit facility. Operationally, our cash flow is very strong and we expect to maintain this strong financial profile

        We are able to purchase and blend coal to the customer's specifications.    In order to provide the customer exactly what he needs at the lowest possible price, we are able to blend our high quality coal to meet the customer's energy needs at an affordable price.

Environmental and Other Regulatory Matters

        Our businesses are subject to numerous federal, state and local laws and regulations with respect to matters such as permitting and licensing requirements, employee health and safety, reclamation and restoration of property and protection of the environment. Environmental laws and regulations include, but are not limited to, the federal Clean Air Act ("CAA") and its state counterpart with respect to air emissions; the Clean Water Act ("CWA") and its state counterpart with respect to water discharges; the Resource Conservation and Recovery Act ("RCRA") and its state counterparts with respect to solid and hazardous waste generation, treatment, storage and disposal; as well as the regulation of underground storage tanks; and the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and its state counterpart with respect to releases, threatened releases, and remediation of hazardous substances. Other environmental laws and regulations require reporting, even though the impact of that reporting is unknown. Compliance with these laws and regulations may be costly and time-consuming and may delay commencement or continuation of exploration or production at our operations. These laws are constantly evolving and becoming increasingly stringent. The ultimate impact of complying with existing laws and regulations is not always clearly known or determinable due in part to the fact that certain implementing regulations for these environmental laws have not yet been promulgated and in certain instances are undergoing revision. These laws and regulations, particularly

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new legislative or administrative proposals (or judicial interpretations of existing laws and regulations) related to the protection of the environment, could result in substantially increased capital, operating and compliance costs and have a material adverse effect on our operations and/or our customers' ability to use our products.

        We strive to conduct our mining, natural gas and coke operations in compliance with all applicable federal, state and local laws and regulations. However, due in part to the extensive and comprehensive regulatory requirements, along with changing interpretations of these requirements, violations occur from time to time in our industry and at our operations. In recent years, expenditures for regulatory or environmental obligations have been mainly for safety or process changes, although certainly some expenditures continue to be made at several facilities to comply with ongoing monitoring or investigation obligations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of our products and services, operating results will be reduced. We believe that our major North American competitors are confronted by substantially similar conditions and thus do not believe that our relative position with regard to such competitors is materially affected by the impact of environmental laws and regulations. However, the costs and operating restrictions necessary for compliance with environmental laws and regulations may have an adverse effect on our competitive position with regard to foreign producers and operators who may not be required to undertake equivalent costs in their operations. In addition, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, applicable state legislation and its production methods.

Permitting and Approvals

        Numerous governmental permits and approvals are required for mining operations. We are required to prepare and present to federal, state or local authorities data pertaining to the effect or impact that any proposed exploration for or production of coal may have upon the environment, the public and our employees. In addition, we must also submit a comprehensive plan for mining and restoring, upon the completion of mining operations, the mined property to its prior condition, productive use or other permitted condition. The requirements are costly and time-consuming and may delay commencement or continuation of exploration or production at our operations. Typically we submit our necessary mining permit applications several months, or even years, before we anticipate mining a new area.

        Our coking operations are subject to numerous regulatory permits and approvals, including air and water permits. These permits subject us to monitoring and reporting requirements. We typically submit our necessary permit renewal applications several months prior to expiration.

        Applications for permits or permit renewals at our mining and coking operations are subject to public comment and may be subject to litigation from third parties seeking to deny issuance of a permit or to overturn the agency's grant of the permit application, which may also delay commencement or continuation of our mining and coking operations. Further, regulations provide that applications for certain permits or permit modifications can be delayed, refused or revoked if an officer, director or a stockholder with a 10% or greater interest in the entity is affiliated with or is in a position to control another entity that has outstanding permit violations. In the current regulatory environment, we anticipate approvals will take even longer than previously experienced, and some permits may not be issued at all. Significant delays in obtaining, or denial of, permits could have a material adverse effect on our business.

Mine Health and Safety

        Stringent health and safety standards have been in effect since Congress enacted the Coal Mine Health and Safety Act of 1969. The Federal Mine Safety and Health Act of 1977 significantly expanded

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the enforcement of safety and health standards and imposed safety and health standards on all aspects of mining operations. Regulations are comprehensive and affect numerous aspects of mining operations, including training of mine personnel, mining procedures, blasting, the equipment used in mining operations and other matters. The Federal Mine Safety and Health Administration ("MSHA") monitors compliance with these federal laws and regulations and can impose under recently enacted regulations maximum penalties of up to $220,000 for certain violations, as well as closure of mines. In addition, certain portions of the Coal Mine Safety and Health Act of 1969 and the Federal Mine Safety and Health Act of 1977, as amended, require payments of benefits to disabled coal miners with black lung disease and to certain survivors of miners who die from black lung disease.

        Underground mining accidents involving fatalities in 2006 received national attention and prompted responses at the federal and state levels that have resulted in increased scrutiny of current safety practices and procedures in the mining industry. On June 15, 2006, Congress passed the federal Mine Improvement and New Emergency Response Act of 2006 (the "MINER Act"). Implementation of the specific requirements is currently underway. The implementation of these new requirements has caused us and will cause us to incur substantial additional costs which will impact our operating costs. The additional requirements of the MINER Act and implementing federal regulations include, among other things, expanded emergency response plans, providing additional quantities of breathable air for emergencies, installation of refuge chambers in underground coal mines, installation of two-way communications and tracking systems for underground coal mines, new standards for sealing mined out areas of underground coal mines, more available mine rescue teams and enhanced training for emergencies.

        On January 25, 2006, an Alabama circuit judge ordered the Alabama governor and legislature to take action to ensure the safety of Alabama's mineworkers. On February 2, 2010, Alabama Senate Bill 362 was proposed and read to the Senate's Business and Labor Committee. The bill purports to extensively revise and modernize the Alabama Coal Mine Safety Law of 1975 to comply with federal law to enhance mining safety. While many of the proposed changes track the federal MINER Act, the proposed bill and its supplemental provisions go beyond current federal law.

        Most aspects of mine operations are subject to extensive regulation. While mine safety and health regulation has a significant effect on our operating costs, our U.S. competitors are subject to the same degree of regulation. However, pending legislation at the state level could result in differing operating costs than our competitors.

Workers' Compensation and Black Lung

        We are self-insured for workers' compensation benefits for work-related injuries. Workers' compensation liabilities, including those related to claims incurred but not reported, are recorded principally using annual valuations based on discounted future expected payments using historical data of the division or combined insurance industry data when historical data is limited. In addition, certain of our subsidiaries are responsible for medical and disability benefits for black lung disease under the Federal Coal Mine Health and Safety Act of 1969 and the Federal Mine Safety and Health Act of 1977, as amended, and is self-insured against black lung related claims. We perform periodic evaluations of our black lung liability, using assumptions regarding rates of successful claims, discount factors, benefit increases and mortality rates, among others. See "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition."

Surface Mining Control and Reclamation Act

        The Surface Mining Control and Reclamation Act of 1977 ("SMCRA"), requires that comprehensive environmental protection and reclamation standards be met during the course of and following completion of mining activities. Permits for all mining operations must be obtained from the

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Federal Office of Surface Mining Reclamation and Enforcement or, where state regulatory agencies have adopted federally approved state programs under the Act, the appropriate state regulatory authority. In Alabama, the Alabama Surface Mining Commission reviews and approves SMCRA permits.

        SMCRA permit provisions include requirements for coal prospecting, mine plan development, topsoil removal, storage and replacement, selective handling of overburden materials, mine pit backfilling and grading, subsidence control for underground mines, surface drainage control, mine drainage and mine discharge control and treatment and revegetation. These requirements seek to limit the adverse impacts of coal mining and more restrictive requirements may be adopted from time to time.

        Before a SMCRA permit is issued, a mine operator must submit a bond or otherwise secure the performance of reclamation obligations. The Abandoned Mine Land Fund, which is part of SMCRA, requires a fee on all coal produced. The proceeds are used to reclaim mine lands closed or abandoned prior to 1977. On December 7, 2006, the Abandoned Mine Land Program was extended for 15 years.

        SMCRA stipulates compliance with many other major environmental statutes, including: the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, and the Comprehensive Environmental Response, Compensation and Liability Act.

        We accrue for the costs of final mine closure. Estimates of our total reclamation and mine-closing liabilities are based upon permit requirements and our experience. The amounts recorded are dependent upon a number of variables, including the estimated future retirement costs, estimated proven reserves, assumptions involving profit margins, inflation rates, and the assumed credit-adjusted risk-free interest rates. Furthermore, these obligations are unfunded. If these accruals are insufficient or our liability in a particular year is greater than currently anticipated, our future operating results could be adversely affected. At December 31, 2009, we have accrued $19.5 million for our asset retirement obligations, most of which will be incurred at our underground mining operations at the end of the mines' life.

Surety Bonds/Financial Assurance

        We use surety bonds, trusts and letters of credit to provide financial assurance for certain transactions and business activities. Federal and state laws require us to obtain surety bonds to secure payment of certain long-term obligations, including mine closure or reclamation costs and other miscellaneous obligations. The bonds are renewable on a yearly basis.

        Surety bond costs have increased in recent years while the market terms of such bonds have generally become more unfavorable. In addition, the number of companies willing to issue surety bonds has decreased. Bonding companies also require posting of collateral, typically in the form of letters of credit, to secure the surety bonds. As of December 31, 2009, we had outstanding surety bonds and collateral with parties for post-mining reclamation totaling $35.0 million, plus $8.9 million for miscellaneous purposes. As of December 31, 2009, we maintained letters of credit totaling $30.4 million to secure surety bonds plus $7.9 million in other forms of collateral to satisfy reclamation obligations.

Climate Change

        Global climate change continues to attract considerable public and scientific attention with widespread concern about the impacts of human activity, especially the emission of greenhouse gases ("GHGs"), such as carbon dioxide and methane. Combustion of fossil fuels, such as the coal and methane gas we produce, results in the creation of carbon dioxide that is currently emitted into the atmosphere by coal and gas end-users. Further, some of our operations, such as coal mining and coke production, directly emit GHGs. Laws and regulations governing emissions of GHGs have been

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adopted by foreign governments, including the European Union and member countries, individual states in the United States, and regional governmental authorities. Further, numerous proposals also have been made and are likely to continue to be made at the international, national, regional, and state levels of government that are intended to limit emissions of GHGs by enforceable requirements and voluntary measures. In addition, the United States and over 160 other nations are signatories to the 1992 Framework Convention on Climate Change, which is intended to limit emissions of GHGs. In December 1997, in Kyoto, Japan, the signatories to the convention established a binding set of emission targets for developed nations. Although the specific emission targets vary from country to country, the United States would have been required to reduce emissions to 93% of 1990 levels from 2008 through 2012. Although the United States has not ratified the Kyoto agreement and is not bound by its emission targets, the United States is participating in international discussions to develop a treaty or other agreement to require reductions in GHG emissions after 2012 and has signed the Copenhagen Accord, which includes a non-binding commitment to reduce GHG emissions.

        In April 2009, in response to a 2007 U.S. Supreme Court decision, EPA proposed findings that emissions of GHGs from motor vehicles are contributing to air pollution which, in turn, is endangering the public health and welfare. These proposed findings (which were made final in December 2009) set in motion the process for EPA to regulate GHGs from mobile sources, which in turn may result in regulation of GHGs from stationary sources under the Clean Air Act. EPA's findings focus on six GHGs, including carbon dioxide and nitrous oxide (which are emitted from coal combustion) and methane (which is emitted from coal beds). Although EPA has stated a preference that GHG reduction be based on new federal legislation rather than through agency regulation pursuant to the existing Clean Air Act, EPA is nonetheless taking steps to regulate many sources of GHGs without further legislation (see Clean Air Act below). It is difficult to predict reliably how such regulation will develop and when or whether it will take effect, as EPA's recently finalized findings that underpin such regulation are the subject of a number of lawsuits. Also, bills have been introduced in Congress that would, if enacted, prevent EPA from regulating GHGs under the Clean Air Act.

        The U.S. House of Representatives has passed a bill that would regulate GHG emissions through a "cap and trade" system and related programs, which generally would require emitters of GHGs to purchase or otherwise obtain allowances to emit GHGs. Similar bills have been proposed in the U.S. Senate. However, it is uncertain whether Congress will enact "cap and trade" or other legislation to address climate change and, if it does, when it will occur and what it will require.

        Coalbed methane must be expelled from our underground coal mines for mining safety reasons. Our gas operations extract coalbed methane from our underground coal mines prior to mining. With the exception of some coalbed methane which is vented into the atmosphere when the coal is mined, the methane is captured. If regulation of GHG emissions does not exempt the release of coalbed methane, we may have to curtail coal production, pay higher taxes, or incur costs to purchase credits that allow us to continue operations as they now exist at our underground coal mines. The amount of coalbed methane we capture is recorded, on a voluntary basis, with the U.S Department of Energy. We have recorded the amounts we have captured since 1992. In addition, Jim Walter Resources, Inc is registered as an Offsets Provider of credits with the Chicago Climate Exchange ("CCX"), an international rules-based GHG emission reduction, audit, registry and trading program based in the U.S. As a member, Jim Walter Resources,Inc. reports, on behalf of the mining, cokemaking and natural gas businesses (collectively, "Jim Walter Resources") to the CCX and has agreed to reduce emissions a minimum of 1% per year from its allocated annual emissions allowance, or baseline, and further committed to reduce its emissions a minimum of 6% below its baseline by the year 2010. Members who reduce beyond their targets have surplus allowances to sell or bank on the CCX. As of December 31, 2009, Jim Walter Resources had a total of 27,670 carbon financial instruments ("CFI") registered on the CCX as a result of carbon recapture, consisting of 5,858 exchange allowances and 21,812 exchange offsets. A CFI is equal to 100 metric tons of carbon dioxide credits available for use or sale on the

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CCX. In addition, in 2009, Jim Walter Resources partnered with Biothermica Technologies to capture and mitigate the methane that is vented into the atmosphere as a result of the mining process. This project resulted in the listing of the project with the Climate Action Reserve on February 2, 2010, a national offsets program working to ensure integrity, transparency and financial value in the U.S. carbon market by establishing regulatory-quality standards for the development, quantification and verification of GHG emissions reduction projects in North America. If regulation of GHGs does not give us credit for capturing methane that would otherwise be released into the atmosphere at our coal mines, any value associated with our historical or future credits would be reduced or eliminated.

        Depending on their requirements, additional laws or regulations regarding GHG emissions or other actions to limit GHG emissions could result in fuel switching, from coal or, to a lesser degree, natural gas to other fuel sources. Alternative fuels (non-fossil fuels) could become more attractive than coal or, to a lesser degree, natural gas in order to reduce GHG emissions. This could result in a reduction in the demand for our coal and, to a lesser degree, our natural gas, and, therefore, our revenues, as well as reduce the value of our reserves (although fuel switching could increase demand for our natural gas, which emits less GHG when burned than an equivalent quantity of coal). The anticipation of such requirements could also lead to reduced demand for some of our products. Additional GHG laws or regulations could also increase our costs, such as those to produce natural gas and manufacture coke. Although the potential impacts on us of additional climate change regulation are difficult to reliably quantify, they could be material.

Clean Air Act

        The federal Clean Air Act ("CAA") and comparable state laws that regulate air emissions affect coal mining and coking operations both directly and indirectly. Direct impacts on coal mining may occur through permitting requirements and/or emission control requirements relating to particulate matter, such as fugitive dust, or fine particulate matter measuring 2.5 micrometers in diameter or smaller. The Clean Air Act indirectly affects our mining operations and directly affects our cokemaking operations by extensively regulating the air emissions of sulfur dioxide, nitrogen oxides, mercury and other compounds emitted by coal-fired utilities, steel manufacturers and coke ovens. As described below, proposed regulations would also subject GHG emissions to regulation under the Clean Air Act.

        The CAA requires, among other things, the regulation of hazardous air pollutants through the development and promulgation of Maximum Achievable Control Technology ("MACT") Standards. The EPA has developed various industry-specific MACT standards pursuant to this requirement. The CAA requires EPA to promulgate regulations establishing emission standards for each category of Hazardous Air Pollutants. EPA must also conduct risk assessments on each source category that is already subject to MACT standards and determine if additional standards are needed to reduce residual risks.

        Our cokemaking facilities are subject to certain MACT standards and NESHAPS (National Emissions Standards for Hazardous Air Pollutants). Relative to MACT, these standards apply to pushing, quenching, and under-firing stacks and went into effect in April 2006. The Boiler MACT was withdrawn in recent years but is still under consideration by EPA. Concerning NESHAPS, the standards include Coke Oven NESHAPS (1993), Benzene NESHAPS and Benzene Waste NESHAPS, which were also enacted in the early 1990's. EPA is required to make a risk-based determination for pushing and quenching emissions and determine whether additional emissions reductions are necessary from this process by 2011. EPA has yet to publish or propose any residual risk standards from these operations; therefore, the impact cannot be estimated at this time. The portion of NESHAP which applies to coke ovens addresses emissions from charging, coke oven battery tops, and coke oven doors. With regard to this standard, Walter Coke chose the LAER (Lowest Achievable Emissions Rate) track, and therefore is not required to comply with residual risk until 2020. Since the scope of future changes is relatively uncertain, the magnitude of the impact of these anticipated changes cannot be estimated at this time.

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        The CAA also requires EPA to develop and implement National Ambient Air Quality Standards or NAAQS for criteria pollutants, which include, among others, particulate matter. In 1997, EPA established 24-hour and annual standards for fine particles that are less than 2.5 micrometers in size or PM2.5 and in 2006, EPA tightened the 24-hour standard but retained the annual standard. States are required to demonstrate compliance with the fine particle standard by April 2010, with a possible extension to April 2015. EPA designated certain counties in which we operate as "nonattainment" and "unclassified/attainment" for the 2006 PM2.5 fine particle standard. State Implementation Plans for the 2006 standard are expected to be due in early 2013, with attainment demonstrations with the 2006 standard expected to be made thereafter. It is anticipated that EPA's fine particle programs could result in significant costs to us; however, it is impossible to estimate the magnitude of these costs at this time as state and federal agencies are still developing regulations for the programs and implementation could be as late as 2019.

        The EPA has initiated a regional haze program designed to protect and improve visibility at and around national parks, national wilderness areas and international parks. This program may result in additional emissions restrictions from new coal-fired power plants whose operation may impair visibility at and around federally protected areas. This program may also require certain existing coal-fired power plants to install additional control measures designed to limit haze-causing emissions, such as sulfur dioxide, nitrogen oxides, volatile organic chemicals and particulate matter. In addition, there are currently certain bills before Congress that would cut mercury emissions by 90 percent from coal-fired power plants and tighten national limits on emissions of sulfur dioxide (SO2) and nitrogen oxides (NOx). These bills, and others such as acid rain regulations, could affect the future market for coal.

        EPA's finding concerning GHG endangerment of public health and welfare (see the discussion on Climate Change) may lead to regulation of GHG emissions from stationary sources under the Clean Air Act. In connection with that finding, EPA has also proposed a tailoring rule which would set emission thresholds for GHG regulation under EPA's current Clean Air Act stationary source permitting requirements. Once finalized, this rule may draw legal challenges, as EPA's endangerment finding has. Accordingly, the impact of such regulation on us cannot be reliably estimated at this time, although it could be material.

Clean Water Act

        The federal Clean Water Act ("CWA") and corresponding state laws affect our operations by imposing restrictions on discharges of wastewater into creeks and streams. These restrictions, more often than not, require us to pre-treat the wastewater prior to discharging it. Permits requiring regular monitoring and compliance with effluent limitations and reporting requirements govern the discharge of pollutants into regulated waters. Our mining and cokemaking operations maintain water discharge permits as required under the National Pollutant Discharge Elimination System program of the CWA, and conduct its operations to be in compliance with such permits. We believe we have obtained all permits required under the Clean Water Act and corresponding state laws and are in substantial compliance with such permits. However, new requirements under the Clean Water Act and corresponding state laws may cause us to incur significant additional costs that could adversely affect our operating results.

Resource Conservation and Recovery Act

        The Resource Conservation and Recovery Act ("RCRA") and corresponding state laws establish standards for the management of solid and hazardous wastes generated at our various facilities. Besides affecting current waste disposal practices, RCRA also addresses the environmental effects of certain past hazardous waste treatment, storage and disposal. In addition, RCRA also requires certain of our facilities to evaluate and respond to any past release, or threatened release, of a hazardous substance that may pose a risk to human health or the environment.

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        RCRA may affect coal mining operations by establishing requirements for the proper management, handling, transportation and disposal of solid and hazardous wastes. Currently, certain coal mine wastes, such as earth and rock covering a mineral deposit (commonly referred to as overburden) and coal cleaning wastes, are exempted from hazardous waste management under RCRA. Any change or reclassification of this exemption could significantly increase our coal mining costs.

        Our cokemaking operation is in the study phase of a RCRA corrective action program. Until the studies are complete, we are unable to determine the cleanup or remediation that may be required and are unable to estimate the total cost of any such remediation activities. For additional information regarding significant enforcement actions, capital expenditures and costs of compliance, see "Item 3. Legal Proceedings" and Environmental Matters under "Note 14- Commitments and Contingencies."

Comprehensive Environmental Response, Compensation and Liability Act

        The Comprehensive Environmental Response, Compensation and Liability Act, CERCLA or Superfund, and similar state laws affect our coal mining and coking operations by, among other things, imposing investigation and cleanup requirements for threatened or actual releases of hazardous substances. Under CERCLA, joint and several liability may be imposed on operators, generators, site owners, lessees and others regardless of fault or the legality of the original activity that caused or resulted in the release of the hazardous substances. Although the EPA excludes most wastes generated by coal mining and processing operations from the hazardous waste laws, the universe of materials/wastes governed by CERCLA is broader than "hazardous waste" and such even non-hazardous wastes can, in certain circumstances, contain hazardous substances which, if released into the environment, are governed by CERCLA. Alabama's version of CERCLA mirrors the federal version, with the important difference that there is no joint and several liability—liability is consistent with one's contribution to the contamination. In addition, the disposal, release or spilling of some products used by coal and coking companies in operations, such as chemicals, could trigger the liability provisions of CERCLA or similar state laws because, at that point, they are deemed to be waste and the activity, even though inadvertent, is deemed to constitute disposal or a covered CERCLA release. Thus, we may be subject to liability under CERCLA and similar state laws for properties that 1) we currently own, lease or operate or that 2) we, our predecessors, or former subsidiaries have previously owned, leased or operated, 3) sites to which we, our predecessors or former subsidiaries sent waste materials, or 4) sites at which hazardous substances from our facilities' operations have otherwise come to be located.

Other Environmental Laws

        We are required to comply with numerous other federal, state and local environmental laws and regulations in addition to those previously discussed. These additional laws include, for example, the Endangered Species Act, the Safe Drinking Water Act, the Toxic Substance Control Act and the Emergency Planning and Community Right-to-Know Act.

Seasonality

        Our primary business is not materially impacted by seasonal fluctuations. Demand for coal is generally more heavily influenced by other factors such as the general economy, interest rates and commodity prices.

Employees

        As of December 31, 2009, we employed approximately 2,100 people, of whom approximately 1,300 were hourly workers and 800 were salaried employees. Unions represented approximately 1,300 employees under collective bargaining agreements, of which approximately 1,100 were covered by one contract with the United Mine Workers of America that expires on December 31, 2011.

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Available Information

        We make our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments thereto available on our website at www.walterenergy.com without charge as soon as reasonably practical after filing or furnishing these reports to the Securities and Exchange Commission ("SEC"). Additionally, we will also provide, without charge, a copy of our Form 10-K to any shareholder by mail. Requests should be sent to Walter Energy, Inc., Attention: Shareholder Relations, 4211 W. Boy Scout Boulevard, Tampa, Florida 33607. You may read and copy any document the Company files at the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our SEC filings are also available to the public from the SEC's website at http://www.sec.gov.

Item 1A.    Risk Factors

Continuing unfavorable economic, financial and business conditions may adversely affect our businesses and financial condition.

        The financial markets in the United States, Europe, South America and Asia have been experiencing extreme disruption over the last year. As widely reported, these markets have experienced, among other things, extreme volatility in security prices, commodities and currencies; severely diminished liquidity and credit availability, rating downgrades and declining valuations of certain investments. The tightening of credit in financial markets, the inability to access capital markets, the bankruptcy, failure, collapse or sale of various financial institutions and an unprecedented level of intervention from the United States federal government could have a material adverse effect on the demand for our coal, coke and natural gas products and on our sales, pricing and profitability. Continuation or worsening of the current economic conditions, a prolonged global, national or regional economic recession or other similar events could have a material adverse effect on the demand for our products and on our sales, pricing and profitability. We are unable to predict the likely duration and severity of the current disruption in financial markets and adverse economic conditions in the U.S. and other countries and the impact these events may have on our operations and the industry in general.

Our businesses may suffer as a result of a substantial or extended decline in pricing, demand and other factors beyond our control, which could negatively affect our operating results and cash flows.

        Our businesses are cyclical and have experienced significant difficulties in the past. Our financial performance depends, in large part, on varying conditions in the international and domestic markets we serve, which fluctuate in response to various factors beyond our control. The prices at which we sell our coal, coke and natural gas are largely dependent on prevailing market prices for those products. We have experienced significant price fluctuations in our coal, coke and natural gas businesses, and we expect that such fluctuations will continue. Demand for and, therefore, the price of, coal, coke and natural gas are driven by a variety of factors such as availability, price, location and quality of competing sources of coal, coke or natural gas, availability of alternative fuels or energy sources, government regulation and economic conditions. In addition, reductions in the demand for metallurgical coal caused by reduced steel production by our customers, increases in the use of substitutes for steel (such as aluminum, composites or plastics) and the use of steel-making technologies that use less or no metallurgical coal can significantly affect our financial results and impede growth. Demand for steam coal is primarily driven by the price of steam coal and natural gas and the consumption patterns of the domestic electric power generation industry, which, in turn, is influenced by demand for electricity and technological developments. We estimate that a 10% decrease in the price of metallurgical coal in 2009 would have resulted in a reduction in pre-tax income of $75.8 million. Demand for natural gas is also affected by storage levels of natural gas in North America and consumption patterns, which can be affected by weather conditions. We estimate that a 10%

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decrease in the price in natural gas in 2009 would have resulted in a reduction in pre-tax income of approximately $2.6 million in that year, which includes the benefit of hedges. Occasionally we utilize derivative commodity instruments to manage fluctuations in natural gas prices. If we choose not to engage in, or reduce our use of hedging arrangements in the future, we may be more adversely affected by changes in the pricing of these commodities. Currently, we have hedged approximately 24% of our anticipated 2010 natural gas production at an average price of $6.20 per thousand cubic feet.

The failure of our customers to honor or renew contracts could adversely affect our business.

        A significant portion of the sales of our coal, coke and natural gas are to long-term customers. The success of our businesses depends on our ability to retain our current clients, renew our existing customer contracts and solicit new customers. Our ability to do so generally depends on a variety of factors, including the quality and price of our products, our ability to market these products effectively, our ability to deliver on a timely basis and the level of competition we face. If current customers do not honor current contract commitments, terminate agreements or exercise force majeure provisions allowing for the temporary suspension of performance, our revenues will be adversely affected. If we are unsuccessful in renewing contracts with our long-term customers and they discontinue purchasing coal, coke or natural gas from us, renew contracts on terms less favorable than in the past, or if we are unable to sell our coal, coke or natural gas to new customers on terms as favorable to us, our revenues could suffer significantly.

Coal mining is subject to inherent risks and is dependent upon many factors and conditions beyond our control, which may cause our profitability and our financial position to decline.

        The majority of our coal mining operations are conducted in underground mines and the balance of our operations is surface mining operations. Coal mining is subject to inherent risks and is dependent upon a number of conditions beyond our control that can affect our costs and production schedules at particular mines. These risks and conditions include, but are not limited to:

    variations in geological conditions, such as the thickness of the coal seam and amount of rock embedded in the coal deposit;

    mining, process and equipment or mechanical failures;

    adverse weather and natural disasters, such as heavy rains and flooding;

    environmental hazards, such as subsidence and excess water ingress;

    delays and difficulties in acquiring, maintaining or renewing necessary permits or mining rights; and

    unexpected mine accidents, including rock-falls and explosions caused by the ignition of coal dust, natural gas or other explosive sources at our mine sites or fires caused by the spontaneous combustion of coal.

        These risks and conditions could result in damage to or the destruction of mineral properties or production facilities, personal injury or death, environmental damage, delays in mining, monetary losses and legal liability. For example, an explosion and fire occurred in Mine No. 5 in September 2001. This accident resulted in the deaths of thirteen employees and caused extensive damage to the mine. Our insurance coverage may not be available or sufficient to fully cover claims which may arise from these risks and conditions. We have also experienced adverse geological conditions in our mines, such as variations in coal seam thickness, variations in the competency and make-up of the roof strata, fault-related discontinuities in the coal seam and the potential for ingress of excessive amounts of methane gas or water. Such adverse conditions may increase our cost of sales and reduce our profitability, and may cause us to decide to close a mine. Any of these risks or conditions could have a negative impact on our profitability, the cash available from our operations and our financial position.

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The financial performance of our coke business is dependent upon customers in the furnace and foundry industries whose failure to perform under their contracts with us could adversely affect our coke business.

        Substantially all of our domestic furnace and foundry coke sales are currently made under annual contracts with steel manufacturers and foundries. The global economic slowdown has had an adverse impact on the steel industry and the domestic foundries. In 2009, furnace coke sales were affected by certain companies who requested we postpone or suspend shipments. Although none of our foundry customers suspended shipments, foundry coke sales volumes were weakened due to economic conditions affecting our customers and the markets they serve. In the event of nonperformance by our current or future customers, our results of operations and cash flows may be adversely affected.

Disruption in supplies of coal produced by third parties could temporarily impair our cokemaking operations ability to fill its customers' orders or increase its costs.

        Our cokemaking operations purchase coal produced by third parties to meet customer specifications. Disruption in the supply of third-party coal could temporarily impair our ability to fill our customers' orders, maintain quality specifications or require us to pay higher prices in order to obtain the required coal from other sources. Any increase in the prices we pay for third-party coal could increase our costs and, therefore, lower our earnings.

Defects in title of any real property or leasehold interests in our properties could limit our ability to mine or develop these properties or result in significant unanticipated costs.

        Our right to mine some of our reserves and extract natural gas may be materially adversely affected by defects in title or boundaries. Any challenge to our title could delay the development of the property and could ultimately result in the loss of some or all of our interest in the property and could increase our costs. In addition, if we mine or conduct our natural gas operations on property that we do not own or lease, we could incur liability for such mining and gas operations. Some leases have minimum production requirements or require us to commence mining or gas operations in a specified term to retain the lease. Failure to meet those requirements could result in losses of prepaid royalties and, in some rare cases, could result in a loss of the lease itself.

Currently our coal, cokemaking and natural gas producing properties are located predominately in four counties in central Alabama, making us vulnerable to risks associated with having our production concentrated in one area.

        Our mining, cokemaking and natural gas operations are geographically concentrated in four counties in Alabama. As a result of this concentration, we may be disproportionately exposed to the impact of delays or interruptions of production caused by significant governmental regulation, transportation capacity constraints, curtailment of production, natural disasters or interruption of transportation or other events which impact this area.

A reduction in the demand for coal by our domestic electric utility customers would likely cause our surface mining revenues and profitability to decline significantly.

        The majority of our revenues from our surface mining operations are derived from contracts with domestic utility providers. Fuel cost is a significant component of the cost associated with coal-fired power generation, with respect to not only the price of the coal, but also the costs associated with emissions control and credits (i.e., sulfur dioxide, nitrogen oxides, etc.), combustion by-product disposal (i.e., ash) and equipment operations and maintenance (i.e., materials handling facilities) of the utility providers. Further, current and future laws and regulations relating to the control of GHG emissions could increase coal-related costs of utility providers. All of these costs must be considered when choosing between coal generation and alternative methods, including natural gas, nuclear, hydroelectric and others. Any prolonged depression in the price of natural gas could cause our customers not to

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purchase steam coal from us. In addition, electric utility deregulation is expected to provide incentives to generators of electricity to minimize their fuel costs and is believed to have caused electric generators to be more aggressive in negotiating prices with coal suppliers. Downward economic pressures by our industrial customers will likely cause our profitability to decline.

If transportation for our coal becomes unavailable or uneconomic for our customers, our ability to sell coal could suffer.

        Transportation costs can represent a significant portion of the total cost of coal to be delivered to the customer and, as a result, the cost of transportation is a critical factor in determining overall price. Increases in our transportation costs could make our coal less competitive with the same or alternative products from competitors with lower transportation costs. We typically depend upon overland conveyor, trucks, rail or barge to deliver our products. Disruption of any of these transportation services because of weather-related problems, which are variable and unpredictable; strikes, lock-outs; transportation delays or other events could temporarily impair our ability to supply our products to our customers, thereby resulting in lost sales and reduced profitability. All of our metallurgical mines are served by only one rail carrier, which increases our vulnerability to these risks, although our access to barge transportation partially mitigates that risk. In addition, the majority of the metallurgical coal produced by our underground mining operations is sold to coal customers who typically arrange and pay for transportation through the state-run docks at the Port of Mobile, Alabama to the point of use. As a result, disruption at the docks, port congestion and delayed coal shipments may result in demurrage fees to us. If this disruption were to persist over an extended period of time, demurrage costs could significantly impact profits.

Significant competition and foreign currency fluctuations could harm our sales, profitability and cash flows.

        The consolidation of the U.S. coal industry over the last several years has contributed to increased competition among coal producers. Some of our competitors have significantly greater financial resources than we do. This competition may affect domestic coal prices and impact our ability to retain or attract steam coal customers. In addition, our metallurgical coal business faces competition from foreign producers that sell their coal in the export market. The general economic conditions in foreign markets and changes in currency exchange rates are factors outside of our control that may affect international coal prices. If our competitors' currencies decline against the U.S. dollar or against our customers' currencies, those competitors may be able to offer lower prices to our customers. Furthermore, if the currencies of our overseas customers were to significantly decline in value in comparison to the U.S. dollar, those customers may seek decreased prices for the coal we sell to them. In addition, these factors may negatively impact our collection of trade receivables from our customers. These factors could reduce our profitability or result in lower coal sales.

Our businesses are subject to risk of cost increases and fluctuations and delay in the delivery of raw materials, mining equipment and purchased components.

        Our businesses require significant amounts of raw materials, mining equipment and labor and, therefore, shortages or increased costs of raw materials, mining equipment and labor could adversely affect our business or results of operations. Our coal mining operations rely on the availability of steel, petroleum products and other raw materials for use in various mining equipment. The availability and market prices of these materials are influenced by various factors that are beyond our control. Over the last year petroleum prices have fluctuated significantly and pricing for steel scrap has fluctuated markedly. Any inability to secure a reliable supply of these materials or shortages in raw materials used in the operation and manufacturing of mining equipment or replacement parts could negatively impact our operating results.

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Work stoppages, labor shortages and other labor relations matters may harm our business.

        The majority of our employees in our underground mining and cokemaking operations are unionized and we have a risk of work stoppages as the result of strike or lockout. The majority of employees of our underground mining operations are members of United Mine Workers of America ("UMWA"). Normally, our negotiations with the UMWA follow the national contract negotiated with the UMWA by the Bituminous Coal Operators Association. The collective bargaining agreement expires December 31, 2011. At our cokemaking operation, our contract with the United Steelworkers of America expires December 6, 2010. We experienced a strike at our coke facilities at the end of 2001 that lasted eight months. Future work stoppages, labor union issues or labor disruptions at our key customers or service providers could impede our ability to produce and deliver our products, to receive critical equipment and supplies or to collect payment. This may increase our costs or impede our ability to operate one or more of our operations.

We require a skilled workforce to run our business. If we cannot hire qualified people to meet replacement or expansion needs, we may not be able to achieve planned results.

        The demand for coal in recent years has caused a significant constriction of the labor supply resulting in higher labor costs. As coal producers compete for skilled miners, employee turnover rates have increased which negatively affects operating costs. If the shortage of skilled workers continues and we are unable to train and retain the necessary number of miners, it could adversely affect our productivity, costs and ability to expand production.

We have reclamation and mine closure obligations. If the assumptions underlying our accruals are inaccurate, we could be required to expend greater amounts than anticipated.

        The Surface Mining Control and Reclamation Act established operational, reclamation and closure standards for all aspects of surface mining as well as most aspects of deep mining. We accrue for the costs of final mine closure. Estimates of our total reclamation and mine-closing liabilities are based upon permit requirements and our experience. The amounts recorded are dependent upon a number of variables, including the estimated future retirement costs, estimated proven reserves, assumptions involving profit margins, inflation rates, and the assumed credit-adjusted risk-free interest rates. Furthermore, these obligations are unfunded. If these accruals are insufficient or our liability in a particular year is greater than currently anticipated, our future operating results could be adversely affected. At December 31, 2009, we have accrued $19.5 million for our asset retirement obligations, most of which will be incurred at our underground mining operations at the end of the mines' life.

Factors impacting our forecasts of future performance, reserve estimates and a decline in pricing could affect our revenues.

        Forecasts of our future performance are based on estimates of our recoverable coal reserves. Reserve estimates are based on a number of sources of information, including engineering, geological, mining and property control maps, our operational experience of historical production from similar areas with similar conditions and assumptions governing future pricing and operational costs. Reserve estimates will change periodically to reflect mining activities, the acquisition or divestiture of reserve holdings and modifications of mining plans. Certain factors beyond our control could affect the accuracy of these estimates, including unexpected mining conditions, future coal prices, operating and development costs and federal, state and local regulations affecting mining operations. In addition, since we deplete our reserves as we mine, the ability to acquire additional reserves that are economically recoverable at the time and have comparable costs is paramount. Our results of operations are dependent upon our ability to mine our reserves and the prices at which we sell our coal. A decline in reserves or an inability to acquire additional reserves could adversely affect our operating results and profitability.

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Extensive environmental, health and safety laws and regulations impose significant costs on our operations and future regulations could increase those costs, limit our ability to produce or adversely affect the demand for our products.

        Our businesses are subject to numerous federal, state and local laws and regulations with respect to matters such as:

    permitting and licensing requirements;

    employee health and safety, including:

    occupational safety and health;

    mine health and safety;

    workers' compensation;

    black lung;

    reclamation and restoration of property;

    environmental laws and regulations, including:

    climate change;

    air quality standards;

    water quality standards;

    management of materials generated by mining and cokemaking operations;

    the storage, treatment and disposal of wastes;

    remediation of contaminated soil and groundwater;

    protection of human health, plant-life and wildlife, including endangered species, and emergency planning and community right to know.

        Compliance with these regulations may be costly and time-consuming and may delay commencement or continuation of exploration or production at our operations. These laws are constantly evolving and becoming increasingly stringent. The ultimate impact of complying with existing laws and regulations is not always clearly known or determinable due in part to the fact that certain implementing regulations for these environmental laws have not yet been promulgated and in certain instances are undergoing revision. These laws and regulations, particularly new legislative or administrative proposals (or judicial interpretations of existing laws and regulations) related to the protection of the environment, could result in substantially increased capital, operating and compliance costs and have a material adverse effect on our operations and/or our customers' ability to use our products.

        We strive to conduct our mining, natural gas and coke operations in compliance with all applicable federal, state and local laws and regulations. However, due in part to the extensive and comprehensive regulatory requirements, along with changing interpretations of these requirements, violations occur from time to time in our industry and at our operations. In recent years, expenditures for regulatory or environmental obligations have been mainly for safety or process changes. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of our products and services, operating results will be reduced. We believe that our major North American competitors are confronted by substantially similar conditions and thus do not believe that our relative position with regard to such competitors is materially affected by the impact of environmental laws and regulations. However, the costs and operating restrictions necessary for compliance with environmental laws and regulations may have an adverse effect on our competitive position with regard to foreign producers and operators who may not be required to undertake equivalent costs in their operations. In addition,

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the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, applicable state legislation and its production methods.

        See "Environmental and Other Regulatory Matters" in Part I of this Annual Report.

Climate change concerns could negatively affect our results of operations and cash flows.

        The combustion of fossil fuels, such as the coal, coke and natural gas we produce, results in the creation of carbon dioxide that is currently emitted into the atmosphere by coal, coke and gas end-users. Further, some of our operations emit GHGs directly, such as methane incident to coal mining and carbon dioxide during our coke production. Carbon dioxide is considered a greenhouse gas and is a major source of concern with respect to global warming, also known as climate change. Climate change continues to attract public and scientific attention, and increasing government attention is being paid to reducing GHG emissions.

        There are many legal and regulatory approaches currently in effect or being considered to address GHGs, including possible future U.S. treaty commitments, new federal or state legislation that may impose a carbon emissions tax or establish a "cap and trade" program, and regulation by the U.S. Environmental Protection Agency ("EPA").

        These existing laws and regulations or other current and future efforts to stabilize or reduce GHG emissions, could adversely impact the demand for, price of and the value of our products and reserves. Passage of additional state, federal or foreign laws or regulations regarding GHG emissions or other actions to limit GHG emissions could result in switching from coal to other fuel sources. The anticipation of such additional requirements could also lead to reduced demand for some of our products. Alternative fuels (including non-fossil fuels) could become more attractive than coal in order to reduce GHG emissions, which could result in a reduction in the demand for coal and, therefore, our revenues. As our operations also emit GHGs directly, current or future laws or regulations limiting GHGemissions could increase our own costs. Although the potential impacts on us of additional climate change regulation are difficult to reliably quantify, they could be material.

Our expenditures for postretirement benefit and pension obligations are significant and could be materially higher than we have predicted if our underlying assumptions prove to be incorrect.

        We provide a range of benefits to our employees and retired employees, including pensions and postretirement healthcare. We record annual amounts relating to these plans based on calculations specified by generally accepted accounting principles, which include various actuarial assumptions. As of December 31, 2009, we estimate that our pension plans' aggregate accumulated benefit obligation had a present value of approximately $212.6 million, and our fair value of plan assets was approximately $160.9 million. As of December 31, 2009, we estimate that our postretirement health care and life insurance plans' aggregate accumulated benefit obligation would have had a present value of approximately $452.7 million, and such benefits are not required to be funded. In respect of the funding obligations for our pension plans, we must make minimum cash contributions on a quarterly basis. The current volatile economic environment and the rapid deterioration in the equity markets have caused investment income and the values of investment assets held in our pension trust to decline and lose value. As a result, we may be required to increase the amount of cash contributions we make into the pension trust in the future in order to meet the funding level requirements of the Pension Act. Our estimated minimum funding obligation relating to these plans in 2010 is $ 34.2 million. We have estimated these obligations based on assumptions described under the heading "Critical Accounting Estimates—Employee Benefits" in "Item 7 Management's Discussion and Analysis of Results of Operations and Financial Condition," and in the notes to our consolidated financial statements. Assumed health care cost trend rates, discount rates, expected return on plan assets and salary increases have a significant effect on the amounts reported for the pension and health care plans. If our assumptions do not materialize as expected, cash expenditures and costs that we incur could be

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materially higher. Moreover, regulatory changes could increase our obligations to provide these or additional benefits.

        In addition, certain of our subsidiaries participate in multiemployer pension and healthcare plan trusts established for union employees. Contributions to these funds could increase as a result of future collective bargaining with the UMWA, a shrinking contribution base as a result of the insolvency of other coal companies who currently contribute to these funds, lower than expected returns on pension fund assets, or other funding deficiencies.

        We have no current intention to withdraw from any multiemployer pension plan, but if we were to do so, under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), we would be liable for a proportionate share of the plan's unfunded vested benefit liabilities upon our withdrawal. Through July 1, 2010, our estimated withdrawal liability for the multiemployer pension plans amounts to $372.2 million.

We self-insure workers' compensation and certain medical and disability benefits, and greater than expected claims could reduce our profitability.

        We are self-insured for workers' compensation benefits for work-related injuries. Workers' compensation liabilities, including those related to claims incurred but not reported, are recorded principally using annual valuations based on discounted future expected payments using historical data of the division or combined insurance industry data when historical data is limited. In addition, certain of our subsidiaries are responsible for medical and disability benefits for black lung disease under the Federal Coal Mine Health and Safety Act of 1969 and the Federal Mine Safety and Health Act of 1977, as amended, and is self-insured against black lung related claims. We perform periodic evaluations of our black lung liability, using assumptions regarding rates of successful claims, discount factors, benefit increases and mortality rates, among others. See additional information under the heading "Critical Accounting Estimates—Employee Benefits" in "Item 7 Management's Discussion and Analysis of Results of Operations and Financial Condition."

        If the number or severity of claims for which we are self insured increases, or we are required to accrue or pay additional amounts because the claims prove to be more severe than our original assessment, our operating results could be reduced.

We may be subject to litigation, the disposition of which could negatively affect our profitability and cash flow in a particular period.

        Our profitability or cash flow in a particular period could be affected by an adverse ruling in any litigation currently pending in the courts or by litigation that may be filed against us in the future. For information regarding our current significant legal proceedings, see "Item 3. Legal Proceedings", "Note 9-Income Taxes" and "Note 14- Commitments and Contingencies."

Access to capital and our debt instruments may limit our ability to engage in certain transactions.

        Our business requires continued capital investment for, among other purposes, managing acquired assets, acquiring new equipment, maintaining the condition of our existing equipment and maintaining compliance with environmental laws and regulations. To the extent that cash generated internally and cash available under our credit facilities are not sufficient to fund capital requirements, we will require additional debt and/or equity financing. However, this type of financing may not be available, particularly in current market conditions, or if available, may not be on satisfactory terms. Future debt financings, if available, may result in increased interest expense, increased financial leverage and decreased income available to fund further acquisitions and expansion. In addition, future debt financings may limit our ability to withstand competitive pressures and render us more vulnerable to economic downturns. If we fail to generate sufficient earnings or to obtain sufficient additional capital in the future or fail to manage our capital investments effectively, we could be forced to reduce or delay capital expenditures, sell assets or restructure or refinance our indebtedness.

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        In addition, the credit agreement governing our amended and restated credit facility contains customary affirmative and negative covenants for credit facilities of this type, including, but not limited to, limitations on the incurrence of indebtedness, asset dispositions, acquisitions, investments, dividends and other restricted payments, liens and transactions with affiliates. The credit agreement requires us to meet certain financial tests, including a maximum leverage ratio and a minimum fixed charge coverage ratio. Our ability to satisfy the financial ratios, tests or covenants related to our existing or future indebtedness can be affected by events beyond our control, and there is a risk that we will not meet those tests. A breach of any such covenants could result in a default under our credit facilities or under any other debt instrument that we may enter into in the future. If an event of default were not remedied after the delivery of notice of default and lapse of any relevant grace period, the holders of our debt could declare it immediately due and payable.

Changes in our credit ratings could adversely affect our costs and expenses.

        Any downgrade in our credit ratings could adversely affect our ability to borrow and result in more restrictive borrowing terms, including increased borrowing costs and more restrictive covenants. This, in turn, could affect our internal cost of capital estimates and therefore impact operational and investment decisions.

Our executive officers and other key personnel are important to our success and the anticipated loss of some of these individuals as a result of the relocation of our corporate offices could harm our business.

        Our executive officers and other key personnel have significant experience in the businesses in which we operate and the loss of certain of these individuals could harm our business. We have announced our intention to relocate our corporate offices from Tampa, Florida to Birmingham, Alabama. While we do not anticipate that this relocation will affect management and key employees of our operating subsidiaries, including our subsidiary Presidents, or our President and Chief Operating Officer, certain members of our management team and corporate staff, including our chief executive officer, chief financial officer and general counsel, treasurer and controller have informed us they will not be relocating. We have created an interim succession plan and are in the process of identifying permanent successors to such individuals. Although we have been successful in attracting qualified individuals for key management and corporate positions in the past, there can be no assurance that we will continue to be successful in attracting and retaining a sufficient number of qualified personnel in the future and the loss of the services of management personnel as a result of the relocation or otherwise could harm our ability to successfully integrate and manage our business functions, prevent us from executing our business strategy and have an adverse effect on our results of operations and cash flows.

We may be unsuccessful in identifying or integrating suitable acquisitions, which could impair our growth.

        Our growth strategy is built upon organic growth and on taking advantage of opportunities to acquire complementary businesses. This strategy depends on the availability of acquisition candidates with businesses that can be successfully integrated into our existing business and that will provide us with complementary capabilities, products or services. However, we may be unable to identify targets that will be suitable for acquisition. In addition, if we identify a suitable acquisition candidate, our ability to successfully implement the acquisition will depend on a variety of factors, including our ability to finance the acquisition. Our ability to finance our acquisitions is subject to a number of factors, including our ability to generate adequate cash from operations, credit availability, or of acceptable financing terms and the terms of our debt instruments. In addition, there are many challenges to integrating acquired companies and businesses, including eliminating redundant operations, facilities and systems, coordinating management and personnel, retaining key employees, managing different

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corporate cultures and achieving cost reductions and cross-selling opportunities. We may not be able to meet these challenges in the future.

The price of our common stock may be volatile and may be affected by market conditions beyond our control.

        Our share price is likely to fluctuate in the future because of the volatility of the stock market in general and a variety of factors, many of which are beyond our control, including:

    general global economic conditions that impact infrastructure activity, including interest rate and currency movements;

    quarterly variations in actual or anticipated results of our operations;

    speculation in the press or investment community;

    changes in financial estimates by securities analysts;

    actions or announcements by our competitors;

    actions by our principal stockholders;

    trading volumes of our common stock;

    regulatory actions;

    litigation;

    U.S. and international economic, legal and regulatory factors unrelated to our performance;

    loss or gain of a major customer;

    additions or departures of key personnel; and

    future issuances of our common stock.

        Market fluctuations could result in extreme volatility in the price of shares of our common stock, which could cause a decline in the value of our stock. Price volatility may be greater if the public float and trading volume of shares of our common stock is low. In addition, if our operating results and net income fail to meet the expectations of stock analysts and investors, we may experience an immediate and significant decline in the trading price of our stock.

Our ability to pay regular dividends to our stockholders is subject to the discretion of our Board of Directors and may be limited by our holding company structure, the covenants in our debt instruments and applicable provisions of Delaware law.

        Our Board of Directors may, in its discretion, decrease the level of dividends or discontinue the payment of dividends entirely. In addition, as a holding company, we will be dependent upon the ability of our subsidiaries to generate earnings and cash flows and distribute them to us so that we may pay our obligations and expenses and pay dividends to our stockholders. Our ability to pay future dividends and the ability of our subsidiaries to make distributions to us will be subject to our and their respective operating results, cash requirements and financial condition, the applicable laws of the State of Delaware (which may limit the amount of funds available for distribution), compliance with covenants and financial ratios related to existing or future indebtedness and other agreements with third parties. If, as a consequence of these various limitations and restrictions, we are unable to generate sufficient distributions from our business, we may not be able to make, or may have to reduce or eliminate, the payment of dividends on our shares.

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Our stockholder rights agreement could discourage or prevent potential acquisition proposals and could deter a change of control.

        On February 27, 2009, our Board of Directors authorized and declared a dividend of one preferred stock purchase right (a "Right") for each share of common stock to stockholders of record as of the close of business on April 23, 2009. Our shareholders approved this action and we entered into a rights agreement on April 24, 2009. Initially the Right is not exercisable and will trade with our common stock. The Right may be exercisable under certain circumstances, including a person or group acquiring, or the commencement of a tender or exchange offer that would result in a person or group acquiring, beneficial ownership of more than 20% of the outstanding shares of common stock. Upon exercise of the Right, each Right holder, other than the person or group triggering the plan, will have the right to purchase from us 1/1000th of a share of junior preferred stock (subject to adjustment) or, at our option, shares of common stock having a value equal to two times the exercise price of the Right. Each fractional share of the junior preferred stock has terms designed to make it substantially the economic equivalent of one share of common stock. This rights agreement expires on April 23, 2012. Our rights agreement is designed to, among other things, deter the use of coercive or abusive takeover tactics by one or more parties interested in acquiring the Company or a significant position in the Company's common stock without offering fair value to all stockholders, as well as to generally assist the Board in representing the interests of all stockholders in connection with any takeover proposals. The rights agreement would accomplish these objectives by encouraging a potential acquiror to negotiate with the Board to have the Rights redeemed or the rights agreement amended prior to such party exceeding the ownership thresholds set forth in the rights agreement. If the Rights are not redeemed (or the rights agreement is not amended to permit the particular acquisition) and such party exceeds the ownership thresholds, the Rights become exercisable at a discounted price resulting in both a dilution of the party's holding in the Company and making an acquisition thereof significantly more expensive by significantly increasing the number of shares that would have to be acquired to effect a takeover. Our rights agreement may discourage third parties from attempting to purchase our Company or a significant position in our common stock, which may adversely affect the price of our common stock.

We may be required to satisfy certain indemnification obligations to Mueller Water or may not be able to collect on indemnification rights from Mueller Water.

        In connection with the spin-off of Mueller Water Products, Inc. ("Mueller Water") on December 14, 2006, we entered into certain agreements with Mueller Water, including an income tax allocation agreement and a joint litigation agreement. Under the terms of those agreements, we and Mueller Water agreed to indemnify each other with respect to the indebtedness, liabilities and obligations that will be retained by our respective companies, including certain tax and litigation liabilities. These indemnification obligations could be significant. For example, to the extent that we or Mueller Water take any action that would be inconsistent with the treatment of the spin-off of Mueller Water as a tax-free transaction under Section 355 of the Internal Revenue Code, then any tax resulting from such actions is attributable to the acting company. The ability to satisfy these indemnities if called upon to do so will depend upon the future financial strength of each of our companies. We cannot determine whether we will have to indemnify Mueller Water for any substantial obligations after the distribution. If Mueller Water has to indemnify us for any substantial obligations, Mueller Water may not have the ability to satisfy those obligations. If Mueller Water is unable to satisfy its obligations under its indemnity to us, we may have to satisfy those obligations.

29


Following the spin-off and merger of our financing business, the surviving corporation, Walter Investment Management Corp., may not be able to satisfy certain indemnification obligations to us. In addition, we have contingent obligations in respect of Walter Investment Management Corp. which, in certain circumstances, could become significant.

        In connection with the spin-off our financing business and its merger with Hanover Capital Mortgage Holdings, Inc. on April 17, 2009, we entered into certain agreements with the surviving corporation, Walter Investment Management Corp. ("Walter Investment Management"), including a tax sharing agreement, transition services, a joint litigation agreement, a support letter of credit agreement in the amount of $15.7 million and a revolving credit facility and security agreement in which we have committed to make available up to $10.0 million in the event a major hurricane has occurred with projected losses greater than $2.5 million. Under the terms of the tax sharing agreement, to the extent that we or Walter Investment Management takes any action that would be inconsistent with the treatment of the spin-off of the financing business from us as a tax-free transaction under Section 355 of the Code, then any tax resulting from such actions will be attributable to the acting company and will result in indemnification obligations that could be significant. Under the terms of the transition services agreement, we and Walter Investment Management will provide certain services to each party for a limited duration. Under the terms of the joint litigation agreement, Walter Investment Management will indemnify us for certain liabilities arising from businesses and operations of the financing business at the time of the spin-off. Under the terms of the support letter of credit agreement, Walter Investment Management agrees to reimburse us for all costs incurred in posting the support letter of credit for Walter Investment Management's bank credit agreement as well as any draws under bonds posted in support of Walter Investment Management and its subsidiaries. Under the terms of the revolving credit and security agreement, Walter Investment Management will pay all fees and repay all loans made under the facility. All obligations of the support letter of credit and the revolving credit and security agreement will be due and payable upon the termination of this agreement on April 20, 2011. The ability to satisfy these indemnities if called upon to do so will depend upon the future financial strength of each of our companies. If Walter Investment Management is unable to satisfy its obligations under its indemnity to us, we may have to satisfy those obligations. In the case of the support letter of credit agreement and the revolving credit facility and security agreement, if Walter Investment Management cannot pay its obligations and the collateral backing those agreements is insufficient to satisfy the obligations, we could lose money in the satisfaction of those obligations.

Item 1B.    Unresolved Staff Comments:

        None

30


Item 2.    Description of Property

        The administrative headquarters and production facilities of the Company and its subsidiaries as of December 31, 2009 are summarized as follows:

 
   
   
  Square Footage  
 
   
  Land
Acreage
 
Facility/Location
  Principal Products/Operations   Leased   Owned  

Underground Mining

                         

Jim Walter Resources

                         
 

Brookwood, AL

    Administrative headquarters                 42,000  
 

Brookwood, AL

    Central shop, supply center and training center                 131,100  
 

Brookwood, AL

    Real estate- Owned     7,000              
 

Brookwood, AL

    Coal mines     33,202           506,130  

Surface Mining

                         

Walter Minerals

                         
 

Birmingham, AL

    Administrative headquarters           800        
 

Brookwood, AL

    Mine support facilities—Barge Loadout     40              

Tuscaloosa Resources

                         
 

Mt. Brook, AL

    Administrative headquarters           1,681        
 

Brookwood, AL

    Mine support facilities                 5,576  
 

Brookwood, AL

    Real estate—Leased     2,240              

Taft

                         
 

Jasper, AL

    Administrative headquarters           3,680        
 

Walker County, AL

    Mine support facilities                 1,800  
 

Walker County, AL

    Supply shop                 4,075  
 

Walker County, AL

    Real estate—Owned     1,487              
 

Walker County, AL

    Real estate—Leased     2,115              
 

Walker County, AL

    Real estate—Leased     820              

Walter Coke

                         
 

Birmingham, AL

    Administrative headquarters                 12,000  
 

Birmingham, AL

    Furnace & foundry coke battery     511           148,000  
 

Birmingham, AL

    Closed facility     5           63,000  
 

Birmingham, AL

    Closed facility     3           53,000  
 

Birmingham, AL

    Closed facility     2           10,000  
 

Alexandria, IN

    Closed facility     33           112,000  

Other

                         
 

Kodiak(1)

                         
   

Shelby County, AL

    Mine support facilities                 13,100  
   

Shelby County, AL

    Administrative headquarters           2,700        
   

Shelby County, AL

    Supply shop                 9,800  
   

Shelby County, AL

    Real estate     76              
 

Tampa, FL(2)

    Administrative headquarters           31,574        
 

Tampa, FL(3)

    Former Administrative headquarters for our Financing and Homebuilding businesses           46,500        

(1)
Kodiak's mining operations ceased in December 2008. Facilities have been idled.

(2)
Subsequent to December 31, 2009, we signed a 10-year, non-cancellable lease agreement for 40,390 square feet of space at the Galleria Tower at Riverchase Galleria in Hoover, Ala., a suburb of Birmingham. This location is expected to become our new headquarters location in 2010.

(3)
In April 2009, we spun off our Financing business and, also in the second quarter of 2009, our Homebuilding business was classified as discontinued operations. We retained the lease obligation related to this space.

31


        The following table provides the location of our recoverable reserves at December 31, 2009:

ESTIMATED RECOVERABLE (1) COAL RESERVES
AS OF DECEMBER 31, 2009
(In Thousands of Tons)

 
   
   
  Reserves   Classifications(3)   Our Interest    
 
Mine
  Status of
Operation
  Coal Beds   Recoverable
Reserves(1)
  Assigned(2)   Measured   Indicated   Owned   Leased(4)   Reportable
Acres
 

JWR's No. 4 Mine(5)

  Operational   Mary Lee and Blue Creek     62,844     62,844     60,398     2,446         62,844     15,043  

JWR's No. 7 Mine

  Operational   Mary Lee and Blue Creek     77,568     77,568     67,735     9,833     507     77,061     18,159  

TRI's(6) East Brookwood Mine(9)

  Operational   Upper & Lower Brookwood, Milldale, Carter & Johnson     699     699     699         699         42  

TRI's(6) Howton Mine(7)

  Closed   Guide, Lower Brookwood Milldale, Carter                              

TRI's(6) Panther 3 Mine

  Idled   Carter, Johnson     289     289     289         289         161  

Taft's(8) Choctaw Mine(9)

  Operational   Pratt, Nickle Plate, Top American, Bot. American & American No. 3     3,646     3,646     3,646             3,646     417  

Taft's(8) Reid School Mine

  Ready for Operation   Lick Creek Jefferson & Black Creek     569     569     569             569     130  

Taft's(8) Gayosa South Mine

  Development   Pratt, Nickle Plate, Top American, Bot. American     389     389     389             389     70  

Walter Minerals' Flat Top Mine

  Ready for Operation   Pratt, Nickle Plate, Top American     2,285     2,285     2,285         2,285         356  

Walter Minerals' Highway 59 Mine

  Operational   Lower Brookwood, Mildale, Carter & Johnson     518     518     518         518         54  

Walter Minerals' Beltona East Mine

  Development   Lick Creek Jefferson & Black Creek     1,117     1,117     1,117         1,117         184  

Walter Minerals' Swann's Crossing Mine

  Development   Guide 1 & 2, Lower Brookwood, Mildale, Carter     1,376     1,376     1,376         1,376         98  

Walter Minerals' Morris Mine

  Development   Upper & Lower New Castle, Mary Lee, Blue Creek     1,985     1,985     579     1,406     1,985         249  
                                       

Total(10)

            153,285     153,285     139,600     13,685     8,776     144,509     34,963  
                                       

32



(1)
"Recoverable" reserves are defined as tons of mineable coal which can be extracted and marketed after deduction for coal to be left in pillars, etc. and adjusted for reasonable preparation and handling losses. Resource recovery is estimated at 54% for JWR's No. 4 and No. 7 Mines. For all other mines, recovery is estimated at 82%. Third-party review of our reserve estimates have not been performed for JWR's No. 4 and No. 7 mines.

(2)
"Assigned" reserves represent coal which has been committed to mines, whether operating or in development. "Unassigned" reserves represent coal which is not committed to a mine. The division of reserves into these two categories is based upon current mining plans, projections and techniques. There were no unassigned reserves at December 31, 2009.

(3)
The recoverable reserves (demonstrated resources) are the sum of "Measured" and "Indicated" resources. Measured coal extends 1/4 mile from any point of observation or measurement. Indicated coal is projected to extend from 1/4 mile to 3/4 miles from any point of observation or measurement. Inferred coal extends from 3/4 mile to 3 miles from any point of observation or measurement. Inferred resources are not included in the recoverable reserves. See Glossary for definition of Measured (Proven) and Indicated (Probable) reserves.

(4)
A majority of the leases are either renewable until the reserves are mined to exhaustion or are of sufficient duration to permit mining of all the reserves before the expiration of the term. Leases that expire before mining occurs have been removed from the reserve estimate.

(5)
No. 4 Mine expanded its reserves by acquiring an additional lease encompassing over 7,000 acres in 2008.

(6)
Walter Minerals, Inc. (formerly United Land Corporation) purchased 100% of the stock of TRI effective August 31, 2007.

(7)
Howton Mine closed and production ceased in July 2009.

(8)
Walter Minerals' Inc. (formerly United Land Corporation) purchased 100% of the stock of Taft effective September 2, 2008.

(9)
These active mines are surface mines utilizing drills, excavators, dozers and rock trucks for coal removal. In addition, the Taft Choctaw Mine uses a 47 cubic yard dragline.

(10)
Additional properties that are currently not under lease are under review for possible leasing options.

Note: Also see Glossary for definitions of technical terms.

33


        The following table provides the quality (average ash and sulfur content and Btus per pound) of our recoverable coal reserves as of December 31, 2009:

ESTIMATED RECOVERABLE (1) COAL RESERVES (Continued)
AS OF DECEMBER 31, 2009
(In Thousands of Tons)

 
   
   
   
   
  QUALITY    
 
 
   
   
   
   
  (Wet Basis)    
 
 
   
   
   
  Compliant(8)    
 
 
  Status of
Operation(6)
  Recoverable
Reserves
   
   
  %
Sulfur
   
  Average Coal
Seam (in
Feet)
 
Mine
  Type(1)   Y / N   % Ash   BTU/lb.  

JWR's No. 4 Mine(2,3)

  Operational     62,844     Steam and/or
Metallurgical
  Yes     9.00     0.80     13,909     4.44  

JWR's No. 7 Mine(4,5,7,9)

  Operational     77,568     Steam and/or
Metallurgical
  Yes     9.00     0.65     13,952     4.54  

TRI's East Brookwood Mine

  Operational     699     Steam and/or
Metallurgical
  No     12.04     1.09     12,771     12.60  

TRI's Howton Mine

  Closed         Steam and/or
Metallurgical
  No                  

TRI's Panther 3 Mine

  Idled     289     Steam   No     8.93     1.47     13,636     1.99  

Taft's Choctaw Mine

  Operational     3,646     Steam and/or
Metallurgical
  No     11.77     1.74     13,151     6.18  

Taft's Reid School Mine(6)

  Ready for
Operation
    569     Steam and/or
Metallurgical
  Yes—Black
Creek Only
    3.36     1.13     14,927     4.40  

Taft's Gayosa South Mine(6)

  Development     389     Steam and/or
Metallurgical
  No     14.69     1.32     12,484     4.79  

Walter Minerals' Flat Top Mine(6)

  Ready for
Operation
    2,285     Steam   No     10.89     2.13     13,590     5.80  

Walter Minerals' Highway 59 Mine

  Operational     518     Steam and/or
Metallurgical
  No     8.31     1.09     13,374     8.44  

Walter Minerals' Beltona East Mine(6)

  Development     1,117     Steam and/or
Metallurgical
  Yes—Black
Creek Only
    7.79     2.58     14,162     4.88  

Walter Minerals' Swann's Crossing Mine(6)

  Development     1,376     Steam and/or
Metallurgical
  No     12.57     1.29     12,395     9.51  

Walter Minerals' Morris Mine(6)

  Development     1,985     Steam   No     20.80     1.60     12,175     5.46  
                                             

Total

        153,285                                    
                                             

34



(1)
All of the coal in the Blue Creek, Mary Lee and Black Creek seams is suitable for metallurgical purposes and as a compliance steam coal.

(2)
No. 4 Mine is an underground longwall mine. Production levels are a function of several processes operating simultaneously, each with it's own capacity limitations. Coal production starts at either the longwall face or a miner section face. No. 4 Mine has one longwall unit capable of producing at a rate of 4,000 raw tons per hour at any given instant. In addition, No. 4 Mine has at any time 3 or 4 continuous miner units with each capable of producing at a rate of 33 raw tons per minute. Both the longwall and the continuous miner units load raw coal onto a series of conveyor belts. These belts are capable of hauling from 4,000 raw tons per hour for face belts to 5,000 raw tons per hour for main line belts. The belt conveyors take the raw coal to the production shaft and hoist which is capable of hoisting 1,300 raw tons per hour to the surface storage piles.

(3)
No. 4 Mine has a 1,300 raw ton per hour preparation plant consisting of heavy media baths, spirals, and flotation. There is also a unit train load out facility capable of loading at a rate of 2,400 tons per hour.

(4)
No. 7 Mine is similar in production method and capacity to No. 4 Mine, with the exception of the recent expansion of the mine to increase from one longwall unit to two longwall units and from 3 to 4 continuous miner units to 5 to 6 continuous miner units. Further, a second production hoist has been added.

(5)
No. 7 Mine has two preparation plants. The first one has a capacity to process 1,400 raw tons per hour and the second one has a capacity to process 1,000 raw tons per hour. Both plants consist of cyclones, spirals, and flotation. No. 7 Mine also has two unit train load-outs on separate track loops. Both load-outs are capable of loading 2,400 tons per hour.

(6)
Mines labeled as "ready for operation" will begin production when market conditions permit. Tons at TRI's idled Panther 3 Mine will be mined when market conditions permit. Mines that are labeled as development are undeveloped surface mines that are intended to be fully developed and mined as market conditions permit. No definitive production dates have been identified for these mines.

(7)
The preparation plant at Mine No. 5 (closed December 2006) remains operational and serves as the washing and shipping point for production associated with the Mine No. 7 East expansion project.

(8)
Compliant coal when burned emits 1.2 pounds or less of sulfur dioxide per million Btus as required by Phase II of the Clean Air Act.

(9)
Mine No. 7 East completed an expansion project during 2009 that had originally been announced in 2004. With the addition of a new longwall unit, the new mine area consists of two longwall units and three continuous miner sections, providing incremental annual production capacity of approximately 2.7 million tons. The total investment to develop this additional facility was approximately $180 million. Capital expenditures incurred in 2009 related to this expansion project amounted to approximately $25 million.

Note: Also see Glossary for definitions of technical terms.

        Production and average coal selling price per ton for each of the three years in the period ended December 31, 2009 were as followings (production in thousands):

 
  Production(1) /Average Coal Selling Price per Ton  
Mine
  2009   2008   2007  

JWR's No. 4 Mine

    2,719   $ 125.59     3,188   $ 137.74     3,074   $ 92.39  

JWR's No. 7 Mine

    3,366   $ 126.05     2,854   $ 127.17     2,764   $ 91.88  

TRI's East Brookwood Mine(2)

    539   $ 87.65     529   $ 64.48     172   $ 61.42  

TRI's Howton Mine(2)

    80   $ 86.83     297   $ 66.03     75   $ 62.06  

Taft's Choctaw Mine(3)

    626   $ 58.16     219   $ 64.45     NA     NA  

Walter Minerals Highway 59 Mine (4)

    82   $ 91.79     NA     NA     NA     NA  
                                 

    7,412           7,087           6,085        
                                 

(1)
The production year ends December 31st.

35


(2)
TRI was acquired on August 31, 2007. Production and average coal selling price per ton include activity since the date of acquisition.

(3)
Taft was acquired on September 2, 2008. Production and average coal selling price per ton include activity since the date of acquisition.

(4)
Operations of Walter Minerals' Highway 59 Mine commenced August 2009.

Item 3.    Legal Proceedings

        See the section entitled "Environmental" in Description of Business and Notes 2 and 14 of "Notes to Consolidated Financial Statements" included herein.

Item 4.    Submission of Matters to a Vote of Security Holders

    None

36



PART II

Item 5.    Market for the Registrant's Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities

        Our common stock (the "Common Stock") has been listed on the New York Stock Exchange under the trading symbol "WLT" since December 18, 1997. The table below sets forth, for the fiscal periods indicated, the range of high and low closing sales prices of the Common Stock.

 
  Year ended December 31, 2009  
 
  High   Low  

1st Fiscal quarter

  $ 25.73   $ 15.62  

2nd Fiscal quarter

    37.69     22.14  

3rd Fiscal quarter

    67.21     35.58  

4th Fiscal quarter

    79.14     54.66  

 

 
  Year ended December 31, 2008  
 
  High   Low  

1st Fiscal quarter

  $ 62.90   $ 32.74  

2nd Fiscal quarter

    108.77     64.58  

3rd Fiscal quarter

    109.77     42.09  

4th Fiscal quarter

    45.31     12.20  

        During the year ended December 31, 2009, we declared and paid to shareholders of record on February 20, May 8, August 7 and November 6, a dividend of $0.10 per share as of each of these dates. During the year ended December 31, 2008, we declared and paid a dividend of $0.05 per share to shareholders of record on February 20 and May 9 and declared and paid a dividend of $0.10 per share to shareholders of record on September 12 and November 7. Covenants contained in certain of the debt instruments referred to in Note 10 of "Notes to Consolidated Financial Statements" may restrict the amount the Company can pay in cash dividends. Future dividends will be declared at the discretion of the Board of Directors and will depend on our future earnings, financial condition and other factors affecting dividend policy. As of February 24 2010, there were 98 shareholders of record of the Common Stock.

        The following table sets forth certain information relating to our equity compensation plans as of December 31, 2009:

 
  Number of
Securities to be
Issued upon
Exercise of
Outstanding
Options, Warrants
and Rights
  Weighted
Average Exercise
Price of
Outstanding
Options,
Warrants and
Rights
  Number of
Securities
Remaining
Available for
Future Issuance
 

Equity compensation plans approved by security holders:

                   
   

2002 Long-term Incentive Award Plan

    1,542,377   $ 19.64     2,062,175  
   

1995 Long-term Incentive Stock Plan

    79,412     6.40      
   

1996 Employee Stock Purchase Plan

            1,215,652  

Sales of Unregistered Securities

        None

37


Common Stock Offering

        In June 2008, we completed an offering of 3.2 million shares of our common stock, from which we received $280.5 million of net proceeds. We used these proceeds to repay a portion of the term loan and revolving credit facility borrowings under our Amended 2005 Walter Credit Agreement.

Purchase of Equity Securities by the Company and Affiliated Purchasers

Period
  Total Number of
Shares
Purchased
  Average Price
Paid per Share
Units
  Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
  Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under
the Plans or
Programs (in
millions)(1)(3)(4)
 

January 1, 2009–January 31, 2009

    870,450   $ 21.77     870,450   $ 35.8  

February 1, 2009–February 28, 2009

    516,753 (2) $ 17.89     501,300   $ 26.9  

March 1, 2009–March 31, 2009

    35 (3) $ 21.21       $ 26.9  

April 1, 2009–June 30, 2009

    (4)         $ 26.9  

July 1, 2009–July 31, 2009

              $ 26.9  

August 1, 2009–August 31, 2009

    1,692 (5) $ 55.39       $ 26.9  

September 1, 2009–September 30, 2009. 

    142 (5) $ 55.22       $ 26.9  

October 1, 2009–October 31, 2009

              $ 26.9  

November 1, 2009–November 30, 2009

    78,735   $ 62.39     78,735   $ 21.9  

December 1, 2009–December 31, 2009. 

    20,431   $ 67.34     20,431   $ 20.6  
                       

    1,488,238           1,470,916        
                       

(1)
Our Board of Directors authorized a $100.0 million Common Stock Open Market repurchase program. Purchases are based on liquidity and market conditions.

(2)
In February 2009, we acquired 15,453 shares from employees at an average of price of $17.94 per share. These shares were acquired to satisfy the employees' tax withholding obligations associated with the lapse of restrictions on certain stock awards granted under the 1995 Long-Term Incentive Stock Plan and the 2002 Long-Term Incentive Award Plan. Upon acquisition, these shares were retired.

(3)
In March 2009, we acquired 35 shares from employees at an average price of $21.21 per share. These shares were acquired to satisfy the employees' tax withholding obligations associated with the lapse of restrictions on certain stock awards granted under the 2002 Long-Term Incentive Award Plan. Upon acquisition, these shares were retired.

(4)
No shares were acquired during the second quarter of 2009.

(5)
In August and September 2009, we acquired a total of 1,692 and 142 shares from employees at an average price of $55.39 and $55.22 per share, respectively. These shares were acquired to satisfy the employees' tax withholding obligations associated with the lapse of restrictions on certain stock awards granted under the 2002 Long-Term Incentive Award Plan. Upon acquisition, these shares were retired.

38


Item 6.    Selected Financial Data

        The following data, insofar as it relates to each of the years ended December 31, 2009, 2008, 2007, 2006 and 2005 has been derived from annual consolidated financial statements, including the consolidated balance sheets and the related consolidated statements of operations, changes in stockholders' equity and comprehensive income (loss) and statements of cash flows and the notes thereto as they relate to our continuing operations as of December 31, 2009. The information presented below is for continuing operations only and should be read in conjunction with our consolidated financial statements and the notes thereto including Note 2 related to significant accounting policies, Note 3 related to discontinued operations and acquisitions, and the other information contained elsewhere in this report.

 
  Years ended December 31,  
 
  2009   2008   2007   2006   2005  
 
  (in thousands, except per share data)
 

Net sales and revenues

  $ 966,827   $ 1,149,684   $ 774,795   $ 813,012   $ 687,143  

Income from continuing operations

 
$

141,850
 
$

231,192
 
$

98,227
 
$

130,578
 
$

60,041
 

Basic income per share from continuing operations

 
$

2.67
 
$

4.30
 
$

1.89
 
$

2.97
 
$

1.56
 

Number of shares used in calculation of basic income per share from continuing operations

   
53,076
   
53,791
   
52,016
   
44,030
   
38,485
 

Diluted income per share from continuing operations

 
$

2.64
 
$

4.24
 
$

1.87
 
$

2.57
 
$

1.31
 

Number of shares used in calculation of diluted income per share from continuing operations

   
53,819
   
54,585
   
52,490
   
52,078
   
49,209
 

Capital expenditures

 
$

96,298
 
$

141,627
 
$

147,556
 
$

85,016
 
$

97,054
 

Net property, plant and equipment

 
$

522,931
 
$

504,585
 
$

385,140
 
$

257,902
 
$

207,503
 

Total assets(1)

 
$

1,244,159
 
$

1,195,695
 
$

777,262
 
$

640,315
 
$

470,022
 

Debt:

                               
 

2005 Walter term loan

 
$

137,498
 
$

138,934
 
$

218,517
 
$

248,706
 
$

448,875
 
 

2005 Walter revolving credit facility

 
$

 
$

40,000
 
$

 
$

 
$

 
 

Convertible senior subordinated notes

 
$

 
$

 
$

785
 
$

785
 
$

175,000
 
 

Miscellaneous debt

 
$

39,000
 
$

46,451
 
$

6,558
 
$

—-
 
$

 

Quarterly cash dividend per common share

 
$

0.10
 
$

0.10

(3)

$

0.05

(2)

$

0.04
 
$

0.04
 

(1)
Excludes assets of discontinued operations.

(2)
Raised to $0.05 per common share on February 7, 2007.

(3)
Raised to $0.10 per common share on July 31, 2008.

39


Item 7.    Management's Discussion and Analysis of Results of Operations and Financial Condition and

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

ORGANIZATION

        On April 23, 2009, we changed our name from Walter Industries, Inc. to Walter Energy, Inc. ("Walter"). We are a leading U.S. producer and exporter of premium hard coking coal for the global steel industry (Underground Mining), operate surface mines for the steam coal and industrial coal markets (Surface Mining) and produce metallurgical coke (Walter Coke). In December 2008, we announced the closure of our Homebuilding segment and on April 17, 2009, we spun off our Financing segment, creating Walter Investment Management Corp., a publicly-traded real estate investment trust. As a result of the closure and spin-off, amounts previously reported in those segments are presented as discontinued operations for all periods presented. See further discussion in Note 3 of "Notes to Consolidated Financial Statements." These actions have completed the transformation of Walter Industries, Inc. from a diversified corporation to a pure play natural resources and energy company, now renamed Walter Energy, Inc. Unless otherwise noted, this "Management's Discussion and Analysis of Results of Operations and Financial Condition" addresses our continuing operations only.

        Prior to 2009, our underground and surface coal mining operations were reported together as the Natural Resources segment. Beginning in 2009, we revised our reportable segments to separate the Natural Resources segment into Underground Mining and Surface Mining. Underground Mining includes our underground hard coking coal operations from the No. 4 and No. 7 mines and its natural gas operations. Surface Mining includes our surface coal mining operations for Tuscaloosa Resources, Inc. ("TRI") and Taft Coal Sales & Associates, Inc. ("Taft") as well as Walter Minerals, Inc. (formerly known as United Land Corporation) results. In addition, during 2009 we changed the name of our metallurgical coke manufacturer from Sloss Industries Corporation to Walter Coke, Inc. Previous years' information has been revised to align with the new segment reporting structure and reflect all name changes.

EXECUTIVE DISCUSSION

        Our key accomplishments in 2009 include:

    We completed the transformation of the Company from a diversified conglomerate into a pure play natural resources and energy company.

    The spin-off of Walter Investment Management Corp. represented approximately $150 million in value distributed to our shareholders.

    At our Underground Mining segment, we completed mining our Southwest "A" panel in mid-December, and began production in the first longwall panel at our Mine No. 7 East expansion. This 5-year, $180 million expansion is expected to increase our annual capacity for premium coking coal to up to 9.5 million tons in 2012. The expansion also makes our No. 7 Mine the largest metallurgical coal mine in North America.

    Our Surface Mining segment generated solid cash flow in a challenging market.

    On a normalized basis, excluding the fiber plant closure charges, Walter Coke was profitable in 2009 despite an unprecedented decline in domestic steel capacity utilization.

    We paid more than $21 million in regular dividends to our shareholders and also repurchased $34 million in stock.

        Overall, we were very pleased with our performance in 2009. But more importantly, based on our current expectations we are looking forward to significant revenue and income growth in 2010, led by

40



increased hard coking coal production and higher prices. In addition, we're very well positioned to capitalize on opportunities to grow the Company and add significant value for our shareholders.

        Seaborne coking coal demand, which declined to about 210 million tons in 2009, is expected to rebound to about 240 million tons in 2010. China will continue to be a key driver, with coking coal imports continuing at a strong pace in 2010. Other Pacific Basin countries are also expected to grow strongly.

        Because of demand in Asia, some metallurgical coal supply from Australia, Canada and the U.S. that normally would have moved into the Atlantic Basin will likely be diverted to the Pacific Basin. Recent increases in commitments of coal out of the U.S are examples of this trend, which will add to the pressure on supply into our strategic markets of Europe and South America. We also see a rebound in these regions, with 2010 metallurgical coal imports expected to increase 15 percent in Europe and 7 percent in South America.

        Our 2009 performance, discussed in more detail below, demonstrates how well our business performs through a difficult cycle and affirms our confidence as the global steel industry improves. We're looking forward to an outstanding 2010 and expect significant organic revenue and income growth and corresponding increases in cash flow. We plan to use our expected strong 2010 financial performance as a platform for continued growth. We are encouraged by the number and quality of projects in our strategic pipeline. In addition, we have been consistently repurchasing our shares, with almost 1.5 million shares repurchased in 2009 at an average price of $23.26 per share, including about 100,000 shares in the fourth quarter at an average price of $63.41, and another 69,679 shares so far in 2010 at an average price of $67.26.

        Regarding 2010, our planned 8.0 million short tons sales volume within our Underground Mining Segment equates to 7.2 million metric tons, of which 3.0 million metric tons are contracted at an average price of $189.00 per metric ton. The remaining 4.2 million metric tons are open to pricing in an extremely strong market.

        Looking beyond 2010, we expect continued growth in metallurgical coal demand globally, with imports possibly reaching 275 million tons or more over the next three years. This outlook includes a compound annual growth rate of almost 10 percent in demand in both of our current core business areas of South America and Europe.

        This strong market environment emphasizes Walter Energy's investment considerations and growth prospects:

    With our Mine No. 7 East Expansion complete and operating, we have already grown our metallurgical coal franchise and expect coking coal production capacity to reach up to 9.5 million tons in 2012.

    Our coking coal product is among the highest qualities in the world. Our low- and mid-vol coals possess the chemical and physical characteristics, including high coke strength and good fluidity, that steel producers prefer.

    Our strategic market areas of Europe and South America, where we have meaningful transportation advantages, remain important but we will continue to explore opportunities outside of our traditional distribution footprint.

    We believe that demand for high quality, hard coking coals, will continue to grow and that these raw materials will continue to grow in scarcity, particularly for the highest-grade coals, such as ours.

41


RESULTS OF CONTINUING OPERATIONS

2009 Summary Operating Results

 
  For the Year Ended December 31, 2009  
(in thousands)
  Underground
Mining
  Surface
Mining
  Walter
Coke
  Other   Cons
Elims
  Total  

Net sales

  $ 782,527   $ 95,484   $ 100,669   $ 584   $ (23,756 ) $ 955,508  

Miscellaneous income

    4,798     4,072     564     1,885         11,319  
                           
 

Net sales and revenues

    787,325     99,556     101,233     2,469     (23,756 )   966,827  

Cost of sales (exclusive of depreciation)

    464,325     61,851     85,050     (412 )   (24,040 )   586,774  

Depreciation

    59,393     8,574     4,566     406           72,939  

Selling, general & administrative

    23,219     4,409     9,881     32,630     (76 )   70,063  

Postretirement benefits

    32,199     230     (527 )   (1,069 )         30,833  

Amortization of intangibles

          447                       447  

Restructuring & impairment charges

            3,601             3,601  
                           
 

Operating income (loss)

  $ 208,189   $ 24,045   $ (1,338 ) $ (29,086 ) $ 360     202,170  
                             
 

Less: Interest expense, net

                                  18,176  
 

Less: Income tax expense

                                  42,144  
                                     
   

Income from continuing operations

                                $ 141,850  
                                     

 

 
  For the Year Ended December 31, 2008  
(in thousands)
  Underground
Mining
  Surface
Mining
  Walter
Coke
  Other   Cons
Elims
  Total  

Net sales

  $ 902,268   $ 70,221   $ 205,398   $ 1,602   $ (43,744 ) $ 1,135,745  

Miscellaneous income

    8,799     2,490     832     1,822     (4 )   13,939  
                           
 

Net sales and revenues

    911,067     72,711     206,230     3,424     (43,748 )   1,149,684  

Cost of sales (exclusive of depreciation)

    490,757     51,373     128,653     (681 )   (41,777 )   628,325  

Depreciation

    43,149     8,327     4,152     914         56,542  

Selling, general & administrative

    19,942     3,769     13,398     26,942     (657 )   63,394  

Postretirement benefits

    29,148     (20 )   (645 )   (926 )       27,557  

Amortization of intangibles

        273                 273  

Restructuring & impairment charges

        32,386                     32,386  
                           
 

Operating income (loss)

  $ 328,071   $ (23,397 ) $ 60,672   $ (22,825 ) $ (1,314 )   341,207  
                             
 

Less: Interest expense, net

                                  8,418  
 

Less: Income tax expense

                                  101,597  
                                     
   

Income from continuing operations

                                $ 231,192  
                                     

42



 
  Increase (Decrease) for the Year Ended December 31, 2009  
(in thousands)
  Underground
Mining
  Surface
Mining
  Walter
Coke
  Other   Cons
Elims
  Total  

Net sales

  $ (119,741 ) $ 25,263   $ (104,729 ) $ (1,018 ) $ 19,988   $ (180,237 )

Miscellaneous income

    (4,001 )   1,582     (268 )   63     4     (2,620 )
                           
 

Net sales and revenues

    (123,742 )   26,845     (104,997 )   (955 )   19,992     (182,857 )

Cost of sales (exclusive of depreciation)

    (26,432 )   10,478     (43,603 )   269     17,737     (41,551 )

Depreciation

    16,244     247     414     (508 )       16,397  

Selling, general & administrative

    3,277     640     (3,517 )   5,688     581     6,669  

Postretirement benefits

    3,051     250     118     (143 )       3,276  

Amortization of intangibles

        174                 174  

Restructuring & impairment charges

        (32,386 )   3,601             (28,785 )
                           
 

Operating income (loss)

  $ (119,882 ) $ 47,442   $ (62,010 ) $ (6,261 ) $ 1,674     (139,037 )
                             
 

Less: (Increase) decrease in interest expense, net

                                  (9,758 )
 

Less: (Increase) decrease in income tax expense

                                  59,453  
                                     
   

Income from continuing operations

                                $ (89,342 )
                                     

Year Ended December 31, 2009 as Compared to the Year Ended December 31, 2008

Overview of Consolidated Financial Results

        Our income from continuing operations for the year ended December 31, 2009 was $141.9 million or $2.64 per diluted share, which compares to $231.2 million, or $4.24 per diluted share for the year ended December 31, 2008.

        Principal factors impacting income from continuing operations in 2009 compared to 2008 include:

    Net sales and revenues in 2009 decreased $182.9 million, or 15.9% from 2008. Approximately 52% of the decrease is attributed to lower metallurgical coke pricing and volumes from our Walter Coke segment, while the remainder is primarily due to lower coking coal pricing and volumes from our Underground Mining segment. Metallurgical coke pricing and volumes were down in 2009 primarily due to weak demand in the domestic steel market. The decrease in coking coal sales volumes was due to lower sales of purchased coal.

    Cost of sales, exclusive of depreciation, decreased $41.6 million in 2009 compared to 2008. Cost of sales represented 60.7% of net sales and revenues in 2009, up from 54.7% in 2008. For the most part, cost of sales dollars decreased in line with the decrease in net sales. However, the effect of lower average pricing at Underground Mining and Walter Coke contributed to the increase in cost of sales as a percentage of net sales.

    Depreciation expense in 2009 increased $16.4 million compared to 2008. The increase was primarily due to our continued investment in the expansion of Underground Mining's mine operations.

    Selling, general and administrative expenses increased $6.7 million, or 10.5%, from 2008 primarily due to expenditures for our transformation strategy and planned relocation of the Company's headquarters to Birmingham, AL.

43


    Restructuring and impairment charges in 2009 includes $3.6 million for the closure of Walter Coke's fiber plant in December 2009, while 2008 includes a charge of $32.4 million related to the impairment in the value of Taft's mineral interests as of December 31, 2008.

    Operating income is $202.2 million in 2009, down $139.0 million versus 2008, primarily due to lower coking coal, metallurgical coke and natural gas pricing and lower metallurgical coke volumes, with lower pricing of these products making up 55 percent of the decrease in operating income.

    Net interest expense increased $9.8 million in 2009 from 2008, primarily as a result of $17.1 million of interest income that was included in 2008, which did not recur in 2009, for a Black Lung Excise Tax refund claim. The total amount of the claim recorded in 2008 was $26.9 million. Of this amount, $23.2 million was received in 2009. The effect of this item was partially offset by the effect of a reduction in both the weighted average borrowings and the weighted average interest rate in 2009 as compared to 2008.

    Our effective tax rate for 2009 and 2008 was 22.9% and 30.5%, respectively. Our 2009 effective tax rate is lower than 2008 primarily due to a permanent tax benefit of $6.7 million recognized in 2009 for non-taxable OPEB Medicare Part D subsidies and a $3.8 million net tax benefit recognized in 2009 relating to a change in the effective state tax rate. Excluding these items, the effective tax rate in 2009 would have been 28.7%. Both the 2009 and 2008 effective tax rates differ from the federal statutory rate primarily due to the benefit of percentage depletion deductions.

Outlook for Our Operating Segments

        In addition to the general overview discussions above, the following discussion provides specific operating and forward-looking information regarding each of our operating segments.

Underground Mining

    We produced and sold approximately 6.0 million tons of hard coking coal in 2009, compared to 5.8 million tons in 2008, despite historic lows in global steel capacity utilization. 2010 coking coal sales are expected to total approximately 8.0 million tons. The growth in coking coal sales volume is expected to be derived from additional production from the start-up of longwall operations at Mine No. 7 East, purchased coal and coal available in inventory.

    We recently concluded settlement of our remaining 2008-2009 carryover tons priced at approximately $315.00 per metric ton and expect to deliver 1.1 million short tons in 2010 and 0.2 million short tons in the first quarter of 2011. Coking coal sales committed and priced for 2010 are projected as follows:

      Coking Coal Sales Committed and Priced (short tons in millions):

 
  Q1
2010E
  Q2
2010E
  Q3
2010E
  Q4
2010E
 

2008-2009 Carryover Tons

    0.2     0.3     0.4     0.2  

2009-2010 Contract Tons

    1.5-1.7     0.5-0.7     NA     NA  
    Pricing on all 2008-2009 carryover tons is at original contract of approximately $315.00 per metric ton FOB Port (approximately $286.00 per short ton FOB Port). Pricing on the 2009-2010 benchmark tons is at approximately $129.00 per metric ton FOB Port (approximately $117.00 per short ton FOB Port). The remainder of forecasted coking coal sales volume for 2010 is unpriced. Given the current market environment, we expect to achieve record average realized pricing in 2010.

44


    In the fourth quarter of 2009, we sold 1.4 million short tons at an operating income of $30.50 per ton. Our sales volume expectation for the first quarter of 2010 ranges from 1.7 million to 1.9 million tons and our forecasted first quarter operating income per ton ranges from $32.00 to $40.00. The fourth quarter 2009 includes 0.1 million tons at 2008-2009 carryover pricing of approximately $315.00 per metric ton, while the first quarter 2010 forecast includes 0.2 million tons at this carryover pricing.

    With our Mine No. 7 East Expansion longwall in full operation, as noted above, our overall hard coking coal production is expected to total 1.7 to 1.8 million tons in the 2010 first quarter, with costs averaging between $55.00 and $60.00 per ton. Two longwall moves in the first quarter will result in slightly lower production volumes and a slightly higher cost per ton compared to our full-year 2010 cost projection of $50.00 to $55.00 per ton. Due to slower than planned development rates on the replacement North longwall panel at Mine No. 7, startup of the next panel will have an extended 45-day delay between the first and second quarters of 2010. We expect total hard coking coal production tons for the second quarter to be between 1.8 and 1.9 million tons at a cost of $50.00 to $55.00 per ton.

    We expect to increase coking coal production to between 8.5 and 9.0 million tons in 2011 and between 9.0 and 9.5 million tons in 2012.

    Transportation and handling costs on metallurgical coal sales are expected to remain consistent in the first quarter of 2010 as compared to 2009, at an average of $14.00 to $15.00 per ton. Royalty expenses were 5.4% of hard coking coal revenues in 2009, but are expected to return to our normal average of 7.0% to 8.0% of hard coking coal revenues in 2010 now that production for Mine No. 7's Southwest A panel has been completed.

    Our natural gas business sold 6.1 billion cubic feet of natural gas at an average price of $4.27 per thousand cubic feet in 2009 versus 6.6 billion cubic feet at $8.39 per thousand cubic feet in 2008. Pricing forecasts for 2010 have recently strengthened. In October 2009, we hedged the sale of approximately 24% of our full year 2010 production, or 1.5 bcf, at $6.20 per thousand cubic feet.

    We will continue to evaluate expansion opportunities, potential acquisitions and further investments in coal and natural gas.

Surface Mining

    During 2009, our surface mining operations sold 1.2 million tons of steam and industrial coal at an average selling price of $76.20 per ton, as compared to 1.1 million tons at an average selling price of $64.96 per ton in 2008. Results in 2009 benefited from a full year of production from Taft, which was acquired in September 2008, as well as increased pricing at TRI on new contracts that began in January 2009.

    In the fourth quarter of 2009, we sold 326,000 tons at an average operating income of $18.59 per ton. In the first quarter of 2010, we expect to sell between 315,000 and 350,000 tons at an average operating income per ton of between $15.00 and $20.00.

    We expect Surface Mining to produce and sell 1.3 to 1.4 million tons in 2010, with all expected sales volumes priced. Operating results for 2010 are expected to remain consistent with the results in 2009.

Walter Coke

    Walter Coke sold 200,241 tons of metallurgical coke at an average price of $328.85 per ton in 2009. In 2008, we sold 409,457 tons at an average price of $393.66 per ton. The decline in

45


      average selling price and sales volume reflect lower domestic steel capacity utilization in 2009 versus 2008.

    Coke sales in the fourth quarter of 2009 were 88,317 tons at an average operating income of $50.08 per ton. This operating income per ton excludes $4.5 million of pre-tax charges for the December 2009 closure of Walter Coke's fiber plant. First quarter 2010 coke sales are expected to be between 125,000 and 135,000 tons at an average operating margin per ton of between $44.00 and $49.00.

    Production has increased during the year from a low of 40 coking ovens per day to 100 coking ovens per day by the end of 2009, and we expect to return to full production of approximately 120 ovens per day by April 2010. We expect 2010 sales to be between 380,000 and 400,000 tons. Pricing beyond the first quarter 2010 for furnace coke remains uncertain and is subject to negotiation.

        The current and prior year period results also include the impact of the factors discussed in the following segment analysis.

Segment Analysis

Underground Mining

        Underground Mining's revenues decreased $123.8 million to $787.3 million in 2009 from $911.1 million in 2008. Approximately 31% of the decrease was due to lower average selling prices of coking coal, while 26% of the decrease was due to lower coking coal volumes. Lower natural gas pricing resulted in a $25.2 million decrease in revenues, or approximately 20% of the total decrease.

 
  For the years ended
December 31,
 
 
  2009   2008  

Average coal selling price per ton at the port

  $ 124.64   $ 130.95  

Tons of coal sold (in thousands)

    6,084     6,334  

Average hedged natural gas selling price (per mcf)

  $ 4.27   $ 8.39  

Billion cubic feet of natural gas sold

    6.1     6.6  

Number of natural gas wells

    391     442  

        Underground Mining reported a decrease in operating income of $119.9 million in 2009, compared to 2008. Approximately 53% of the decrease in operating income is attributable to decreased pricing of coking coal and natural gas. Lower coking coal volumes, increased labor costs and depreciation expense contributed to the remainder of the decrease in operating income.

Surface Mining

        Surface Mining reported a revenue increase of $26.8 million in 2009 compared to 2008. More than 50% of the increase in revenues is due to an increase in the average coal selling price at TRI, while the remainder is due to volume increases, primarily related to the acquisition of Taft in September 2008. Statistics for Surface Mining are presented in the following table:

 
  For the years ended
December 31,
 
 
  2009   2008  

Average coal selling price per ton

  $ 76.20   $ 64.96  

Tons of coal sold (in thousands)

    1,234     1,069  

46


        Surface Mining reported operating income of $24.0 million in 2009 versus an operating loss of $23.4 million in 2008. The 2008 results include a $32.4 million impairment charge related to a decline in value of Taft's mineral interests as of December 31, 2008. Excluding this charge, operating income in 2008 was $9.0 million. The $15.0 million improvement in 2009 operating income from 2008 is almost entirely due to an increase in average coal selling prices.

Walter Coke

        Walter Coke's revenues decreased $105.0 million in 2009, compared to 2008, due to decreased customer demand in the weak domestic steel market. Approximately 91% of the decrease in revenues is due to lower volumes, with the remainder due to a decrease in metallurgical coke selling price as indicated in the table below:

 
  For the years ended
December 31,
 
 
  2009   2008  

Metallurgical coke average selling price per ton

  $ 328.85   $ 393.66  

Metallurgical coke tons sold

    200,241     409,457  

        Walter Coke's operating loss was $1.3 million in 2009 compared to an operating profit of $60.7 million in 2008. Approximately 72% of the decline in operating results is due to lower volumes, while approximately 15% is due to lower average selling prices. In addition, Walter Coke recorded a $3.6 million restructuring and impairment charge and $0.9 million of inventory write-downs in the fourth quarter 2009 related to the closure of Walter Coke's fiber plant.

2008 Summary Operating Results

 
  For the Year Ended December 31, 2008  
(in thousands)
  Underground
Mining
  Surface
Mining
  Walter
Coke
  Other   Cons
Elims
  Total  

Net sales

  $ 902,268   $ 70,221   $ 205,398   $ 1,602   $ (43,744 ) $ 1,135,745  

Miscellaneous income

    8,799     2,490     832     1,822     (4 )   13,939  
                           
 

Net sales and revenues

    911,067     72,711     206,230     3,424     (43,748 )   1,149,684  

Cost of sales (exclusive of depreciation)

    490,757     51,373     128,653     (681 )   (41,777 )   628,325  

Depreciation

    43,149     8,327     4,152     914         56,542  

Selling, general & administrative

    19,942     3,769     13,398     26,942     (657 )   63,394  

Postretirement benefits

    29,148     (20 )   (645 )   (926 )       27,557  

Amortization of intangibles

        273                 273  

Restructuring & impairment charges

        32,386                 32,386  
                           
 

Operating income (loss)

  $ 328,071   $ (23,397 ) $ 60,672   $ (22,825 ) $ (1,314 )   341,207  
                             
 

Less: Interest expense, net

                                  8,418  
 

Less: Income tax expense

                                  101,597  
                                     
   

Income from continuing operations

                                $ 231,192  
                                     

47


 
  For the Year Ended December 31, 2007  
(in thousands)
  Underground
Mining
  Surface
Mining
  Walter
Coke
  Other   Cons
Elims
  Total  

Net sales

  $ 593,628   $ 18,987   $ 134,279   $ 2,314   $ (3,972 ) $ 745,236  

Miscellaneous income

    21,292     7,021     639     1,823     (1,216 )   29,559  
                           
 

Net sales and revenues

    614,920     26,008     134,918     4,137     (5,188 )   774,795  

Cost of sales (exclusive of depreciation)

    376,541     14,960     110,659     (140 )   (5,736 )   496,284  

Depreciation

    33,157     1,222     3,822     966     67     39,234  

Selling, general & administrative

    17,344     2,248     9,440     23,855     2,295     55,182  

Postretirement benefits

    29,599     (15 )   (864 )   (970 )       27,750  

Amortization of intangibles

        351                 351  

Restructuring & impairment charges

                         
                           
 

Operating income (loss)

  $ 158,279   $ 7,242   $ 11,861   $ (19,574 ) $ (1,814 )   155,994  
                             
 

Less: Interest expense, net

                                  16,285  
 

Less: Income tax expense

                                  41,482  
                                     
   

Income from continuing operations

                                $ 98,227  
                                     

 

 
  Increase (Decrease) for the Year Ended December 31, 2008  
(in thousands)
  Underground
Mining
  Surface
Mining
  Walter
Coke
  Other   Cons
Elims
  Total  

Net sales

  $ 308,640   $ 51,234   $ 71,119   $ (712 ) $ (39,772 ) $ 390,509  

Miscellaneous income

    (12,493 )   (4,531 )   193     (1 )   1,212     (15,620 )
                           
 

Net sales and revenues

    296,147     46,703     71,312     (713 )   (38,560 )   374,889  

Cost of sales (exclusive of depreciation)

    114,216     36,413     17,994     (541 )   (36,041 )   132,041  

Depreciation

    9,992     7,105     330     (52 )   (67 )   17,308  

Selling, general & administrative

    2,598     1,521     3,958     3,087     (2,952 )   8,212  

Postretirement benefits

    (451 )   (5 )   219     44         (193 )

Amortization of intangibles

        (78 )               (78 )

Restructuring & impairment charges

        32,386                 32,386  
                           
 

Operating income (loss)

  $ 169,792   $ (30,639 ) $ 48,811   $ (3,251 ) $ 500     185,213  
                             
 

Less: (Increase) decrease in interest expense, net

                                  7,867  
 

Less: (Increase) decrease in income tax expense

                                  (60,115 )
                                     
   

Income from continuing operations

                                $ 132,965  
                                     

Year Ended December 31, 2008 as Compared to the Year Ended December 31, 2007

Overview of Consolidated Financial Results

        Our income from continuing operations for the year ended December 31, 2008 was $231.2 million or $4.24 per diluted share, which compares to $98.2 million, or $1.87 per diluted share in 2007.

        Principal factors impacting income from continuing operations in 2008 compared to 2007 include:

    Net sales and revenues from continuing operations for the year ended December 31, 2008 increased $374.9 million, or 48.4% from 2007. Of this increase, 79% was due to increased revenues at Underground Mining, primarily from increased average coking coal selling prices in 2008. The remainder was attributed to increased selling prices at Walter Coke and revenues

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      generated from Surface Mining. Surface Mining results in 2008 include a full year for TRI, which was acquired in September 2007, and four months from Taft, which was acquired in September 2008.

    Cost of sales, exclusive of depreciation, for 2008 increased $132.0 million from 2007. Cost of sales as a percentage of net sales and revenues decreased from 64.1% in 2007 to 54.7% in 2008 primarily due to the effect of increases in metallurgical coal and coke pricing which significantly exceeded the effect of increased costs at Underground Mining and Walter Coke, respectively.

    Operating income was $341.2 million in 2008, a $185.2 million increase from 2007. The majority of the increase was due to increased selling prices for both metallurgical coal and coke in 2008, the effect of which was partially offset by a $32.4 million impairment of the value of Taft's mineral interests in 2008.

    Our effective tax rate for continuing operations in 2008 and 2007 was 30.5% and 29.7%, respectively. Both years' rates are lower than the statutory rate due to the benefit of percentage depletion deductions. The results of discontinued operations in 2008 includes a tax benefit of $167.0 million from the deemed liquidation for income tax purposes of Homebuilding resulting from the decision to close this business.

        The current and prior year results also include the impact of the factors discussed in the following segment analysis.

Segment Analysis

Underground Mining

        Underground Mining reported revenues of $911.1 million in 2008, an increase of $296.2 million from $614.9 million in 2007. Approximately 83% of the increase in revenues was attributable to increased coking coal pricing. Increased volumes of coking coal contributed to approximately 11% of the increase.

 
  For the years ended
December 31,
 
 
  2008   2007  

Average coal selling price per ton at the port

  $ 130.95   $ 92.21  

Tons of coal sold (in thousands)

    6,334     5,991  

Average hedged natural gas selling price (per mcf)

  $ 8.39   $ 7.81  

Billion cubic feet of natural gas sold

    6.6     7.2  

Number of natural gas wells

    442     408  

        For 2008, Underground Mining's operating income was $328.1 million, compared to operating income of $158.3 million in 2007. Results in 2008 benefited from the effect of record metallurgical coal pricing, which was partially offset by higher production costs. Production costs per ton for 2008 were higher than 2007 due to inflationary increases in labor and materials as well as a higher mix of continuous miner tons versus longwall tons. In addition, 2008 operating income benefited from a 5% increase in production over the prior year but decreased due to higher depreciation expense.

Surface Mining

        Surface Mining reported revenues of $72.7 million in 2008 compared to $26.0 million in 2007. Of the $46.7 million increase, $34.8 million is due to an additional eight months of revenues generated by TRI in 2008 versus 2007, resulting from the September 2007 acquisition of TRI, and $13.8 million of the increase is due to the September 2008 acquisition of Taft. Partially offsetting these items is a slight

49



decrease in revenues at TRI due to lower average selling prices in 2008 compared to 2007. Statistics for Surface Mining are presented in the following table:

 
  For the years ended
December 31,
 
 
  2008   2007  

Average coal selling price per ton

  $ 64.96   $ 69.72  

Tons of coal sold (in thousands)

    1,069     247  

        Surface Mining reported an operating loss of $23.4 million in 2008 versus operating income of $7.2 million in 2007. The results in 2008 include a $32.4 million impairment charge related to the decline in value of Taft's mineral interests as of December 31, 2008. See "Critical Accounting Estimates" for additional discussion of this impairment charge. Excluding this charge, operating income in 2008 was $9.0 million, or a $1.8 million improvement in 2008 as compared to 2007. The 2008 improvement in operating income is due to the addition of Taft and a full year of operating income at TRI. The increase from these subsidiaries was partially offset by the effect of a gain on the sale of land at Walter Minerals in 2007 that did not recur in 2008.

Walter Coke

        Net sales and revenues were $206.2 million for 2008, an increase of $71.3 million compared to 2007. This increase in revenues is due to an increase in metallurgical coke pricing as shown in the table below, which more than offset a slight decrease in tons sold.

 
  For the years ended
December 31,
 
 
  2008   2007  

Metallurgical coke tons sold

    409,457     430,887  

Metallurgical coke average selling price per ton

  $ 393.66   $ 223.08  

        Walter Coke reported operating income of $60.7 million for the year ended December 31, 2008 compared to $11.9 million in 2007, an increase of $48.8 million. Most of the increase results from the increase in metallurgical coke pricing, partially offset by higher raw material coal cost and a $2.4 million charge related to the resolution of a legal matter.

FINANCIAL CONDITION

        Cash and cash equivalents increased by $49.2 million from $116.1 million at December 31, 2008 to $165.3 million at December 31, 2009 reflecting $284.0 million in cash flows provided by operating activities, partially offset by $93.0 million of cash flows used in investing activities and $147.1 million of cash flows used in financing activities. See additional discussion in the Statement of Cash Flows section that follows.

        Net receivables were $70.5 million at December 31, 2009, a decrease of $69.9 million from December 31, 2008 primarily attributable to lower sales at Underground Mining in the fourth quarter of 2009 as compared to the fourth quarter of 2008. Also, net receivables declined $23.2 million due to the 2009 cash receipt of a Black Lung Excise Tax refund claim, which was recorded in December 2008.

        Inventories were $99.3 million at December 31, 2009, an increase of $24.1 million from December 31, 2008 primarily due to increased inventories at Surface Mining and Walter Coke, as production at these segments exceeded shipments in 2009.

        The current portion of our net deferred income tax asset was $110.6 million at December 31, 2009, an increase of $25.9 million from December 31, 2008, primarily due to an increase in the expected utilization of our net operating loss carryforward during the next twelve months.

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        Accounts payable decreased $16.3 million from $60.5 million at December 31, 2008 to $44.2 million at December 31, 2009 primarily due to lower freight payables at Underground Mining and lower raw material purchases at Walter Coke due to reduced activity.

        Accrued expenses decreased $18.2 million from $57.2 million at December 31, 2008 to $39.0 million at December 31, 2009 primarily due to lower workers compensation liabilities, lower state tax liabilities and lower litigation-related claims liabilities.

        Long-term debt decreased $48.8 million from $211.9 million at December 31, 2008 to $163.1 million at December 31, 2009 primarily due to $40.0 million in payments made on our revolving line of credit during 2009.

        The long-term portion of the accumulated postretirement benefits obligation was $429.1 million at December 31, 2009, up $79.9 million from $349.2 million at December 31, 2008 due to an increase in the number of inactive participants, a decrease in the discount rate, an increase in the medical trend assumption, a change in the mortality assumptions and unfavorable claims experience for the United Mine Workers of America postretirement benefit plan, all of which caused an $87.9 million actuarially-determined increase to the liability as of December 31, 2009. This adjustment is recognized as a decrease to stockholders' equity.

LIQUIDITY AND CAPITAL RESOURCES

Overview

        Our principal sources of short-term funding are our existing cash balances, operating cash flows and borrowings under our revolving credit facility. Our principal source of long-term funding is our bank term loan. As of December 31, 2009, total debt decreased $48.9 million as compared to December 31, 2008. See discussion below and Note 10 of "Notes to Consolidated Financial Statements."

        We believe that, based on current forecasts and anticipated market conditions, operating cash flows and available sources of liquidity will be sufficient to meet substantially all operating needs, to make planned capital expenditures and to make all required interest and principal payments on indebtedness for the next twelve to eighteen months. However, our operating cash flows and liquidity are significantly influenced by numerous factors, including prices and sales of coal and natural gas, coal production, costs of raw materials, interest rates and the general economy. Although markets have generally improved during the second half of 2009, there remains uncertainty in the financial markets, less availability and higher relative costs of credit. While we have no indication that the uncertainty in the financial markets would impact our current credit facility or our current credit providers, the possibility does exist.

2005 Walter Credit Agreement

        In 2005, we entered into a $675.0 million credit agreement ("2005 Walter Credit Agreement") which included, prior to its amendments, (1) an amortizing term loan facility with an initial aggregate principal amount of $450.0 million, $137.5 million and $138.9 million of which was outstanding as of December 31, 2009 and 2008 with weighted average interest rates of 2.49% and 3.59% respectively, and (2) an initial $225.0 million revolving credit facility ("Revolver") which provides for loans and letters of credit. Our obligations under the 2005 Walter Credit Agreement ("Credit Agreement") are secured by substantially all of our and our guarantors' real, personal and intellectual property, and our ownership interest in the guarantors. Under the Credit Agreement, we are allowed to pay dividends and repurchase our own capital stock up to a maximum of $25 million plus 50% of consolidated net income from the immediately preceding year, provided that after such dividend and/or stock purchase, the remaining amount available to be drawn under the Revolver is at least $50.0 million. The term loan

51



requires quarterly principal payments of $0.4 million through October 3, 2012, at which time the remaining outstanding principal is due.

        In 2008, we amended the Credit Agreement to increase the Revolver to $475.0 million. Available funds of $214.8 million were used to repay principal, interest and fees and terminate certain debt related to our Financing business prior to its spin-off. The amendment also increased the interest rate on the Revolver and the term loan to as much as LIBOR plus 300 basis points. The commitment fee on the unused portion of the Revolver also increased from 0.375% per year to 0.5% per year. In addition, the amended 2005 Walter Credit Agreement contained a reducing revolver commitment feature, where the total available revolver commitment would not exceed $400.0 million at March 31, 2009, $350.0 million at June 30, 2009, $300.0 million at September 30, 2009, and $250.0 million at December 31, 2009.

        Certain other terms, including affirmative and negative covenants as well as restrictions on our ability to engage in specified activities, were also amended, and included, but were not limited to, increased indebtedness and approval of certain activities associated with our strategic initiatives in businesses that are now discontinued.

        In connection with the 2008 amendment to the Credit Agreement, we incurred $3.9 million of refinancing fees. These fees were deferred and are being amortized over the remaining life of the Revolver.

        During 2008, we borrowed $340.0 million under the Revolver. On June 16, 2008, we completed an offering of shares of our common stock and received $280.5 million of net proceeds, as more fully discussed in Note 12. The net proceeds from the offering were used to repay $77.9 million on the outstanding term loan and $202.5 million on the Revolver. Additional repayments during 2008 totaled $97.5 million, leaving a Revolver balance of $40.0 million at December 31, 2008. This remaining balance was repaid during 2009.

        Under the terms of our amended Credit Agreement, availability under the Revolver was reduced from $475.0 million to $373.8 million in connection with the completion of the stock offering. In connection with the repayments discussed above, we recognized additional amortization of $3.1 million of previously deferred financing fees, which was included in interest expense in the 2008 statement of operations.

        In 2009 we amended the Credit Agreement to extend the maturity date of the Revolver from October 4, 2010 to July 2, 2012 and amend the size of the Revolver to $300.0 million that, subject to certain conditions, can be increased to $425.0 million. The amendment also increases the interest rate on the Revolver by 100 basis points to as much as LIBOR plus 400 basis points. The commitment fee on the unused portion of the Revolver was set at 0.5% per year for all pricing levels compared to a range of 0.4% to 0.5% per year prior to the change. In addition, certain financial covenants in the Credit Agreement were eliminated. The amendment did not affect the term loan portion of the Credit Agreement.

        As of December 31, 2009, the term loan currently bears interest at LIBOR plus 225 basis points. As of December 31, 2009, we had $63.7 million in outstanding stand-by letters of credit, of which $15.7 million relates to the support letter of credit discussed in Note 3 of "Notes to Consolidated Financial Statements", $0.0 Revolver borrowings, and $236.3 million of availability for future borrowings under the Revolver.

Other Debt

        In October 2008, we entered into a $32.3 million equipment financing arrangement for certain previously procured mining equipment. This facility requires monthly payments using a commercial mortgage style amortization, carries an interest rate of 1-month LIBOR plus 375 basis points, will

52



mature in the first quarter of 2014 and is secured by the financed equipment. At December 31, 2009, there was $26.6 million outstanding at a stated interest rate of 3.98%. In addition, in 2008, we entered into a $9.4 million capital lease arrangement to procure certain mining equipment. The capital lease covers a sixty month period and has an implicit fixed interest rate of 9.78%. At December 31, 2009 there was a balance remaining of $7.9 million. In June 2009, we entered into a $12.7 million arrangement to finance the premium payments of our property insurance. The debt obligation is being repaid in nine monthly installments of $1.4 million that began in July 2009 and has a fixed interest rate of 3.90%. As of December 31, 2009, $4.3 million was outstanding. In addition, as of December 31, 2009, $0.2 million of other debt was outstanding.

Statements of Cash Flows

        The following table sets forth, for the periods indicated, selected consolidated cash flow information (in thousands):

 
  For the years
ended December 31,
 
 
  2009   2008  

Cash flows provided by operating activities

  $ 283,968   $ 331,454  

Cash flows used in investing activities

    (93,028 )   (118,761 )

Cash flows provided by (used in) financing activities

    (147,143 )   146,050  
           

Cash flows provided by continuing operations

    43,797     358,743  

Cash flows provided by (used in) discontinued operations

    5,064     (271,685 )
           

Net increase in cash and cash equivalents

  $ 48,861   $ 87,058  
           

        Cash balances were $165.3 million and $116.1 million at December 31, 2009 and December 31, 2008, respectively. The increase in cash in 2009 results from cash provided by operating activities of $284.0 million, partially offset by capital expenditures of $96.3 million, debt repayments of $61.6 million, purchases of stock of $34.3 million, and cash dividend payments of $21.2 million. In addition, $33.8 million of cash was "spun-off" with Financing.

        Net cash provided by operating activities of continuing operations was $284.0 million for the year ended December 31, 2009 compared to $331.5 million for 2008. The decrease of $47.5 million is primarily attributable to $157.2 million of lower income from continuing operations, adjusted for non-cash items, partially offset by $109.7 million favorable effect from changes in current assets and liabilities, primarily resulting from a favorable change in receivables.

        Cash flows used in investing activities of continuing operations for the year ended December 31, 2009 were $93.0 million compared to $118.8 million for the same period in 2008. Cash flows used in investing activities in 2009 were almost entirely related to $96.3 million of capital expenditures. Significant cash flows used in investing activities in 2008 included $99.9 million for capital expenditures and $17.1 million, net of cash acquired, for the acquisition of Taft.

        Cash flows used in financing activities of continuing operations for the year ended December 31, 2009 were $147.1 million compared to $146.1 million of cash flows provided by financing activities in 2008. Cash used in 2009 included $61.6 million of debt repayments, $34.2 million of stock purchased under the stock repurchase program, $33.8 million of cash spun off to Financing and $21.2 million of dividends. Cash flows provided by financing activities in 2008 included: proceeds from debt issuance of $340.0 million and proceeds from a stock offering of $280.5 million, partially offset by debt repayments of $398.7 million, purchases of stock under the stock repurchase program of $64.6 million and dividends paid of $16.2 million.

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        Capital expenditures totaled $96.3 million in 2009 related principally to the Mine No. 7 East expansion project and other mine development activities at Underground Mining. Capital expenditures for 2010 are expected to total approximately $110 million. Current expectations include approximately $80 million of maintenance capital for all of our segments. An additional $10 million is projected for the initial development of the 35 million tons of reserves acquired at Mine No. 4 in 2008. The remainder includes various expenditures primarily for replacement shields at Underground Mining and oven wall repairs at Walter Coke.

Contractual Obligations and Commercial Commitments

        We have certain contractual obligations and commercial commitments. Contractual obligations are those that will require cash payments in accordance with the terms of a contract, such as a borrowing or lease agreement. Commercial commitments represent potential obligations for performance in the event of demands by third parties or other contingent events, such as lines of credit or guarantees of debt.

        The following tables summarize our contractual obligations and commercial commitments as of December 31, 2009. This table does not include interest payable on these obligations. In 2009, we paid approximately $10.0 million of interest on the term loan, revolver and other debt financings. In 2010, we estimate total cash interest payments related to these obligations will be approximately the same as that paid in 2009.

        Contractual obligations and commercial commitments(5):

 
   
  Payments Due by Period (in thousands)  
 
  Total   2010   2011   2012   2013   2014   Thereafter  

2005 Walter term loan

  $ 137,498   $ 1,436   $ 1,436   $ 134,626   $   $   $  

Other debt(1)

    39,000     11,915     8,042     8,617     8,643     1,783      

Operating leases(2)

    23,546     9,219     7,189     5,546     1,429     163      

Long term purchase obligations(3)

    44,933     11,982     11,982     11,982     8,987          
                               

Total contractual cash obligations

  $ 244,977     34,552     28,649     160,771     19,059     1,946   $  
                                         

Other long-term liabilities(4)

          34,234     25,297     26,387     27,781     28,886        
                                   

Total cash obligations

        $ 68,786   $ 53,946   $ 187,158   $ 46,840   $ 30,832        
                                   

(1)
Primarily includes equipment financing, capital leases and a one-year property insurance financing agreement. See Note 10 of "Notes to Consolidated Financial Statements" for further discussion.

(2)
Subsequent to December 31, 2009, we signed a 10-year, non-cancellable lease agreement for 40,390 square feet of space for our new headquarters location in 2010. The rent on this space ranges from $0.8 million to $0.9 million per year. This obligation is not included in the table above.

(3)
Represents minimum maintenance payments due for assets under capital lease.

(4)
Other long-term liabilities include pension and other post-retirement benefit liabilities. While the estimated total liability is actuarially determined, there are no definitive payments by period, as pension contributions depend on government-mandated minimum funding requirements and other post-retirement benefits are paid as incurred. Accordingly, amounts by period included in this schedule are estimates and primarily include estimated post-retirement benefits.

(5)
The timing of cash outflows related to liabilities for uncertain tax positions, and the interest thereon, as established pursuant to ASC Topic 740, "Income Taxes," cannot be estimated and, therefore, has not been included in the table. See Note 9 of "Notes to Consolidated Financial Statements."

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        Environmental, miscellaneous litigation and other commitments and contingencies:

        See Note 14 of "Notes to Consolidated Financial Statements" for discussion of these matters not included in the tables above due to their contingent nature.

CRITICAL ACCOUNTING ESTIMATES

        Management's discussion and analysis is based on, and should be read in conjunction with, the consolidated financial statements and notes thereto, particularly Note 16 of "Notes to Consolidated Financial Statements" which presents net sales and revenues and operating income by reportable segment. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires management to make estimates and assumptions that affect the amounts reported in these financial statements or disclosed in the related notes thereto. Management evaluates these estimates and assumptions on an ongoing basis, using historical experience, consultation with experts and other methods considered reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from management's estimates.

        We believe the following discussion addresses our most critical accounting estimates, which are those that are most important to the portrayal of our financial condition and results of operations and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. These estimates are based upon management's historical experience and on various other assumptions that we believe reasonable under the circumstances. Changes in estimates used in these and other items could have a material impact on our financial statements.

Inventory valuation

        The valuation of coal inventories are subject to estimates due to possible gains or losses resulting from inventory movements from the mine site to storage facilities at the Port of Mobile, inherent inaccuracies in belt scales and aerial surveys used to measure quantities and due to fluctuations in moisture content. Adjustments to coal tonnages on hand are made for an estimate of coal shortages due to these inherent losses, primarily based on historical findings, the results of aerial surveys and periodic coal pile clean-ups. During the four years ended December 31, 2009, results of aerial surveys have indicated that perpetual records require adjustments ranging from +3.5% to -5.5% of the ending inventory tonnage balance. As a result of these historical results, we have recognized a reduction to the ending coal inventory at December 31, 2009 in the amount of $0.4 million, or 1.1% of the ending balance, as the estimate of the probable valuation inaccuracy inherent in the inventory balance. A 1.0% gain or loss of the inventory balance at December 31, 2009 potentially resulting from these inherent inaccuracies in the measurement processes would result in an increase or decrease, respectively, to income of approximately $0.3 million.

Employee Benefits

        We provide a range of benefits to our employees and retired employees, including pensions and postretirement healthcare. We record annual amounts relating to these plans based on calculations specified by U.S. GAAP, which include various actuarial assumptions used in developing the required estimates including the following key factors:

    Discount rate

    Salary growth

    Retirement rates

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    Mortality rates

    Healthcare cost trends

    Expected return on plan assets

 
  Pension Benefits   Other Benefits  
 
  December 31,
2009
  December 31,
2008
  December 31,
2009
  December 31,
2008
 

Weighted average assumptions used to determine benefit obligations:

                         
 

Discount rate

    5.90 %   6.50 %   5.90 %   6.50 %
 

Rate of compensation increase

    3.70 %   3.70 %        

Weighted average assumptions used to determine net periodic cost:

                         
 

Discount rate

    6.50 %   6.50 %   6.50 %   6.50 %
 

Expected return on plan assets

    8.90 %   8.90 %        
 

Rate of compensation increase

    3.70 %   3.60 %        

 

 
  December 31,  
 
  2009   2008  
 
  Pre-65   Post-65   Pre-65   Post-65  

Assumed health care cost trend rates:

                         
 

Health care cost trend rate assumed for next year

    8.00 %   8.00 %   7.60 %   8.40 %
 

Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)

    5.00 %   5.00 %   5.00 %   5.00 %
 

Year that the rate reaches the ultimate trend rate

    2016     2016     2014     2014  

        The discount rate used to determine pension and other post-retirement expense is 6.50% for both 2009 and 2008. The rate of return on plan assets used to determine pension expense is 8.90% for both 2009 and 2008. The discount rate is based on a yield-curve approach which discounts each projected benefit obligation based cash flow of the liability stream at an interest rate specifically applicable to the timing of each respective liability stream cash flow. The model sums the present values of all of the cash flows and then calculates the equivalent weighted-average discount rate by imputing the single interest rate that equates the total present value with the stream of future cash flows. We review our actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when appropriate. As required by U.S. GAAP, the effects of modifications are amortized over future periods.

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        Assumed healthcare cost trend rates, discount rates, expected return on plan assets and salary increases have a significant effect on the amounts reported for the pension and healthcare plans. A one-percentage-point change in the rate for each of these assumptions would have the following effects as of and for the year ended December 31, 2009 (in thousands):

 
  Increase (Decrease)  
 
  1-Percentage
Point Increase
  1-Percentage
Point Decrease
 

Healthcare cost trend:

             
 

Effect on total of service and interest cost components

  $ 3,288   $ (2,732 )
 

Effect on postretirement benefit obligation

    61,537     (49,859 )

Discount rate:

             
 

Effect on postretirement service and interest cost components

    223     (378 )
 

Effect on postretirement benefit obligation

    (51,950 )   65,237  
 

Effect on current year postretirement expense

    (2,577 )   2,995  
 

Effect on pension service and interest cost components

    (122 )   (58 )
 

Effect on pension benefit obligation

    (22,333 )   24,857  
 

Effect on current year pension expense

    (2,191 )   2,246  

Expected return on plan assets:

             
 

Effect on current year pension expense

    (1,270 )   1,270  

Rate of compensation increase:

             
 

Effect on pension service and interest cost components

    367     (350 )
 

Effect on pension benefit obligation

    2,963     (2,809 )
 

Effect on current year pension expense

    656     (623 )

        We also have significant liabilities for uninsured or partially insured employee-related liabilities, including workers' compensation liabilities, miners' Black Lung benefit liabilities, and liabilities for various life and health benefits. The recorded amounts of these liabilities are based on estimates of loss from individual claims and on estimates determined on an actuarial basis from historical experience using assumptions regarding rates of successful claims, discount factors, benefit increases and mortality rates.

        Workers' compensation and Black Lung benefit liabilities are also affected by discount rates used. Changes in the frequency or severity of losses from historical experience, changes in discount rates or actual losses on individual claims that differ materially from estimated amounts could affect the recorded amount of these liabilities. At December 31, 2009, a one-percentage-point increase in the discount rate on the discounted Black Lung liability would decrease the liability by $1.3 million, while a one-percentage-point decrease in the discount rate would increase the liability by $1.6 million.

        For the workers' compensation liability, we apply a discount rate at a risk-free interest rate, generally a U.S. Treasury bill rate, for each policy year. The rate used is one with a duration that corresponds to the weighted average expected payout period for each policy year. Once a discount rate is applied to a policy year, it remains the discount rate for the year until all claims are paid. The use of this method decreases the volatility of the liability as impacted by changes in the discount rate. At December 31, 2009, a one-percentage-point increase in the discount rate on the discounted workers' compensation liability would decrease the liability by $0.1 million, while a one-percentage-point decrease in the discount rate would increase the liability by $0.1 million.

Income Taxes

        Accounting principles generally accepted in the U.S. require that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Deferred tax assets are required to be reduced by a valuation

57



allowance if it is "more likely than not" that some portion or the entire deferred tax asset will not be realized. No valuation allowance has been established against our net deferred tax asset because we believe that the entire deferred tax asset will be realized during the allowed statutory carryforward period. In our evaluation of the need for a valuation allowance against the net deferred tax asset, we considered various factors including the expected level of future taxable income and available tax planning strategies. If actual results differ from the assumptions made in this evaluation, we may need to record a charge to earnings to reflect the change in our expected valuation of the net deferred tax asset.

        As discussed in Note 9 of "Notes to Consolidated Financial Statements," we are in dispute with the Internal Revenue Service (the "IRS") on a number of federal income tax issues primarily related to the discontinued Homebuilding and Financing businesses. We believe that our tax filing positions have substantial merit and we intend to vigorously defend these positions. We have established accruals that we believe are sufficient to address claims related to our uncertain tax positions, including related interest and penalties. Since the issues involved are highly complex, are subject to the uncertainties of extensive litigation and/or administrative processes and may require an extended period of time to reach ultimate resolution, it is possible that management's estimate of this liability could change.

Accounting for the Impairment of Long-Lived Assets

        Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. We periodically evaluate whether events and circumstances have occurred that indicate possible impairment. Assumptions made in the evaluation of impairment testing can have a significant effect on financial results.

        As discussed in Note 3 of "Notes to the Consolidated Financial Statements," we acquired Taft in September 2008. A significant portion of the purchase price was allocated to the mineral interests, valued at $44.0 million. The value of the mineral interests was based, in part, on the market price of similar coals at the date of acquisition and the forecasts that existed as of that date. Subsequent to the acquisition, the market price and future forecasted market prices for similar coal dropped significantly, triggering a need for an impairment test of the mineral interests. The results of the impairment test indicated that the fair value of the mineral interests were significantly below the carrying value. As a result, we recorded a $32.4 million impairment charge in the 2008 fourth quarter. The estimated fair value of the mineral interests used in the impairment testing was extremely sensitive to the estimated market price of similar coals. For example, a 10% increase or decrease in the market pricing used as of the date of the impairment testing of this asset would have increased or decreased, respectively, the estimated fair value by approximately $5.0 million.

NEW ACCOUNTING PRONOUNCEMENTS

        In January 2010, the FASB amended its guidance in ASC Topic 932 "Extractive Activities-Oil and Gas," expanding the definition of oil and gas producing activities to include the extraction of saleable hydrocarbons from oil sands, shale and coalbeds, clarifying that entities' equity method investments must be considered in oil and gas activities, and requiring new disclosures. This updated guidance is generally effective for annual periods ending on or after December 31, 2009, but for entities becoming subject to this standard because of the change in the definition of significant oil and gas producing activities, disclosure is required for periods beginning after December 31, 2009. Since we are subject to this guidance because we extract hydrocarbons from coalbeds, disclosures under ASC Topic 932 will be provided for our 2010 reporting period, as required. We do not expect the effect of applying the amendment to have a material effect on our operating results or financial condition.

58


MARKET RISK

        We are exposed to certain market risks inherent in our operations. These risks generally arise from transactions entered into in the normal course of business. Our primary market risk exposures relate to interest rate risk and commodity risks. We do not enter into derivatives or other financial instruments for trading or speculative purposes.

Interest rate risk

        Our primary interest rate risk exposures relate to the interest rates on third-party indebtedness. As described more fully under the caption "Liquidity and Capital Resources," above, we have the following financial instruments that inherently expose us to interest rate risk: the 2005 Walter Credit Agreement, an equipment financing arrangement, a capital lease for certain mining equipment and an insurance premium financing arrangement. In addition, as described in Note 15 of "Notes to Consolidated Financial Statements," we have entered into an interest rate hedge agreement to convert our equipment financing from a floating rate of interest to a fixed rate of interest.

        A ten percent decrease in interest rates from the December 31, 2009 and 2008 rates would result in an increase to annual pre-tax income from these financial instruments of approximately $0.4 million and $0.6 million, respectively, while a ten percent increase in rates would decrease annual pre-tax income approximately $0.4 million and $0.6 million, respectively.

Commodity risks

        We are exposed to commodity price risk on sales of natural gas. On an annual basis, our sales of natural gas approximates 6.0 to 6.4 million mmbtus (equivalent of 6.1 to 6.6 billion cubic feet).

        We occasionally utilizes derivative commodity instruments to manage the exposure to changing natural gas prices. Such derivative instruments are structured as cash flow hedges and not for trading. During 2009 and 2008, we hedged approximately 8% and 73%, respectively, of our natural gas sales with swap contracts. These swap contracts effectively converted a portion of forecasted sales at floating-rate natural gas prices to a fixed-rate basis. These swap contracts resulted in $2.0 million of cash inflows in 2009 and $3.6 million of cash outflows in 2008, impacting net sales and revenues.

        At December 31, 2009, swap contracts to hedge approximately 1.6 million mmbtus of anticipated natural gas sales in 2010 and, at December 31, 2008, swap contracts to hedge approximately 0.5 million mmbtus of anticipated natural gas sales in 2009 were outstanding as more fully described in Note 15 of "Notes to Consolidated Financial Statements." A ten percent favorable or unfavorable change in the natural gas prices would not have a material effect in the fair value of the swap contracts outstanding at December 31, 2009 and 2008.

59


UNAUDITED INTERIM FINANCIAL INFORMATION:
(in thousands, except per share amounts)

 
  Quarter ended  
Fiscal Year 2009(1)
  March 31   June 30   September 30   December 31  

Net sales and revenues

  $ 283,137   $ 169,120   $ 278,305   $ 236,265  

Income from continuing operations

  $ 72,850   $ 11,336   $ 24,368   $ 33,296  

Income (loss) from discontinued operations

    253     (265 )   (560 )   (4,120 )
                   

Net income

  $ 73,103   $ 11,071   $ 23,808   $ 29,176  
                   

Diluted income (loss) per share:(2)

                         

Income from continuing operations

  $ 1.36   $ 0. 21   $ 0.45   $ 0.62  

Income (loss) from discontinued operations

            (0.01 )   (0.08 )
                   

Net income

  $ 1.36   $ 0.21   $ 0.44   $ 0.54  
                   

 

 
  Quarter ended  
Fiscal Year 2008(1)
  March 31   June 30   September 30   December 31  

Net sales and revenues

  $ 200,933   $ 274,408   $ 308,807   $ 365,536  

Income from continuing operations

  $ 17,280   $ 45,631   $ 71,290   $ 96,991  

Income (loss) from discontinued operations(3)

    (16,781 )   5,145     (16,290 )   143,314  
                   

Net income

  $ 499   $ 50,776   $ 55,000   $ 240,305  
                   

Diluted income (loss) per share:(2)

                         

Income from continuing operations

  $ 0.33   $ 0.85   $ 1.26   $ 1.77  

Income (loss) from discontinued operations

    (0.32 )   0.09     (0.29 )   2.60  
                   

Net income

  $ 0.01   $ 0.94   $ 0.97   $ 4.37  
                   

(1)
Amounts vary from previous Form 10-Q disclosures as a result of classifying Kodiak, Financing and Homebuilding as discontinued operations.

(2)
The sum of quarterly EPS amounts may be different than annual amounts as a result of the impact of variations in shares outstanding.

(3)
Fourth quarter 2008 results from discontinued operations includes a tax benefit of $167.0 million related to the deemed liquidation of Homebuilding for tax purposes.

Item 8.    Financial Statements and Supplementary Data

        Financial Statements and Supplementary Data consist of the financial statements as indexed on page F-1 and unaudited financial information presented in Part II, Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition."

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

        Incorporated by reference to the 2010 Proxy Statement.

Item 9A.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

        An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer (principal executive and financial officer), of the effectiveness of

60



our disclosure controls and procedures as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 as amended ("Exchange Act") as of the end of the period covered by this annual report on Form 10-K. Based on that evaluation, our management, including our principal executive and financial officer, concluded that our disclosure controls and procedures are effective as of December 31, 2009 to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (2) accumulated and communicated to our management, including our principal executive and financial officer, as appropriate to allow timely decisions regarding required disclosures. There has been no change in our internal control over financial reporting during the year ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

Management's Report on Internal Control over Financial Reporting

        Management, under the supervision of our Chief Executive Officer (principal executive and financial officer), is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)). 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 in the United States of America. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) 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 (iii) 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.

        Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated Framework. Based on this assessment, management has concluded that, as of December 31, 2009, our internal control over financial reporting was effective.

        Our independent registered public accounting firm, Ernst and Young, has audited the effectiveness of our internal control over financial reporting, as stated in their attestation report included in this Annual Report on Form 10-K.

Evaluation of Changes in Internal Control over Financial Reporting

        There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the year ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

Item 9B.    Other Information

None

61


Part III

Item 10.    Directors, Executive Officers and Corporate Governance

Executive Officers of the Registrant

        Set forth below is a list showing the names, ages and positions of the executive officers of the Company.

Name   Age   Position

Victor P. Patrick

    52   Chief Executive Officer, Chief Financial Officer and General Counsel

George R. Richmond

    59   President and Chief Operating Officer

Lisa A. Honnold

    42   Senior Vice President, Controller

Michael T. Madden

    58   Senior Vice President, Sales and Marketing

Keith M. Shull

    59   Senior Vice President, Human Resources

Charles C. Stewart

    54   President, Walter Coke, Inc. and Walter Minerals, Inc.

        Our executive officers as of February 26, 2010 are listed below.

        Victor P. Patrick is Chief Executive Officer, Chief Financial Officer and General Counsel for the Company and has served on the Board of Directors of the Company since 2006. Mr. Patrick served as Vice Chairman, Chief Financial Officer and General Counsel since February 2008. Mr. Patrick previously served as Vice Chairman and General Counsel since April 2007 and Vice Chairman, General Counsel and Secretary since August 2006. Mr. Patrick joined the Company in 2002 as Senior Vice President, General Counsel and Secretary. Prior to joining the Company, Mr. Patrick held various executive positions with Honeywell International, a diversified company providing aerospace, control technologies, automotive products and specialty materials, from 1994 to July 2002, last serving as Vice President, Secretary and Deputy General Counsel. Mr. Patrick received his law degree from Harvard University and holds a B.S. from Princeton University. Mr. Patrick has advised the Company of his intention to retire from the Company and his decision not to seek re-election to the Board at the Company's annual meeting of stockholders to be held on April 21, 2010.

        George R. Richmond is President and Chief Operating Officer for the Company and has served on the Board of Directors of the Company since 2006. Mr. Richmond previously served as Chief Executive Officer of Jim Walter Resources, Inc. from 2006 to September 2009 and President and Chief Operating Officer of Jim Walter Resources, Inc. since 1997. Mr. Richmond has over 44 years of experience in deep underground longwall mining, having joined Jim Walter Resources, Inc. in 1978 after 13 years in various engineering and management capacities for Great Britain's National Coal Board (now known as British Coal). Mr. Richmond is a member of the Board of Directors of the National Mining Association; the Alabama Coal Association, serving as Chairman from 2004-2006; and the Business Council of Alabama. Mr. Richmond received a national diploma in Mining Engineering from Doncaster College, Yorkshire, a bachelor degree in Mechanical Engineering from the University of Bradford, Yorkshire, and a Government Certificate in Safety and Law from the National Coal Board.

        Lisa A. Honnold is Senior Vice President, Controller of the Company. Ms. Honnold previously served as Vice President of Corporate Accounting for the Company from December 2005 through March 2006. Prior to joining the Company, Ms. Honnold was Vice President, Corporate Controller of Catalina Marketing Corporation, a targeted media marketing firm, from December 2004 to November 2005, holding the previous title of Assistant Controller since November 2003. From 1996 to November 2003, Ms. Honnold held various positions with NACCO Industries, Inc., a diversified company with businesses in lift trucks, small appliances, specialty retail and mining, last serving as Manager of Financial Reporting and Analysis. Ms. Honnold is a certified public accountant and received a B.S. in Accountancy from Miami University.

62


        Michael T. Madden is Senior Vice President, Sales and Marketing for the Company. Mr. Madden previously served as Vice President—Marketing & Transportation of Jim Walter Resources, Inc. from 1996 through February 2010. Prior to that, Mr. Madden held various management positions in the coal industry for both the domestic and export markets from 1974 through 1996. Mr. Madden is a member of the National Mining Association; the Alabama Coal Association and the New York Coal Trade Association. Mr. Madden received a B.S. in business administration from St. Bonaventure University.

        Keith M. Shull was appointed Senior Vice President, Human Resources on January 25, 2010. Prior to joining the Company, Mr. Shull served in various senior executive human resource roles, including Senior Vice President Global Human Resources, for Arrow Electronics, Inc., an electronics distribution and services corporation, from 2005 through 2008. From 2009 to 2010 Mr. Shull was an independent consultant to the global mining industry. From January 2005 to December 2005 Mr. Shull served as Corporate Vice President of Human Resources for Commercial Metals Company, an international public steel corporation. From 1996 through 2005 Mr. Shull served in various executive management human resources positions, including Senior Vice President Human Resources, in the base metals and petroleum divisions of BHP Billiton, Inc., an international diversified natural resources company. Mr. Shull received a B. A. in business administration from California State University, Fullerton and a MA in management from the Drucker School of Management at Claremont University.

        Charles C. Stewart has been President and Chief Operating Officer of Walter Coke, Inc. since May 2003 and President of Walter Minerals, Inc. (previously known as United Land Corporation) since July 2007. Mr. Stewart previously served in various mining and engineering capacities for Jim Walter Resources for 25 years, culminating in his appointment as Vice President of Engineering. Mr. Stewart is a trustee of the Birmingham Business Alliance; a member of the Board of Directors of the American Coke and Coal Chemicals Institute, serving as Chairman from 2007-2008; and a member of the Alabama Coal Association. Mr. Stewart received a B.S. in Mineral Engineering from the University of Alabama and a MBA from Samford University.

Code of Conduct

        The Board has adopted a Code of Conduct Policy and Compliance Program ("Code of Conduct") which is applicable to all employees, directors and officers of the Company. The code of Conduct is posted on our website at www.walterenergy.com and is available in print to stockholders who request a copy. We have made available an Ethics Hotline, where employees can anonymously report a violation of the Code of Conduct.

Additional Information

        Additional information, as required in Item 10. "Directors and Executive Officers of the Registrant" are incorporated by reference to the Proxy Statement (the "2010 Proxy Statement") included in the Schedule 14A to be filed by the Company with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934, as amended.

Item 11.    Executive Compensation

        Incorporated by reference to the 2010 Proxy Statement.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

        The equity compensation plan information as required by Item 201(d) of Regulation S-K is illustrated in Part II, Item 5 of this document. All other information as required by Item 12 is incorporated by reference to the 2010 Proxy Statement.

63



Item 13.    Certain Relationships and Related Transactions, and Director Independence

        Incorporated by reference to the 2010 Proxy Statement.

Item 14.    Principal Accounting Fees and Services

        Incorporated by reference to the 2010 Proxy Statement.

Part IV

Item 15.    Exhibits, Financial Statement Schedules

      (a)(1)    Financial Statements—See Index to Financial Statements on page F-1.
           (2)    Exhibits—See Item 15(b).

      (b)    Exhibits—See Index to Exhibits on pages E1-E-4.

64



SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    WALTER ENERGY, INC.

February 26, 2010

 

/s/ VICTOR P. PATRICK

Victor P. Patrick, Chief Executive Officer,
Chief Financial Officer and General Counsel
(Principal Executive and Financial 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.

February 26, 2010   /s/ HOWARD L. CLARK, JR.

Howard L. Clark, Jr., Director*

February 26, 2010

 

/s/ JERRY W. KOLB

Jerry W. Kolb, Director*

February 26, 2010

 

/s/ PATRICK A. KRIEGSHAUSER

Patrick A. Kriegshauser, Director*

February 26, 2010

 

/s/ JOSEPH B. LEONARD

Joseph B. Leonard, Director*

February 26, 2010

 

/s/ BERNARD G. RETHORE

Bernard G. Rethore, Director*

February 26, 2010

 

/s/ GEORGE R. RICHMOND

George R. Richmond, Director, President and
Chief Operating Officer*

February 26, 2010

 

/s/ MICHAEL T. TOKARZ

Michael T. Tokarz, Chairman*

February 26, 2010

 

/s/ A.J. WAGNER

A.J. Wagner, Director*

February 26, 2010

 

/s/ LISA A. HONNOLD

Lisa A. Honnold, Senior Vice President, Controller
and Principal Accounting Officer

*By:

 

/s/ VICTOR P. PATRICK


Victor P. Patrick
Attorney-in-Fact
       

65



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1



Report of Independent Registered Certified Public Accounting Firm

The Board of Directors and Stockholders of Walter Energy, Inc.

        We have audited the accompanying consolidated balance sheets of Walter Energy, Inc. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in stockholders' equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Walter Energy, Inc. and subsidiaries at December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.

        As noted in the consolidated statements of changes in stockholders' equity and comprehensive income, in 2007 the Company changed its method for accounting for income tax uncertainties. As discussed in Note 11 to the consolidated financial statements, in 2008 the Company changed its accounting for defined benefit pension and other postretirement plans.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Walter Energy, Inc. and subsidiaries' internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2010 expressed an unqualified opinion thereon.

/s/ Ernst & Young, LLP

Tampa, Florida
February 26, 2010

F-2



Report of Independent Registered Certified Public Accounting Firm

The Board of Directors and Stockholders of Walter Energy, Inc.

        We have audited Walter Energy, Inc. and subsidiaries' internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Walter Energy, Inc.'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 included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, 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.

        In our opinion, Walter Energy, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Walter Energy, Inc. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in stockholders' equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2009 and our report dated February 26, 2010 expressed an unqualified opinion thereon.

/s/ Ernst & Young, LLP

Tampa, Florida
February 26, 2010

F-3



WALTER ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

 
  December 31,  
 
  2009   2008  

ASSETS

             

Current assets of continuing operations:

             

Cash and cash equivalents

  $ 165,279   $ 116,074  

Receivables, net

    70,500     140,423  

Inventories

    99,278     75,172  

Deferred income taxes

    110,576     84,669  

Other current assets

    27,065     26,119  
           
   

Total current assets

    472,698     442,457  

Property, plant and equipment, net

    522,931     504,585  

Deferred income taxes

    178,338     179,402  

Other long-term assets

    70,192     69,251  
           
   

Total assets of continuing operations

    1,244,159     1,195,695  
           

Assets of discontinued operations:

             

Current assets

    15,197     16,158  

Long-term assets

        18,396  

Unclassified assets

        1,837,744  
           
   

Total assets of discontinued operations

    15,197     1,872,298  
           

  $ 1,259,356   $ 3,067,993  
           

LIABILITIES AND STOCKHOLDERS' EQUITY

             

Liabilities of continuing operations:

             

Accounts payable

  $ 44,211   $ 60,497  

Accrued expenses

    39,034     57,230  

Current debt

    13,351     13,480  

Accumulated postretirement benefits obligation

    23,563     19,124  

Other current liabilities

    18,513     20,801  
           
   

Total current liabilities

    138,672     171,132  

Long-term debt

    163,147     211,905  

Accumulated postretirement benefits obligation

    429,096     349,184  

Other long-term liabilities

    261,736     273,645  
           
   

Total liabilities of continuing operations

    992,651     1,005,866  
           

Liabilities of discontinued operations:

             

Current liabilities

    7,310     12,400  

Unclassified liabilities

        1,419,458  
           
   

Total liabilities of discontinued operations

    7,310     1,431,858  
           

Total liabilities

    999,961     2,437,724  
           

Commitments and Contingencies (Note 14)

             

Stockholders' equity:

             
 

Common stock, $0.01 par value per share:

             
   

Authorized—200,000,000 shares
Issued—53,256,904 and 54,143,958 shares, respectively

    533     541  
 

Preferred stock, $0.01 par value per share:

             
   

Authorized—20,000,000 shares, issued—0 shares

         
 

Capital in excess of par value

    374,522     714,174  
 

Retained earnings

    50,852     50,990  
 

Accumulated other comprehensive income (loss):

             
   

Pension and other post-retirement benefit plans, net of tax

    (167,037 )   (137,364 )
   

Unrealized gain on hedges, net of tax

    525     1,928  
           
   

Total stockholders' equity

    259,395     630,269  
           

  $ 1,259,356   $ 3,067,993  
           

The accompanying notes are an integral part of the consolidated financial statements.

F-4



WALTER ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 
  For the years ended December 31,  
 
  2009   2008   2007  

Net sales and revenues:

                   
 

Net sales

  $ 955,508   $ 1,135,745   $ 745,236  
 

Miscellaneous income

    11,319     13,939     29,559  
               

    966,827     1,149,684     774,795  
               

Cost and expenses:

                   
 

Cost of sales (exclusive of depreciation)

    586,774     628,325     496,284  
 

Depreciation

    72,939     56,542     39,234  
 

Selling, general and administrative

    70,063     63,394     55,182  
 

Postretirement benefits

    30,833     27,557     27,750  
 

Amortization of intangibles

    447     273     351  
 

Restructuring and impairment charges

    3,601     32,386      
               

    764,657     808,477     618,801  
               

Operating income

    202,170     341,207     155,994  
 

Interest expense

    (18,975 )   (26,226 )   (18,830 )
 

Interest income

    799     17,808     2,545  
               

Income from continuing operations before income tax expense

    183,994     332,789     139,709  
 

Income tax expense

    42,144     101,597     41,482  
               

Income from continuing operations

    141,850     231,192     98,227  

Income (loss) from discontinued operations

    (4,692 )   115,388     13,772  
               

Net income

  $ 137,158   $ 346,580   $ 111,999  
               

Basic income (loss) per share:

                   
 

Income from continuing operations

  $ 2.67   $ 4.30   $ 1.89  
 

Income (loss) from discontinued operations

    (0.09 )   2.14     0.26  
               
 

Basic net income per share

  $ 2.58   $ 6.44   $ 2.15  
               

Diluted income (loss) per share:

                   
 

Income from continuing operations

  $ 2.64   $ 4.24   $ 1.87  
 

Income (loss) from discontinued operations

    (0.09 )   2.11     0.26  
               
 

Diluted net income per share

  $ 2.55   $ 6.35   $ 2.13  
               

The accompanying notes are an integral part of the consolidated financial statements.

F-5


Table of Contents


WALTER ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
FOR THE THREE YEARS ENDED DECEMBER 31, 2009

(in thousands)

 
  Total   Common
Stock
  Capital in
Excess of
Par Value
  Comprehensive
Income
  Retained
Earnings
(Deficit)
  Treasury
Stock
  Accumulated
Other
Comprehensive
Income (Loss)
 

Balance at December 31, 2006

  $ 1,908   $ 728   $ 757,699         $ (398,564 ) $ (259,317 ) $ (98,638 )

Adjustment to initially apply FIN 48

    (4,421 )                     (4,421 )            
                                 

Adjusted balance at January 1, 2007

    (2,513 )   728     757,699           (402,985 )   (259,317 )   (98,638 )

Comprehensive income:

                                           
 

Net income

    111,999               $ 111,999     111,999              
 

Other comprehensive income, net of tax:

                                           
   

Change in pension and postretirement benefit plans, net of $9.7 million tax provision

    15,231                 15,231                 15,231  
   

Net unrealized loss on hedges, net of $4.3 million tax benefit

    (8,446 )               (8,446 )               (8,446 )
                                           

Comprehensive income

                    $ 118,784                    
                                           

Retirement of treasury stock

          (207 )   (259,902 )               260,109        

Purchases of stock under stock repurchase program

    (5,627 )   (1 )   (5,626 )                        

Stock issued upon exercise of stock options

    1,447           1,447                          

Tax benefit on the exercise of stock options

    2,015           2,015                          

Dividends paid, $0.20 per share

    (10,411 )         (10,411 )                        

Stock based compensation

    11,810           11,810                          

Other

    (792 )                           (792 )      
                                 

Balance at December 31, 2007

    114,713     520     497,032           (290,986 )       (91,853 )

Comprehensive income:

                                           
 

Net income

    346,580               $ 346,580     346,580              
 

Other comprehensive income, net of tax:

                                           
   

Change in pension and postretirement benefit plans, net of $32.3 million tax benefit

    (50,961 )               (50,961 )               (50,961 )
   

Net unrealized gain on hedges, net of $4.5 million tax provision

    6,710                 6,710                 6,710  
                                           

Comprehensive income

                    $ 302,329                    
                                           

Effects of changing the pension plan measurement date pursuant to FASB Statement No. 158:

                                           
 

Service cost, interest cost, and expected return on plan assets for October 1–December 31, 2007, net of $3.0 million tax benefit

    (4,604 )                     (4,604 )            
 

Amortization of prior service cost and actuarial gain/loss for October 1–December 31, 2007, net of $0.5 million tax provision

    668                                   668  

Proceeds from public stock offering

    280,464     32     280,432                          

Purchases of stock under stock repurchase program

    (64,644 )   (16 )   (64,628 )                        

Stock issued upon exercise of stock options

    7,993     4     7,989                          

Stock issued upon conversion of convertible notes

    785     1     784                          

Dividends paid, $0.30 per share

    (16,233 )         (16,233 )                        

Stock based compensation

    10,439           10,439                          

Other

    (1,641 )         (1,641 )                        
                                 

Balance at December 31, 2008

    630,269     541     714,174           50,990         (135,436 )

Comprehensive income:

                                           
 

Net income

    137,158               $ 137,158     137,158              
 

Other comprehensive income, net of tax:

                                           
   

Change in pension and postretirement benefit plans, net of $44.2 million tax benefit

    (28,513 )               (28,513 )