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TABLE OF CONTENTS

Table of Contents

 

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

FORM 10-Q


ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

or

o

 

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

For the transition period from                    to                  

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
(I.R.S Employer
Identification No.)

3000 Riverchase Galleria, Suite 1700
Birmingham, Alabama

(Address of principal executive offices)

 

35244
(Zip Code)

(205) 745-2000
(Registrant's telephone number, including area code)

        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 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 o   Accelerated filer ý   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

        Number of shares of common stock outstanding as of July 31, 2014: 65,827,966

   


Table of Contents


WALTER ENERGY, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

 
   
  Page  

Part I—Financial Information

       

Item 1.

 

Financial Statements

       

 

Walter Energy, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited)

    1  

 

Walter Energy, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited)

    2  

 

Walter Energy, Inc. and Subsidiaries Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

    3  

 

Walter Energy, Inc. and Subsidiaries Condensed Consolidated Statement of Changes in Stockholders' Equity (Unaudited)

    4  

 

Walter Energy, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited)

    5  

 

Walter Energy, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)

    6  

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

    39  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

    61  

Item 4.

 

Controls and Procedures

    62  

Part II—Other Information

       

Item 1.

 

Legal Proceedings

    63  

Item 1A.

 

Risk Factors

    63  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

    64  

Item 4.

 

Mine Safety Disclosures

    65  

Item 6.

 

Exhibits

    65  

Signatures

    67  

Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

        


WALTER ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

 
  June 30,
2014
  December 31,
2013
 

ASSETS

             

Cash and cash equivalents

  $ 293,472   $ 260,818  

Receivables, net

    231,032     281,763  

Inventories

    274,482     312,647  

Deferred income taxes

    32,079     37,067  

Prepaid expenses

    45,361     39,022  

Assets held for sale

    24,150      

Other current assets

    12,504     18,031  
           

Total current assets

    913,080     949,348  

Mineral interests, net

    2,887,612     2,905,002  

Property, plant and equipment, net

    1,547,280     1,637,552  

Other long-term assets

    113,926     98,958  
           

  $ 5,461,898   $ 5,590,860  
           
           

LIABILITIES AND STOCKHOLDERS' EQUITY

             

Current debt

  $ 15,353   $ 9,210  

Accounts payable

    60,451     92,712  

Accrued expenses

    142,831     133,870  

Accumulated other postretirement benefits obligation

    30,887     30,036  

Other current liabilities

    225,713     214,073  
           

Total current liabilities

    475,235     479,901  

Long-term debt

    2,880,951     2,769,622  

Accumulated other postretirement benefits obligation

    574,856     570,712  

Deferred income taxes

    783,591     822,867  

Other long-term liabilities

    189,930     195,064  
           

Total liabilities

    4,904,563     4,838,166  
           

Stockholders' equity:

             

Common stock, $0.01 par value per share:

             

Authorized—200,000,000 shares; issued—65,824,776 and 62,577,924 shares, respectively

    658     626  

Capital in excess of par value

    1,639,310     1,613,256  

Accumulated deficit

    (942,499 )   (698,930 )

Accumulated other comprehensive loss

    (140,134 )   (162,258 )
           

Total stockholders' equity

    557,335     752,694  
           

  $ 5,461,898   $ 5,590,860  
           
           

   

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

1


Table of Contents


WALTER ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

 
  For the three months
ended June 30,
  For the six months ended
June 30,
 
 
  2014   2013   2014   2013  

Revenues:

                         

Sales

  $ 377,982   $ 437,798   $ 783,211   $ 927,407  

Miscellaneous income

    369     3,698     9,025     5,432  
                   

    378,351     441,496     792,236     932,839  
                   

Costs and expenses:

                         

Cost of sales (exclusive of depreciation and depletion)

    343,761     367,616     693,636     788,550  

Depreciation and depletion

    69,816     68,320     146,240     149,510  

Selling, general and administrative

    19,002     27,129     39,781     57,803  

Postretirement benefits

    13,869     14,725     27,738     29,450  

Restructuring and asset impairments

    31,342     (5,741 )   31,342     1,699  
                   

    477,790     472,049     938,737     1,027,012  
                   

Operating loss

    (99,439 )   (30,553 )   (146,501 )   (94,173 )

Interest expense, net

    (73,402 )   (52,985 )   (138,834 )   (98,952 )

Gain (loss) on extinguishment of debt

    11,397         (2,492 )   (6,001 )

Other income (loss), net

    978     (714 )   (778 )   (609 )
                   

Loss before income tax benefit

    (160,466 )   (84,252 )   (288,605 )   (199,735 )

Income tax benefit

    (9,075 )   (49,760 )   (45,036 )   (115,799 )
                   

Net loss

  $ (151,391 ) $ (34,492 ) $ (243,569 ) $ (83,936 )
                   
                   

Net loss per share:

                         

Basic

  $ (2.33 ) $ (0.55 ) $ (3.81 ) $ (1.34 )
                   
                   

Diluted

  $ (2.33 ) $ (0.55 ) $ (3.81 ) $ (1.34 )
                   
                   

Dividends per share

  $ 0.01   $ 0.125   $ 0.02   $ 0.25  
                   
                   

   

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

2


Table of Contents


WALTER ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(IN THOUSANDS)

 
  For the three months
ended June 30,
  For the six months
ended June 30,
 
 
  2014   2013   2014   2013  

Net loss

  $ (151,391 ) $ (34,492 ) $ (243,569 ) $ (83,936 )

Other comprehensive income (loss):

                         

Change in pension and postretirement benefit plans (net of tax: $2,154 and $4,322 and $2,883 and $5,765 for the three and six months ended June 30, 2014 and 2013, respectively)

    3,498     4,658     7,017     9,317  

Change in unrealized gain on hedges (net of tax: $1,034 for the six months ended June 30, 2014 and $324 and $667 for the three and six months ended June 30, 2013, respectively)

        526     1,679     1,248  

Change in foreign currency translation adjustment

    11,264     (1,461 )   13,428     (17,086 )

Change in unrealized gain (loss) on investments, net of tax

        (1 )       43  
                   

Total other comprehensive income (loss)

    14,762     3,722     22,124     (6,478 )
                   

Total comprehensive loss

  $ (136,629 ) $ (30,770 ) $ (221,445 ) $ (90,414 )
                   
                   

   

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

3


Table of Contents


WALTER ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2014 (UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

 
  Total   Common
Stock
  Capital in
Excess of
Par Value
  Accumulated
Deficit
  Accumulated
Other
Comprehensive
Loss
 

Balance at December 31, 2013

  $ 752,694   $ 626   $ 1,613,256   $ (698,930 ) $ (162,258 )

Net loss

    (243,569 )           (243,569 )    

Other comprehensive income, net of tax

    22,124                 22,124  

Dividends paid, $0.02 per share

    (1,284 )       (1,284 )        

Stock based compensation

    4,865         4,865          

Issuance of common stock in connection with the extinguishment of debt

    22,696     32     22,664          

Other

    (191 )       (191 )        
                       

Balance at June 30, 2014

  $ 557,335   $ 658   $ 1,639,310   $ (942,499 ) $ (140,134 )
                       
                       

   

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

4


Table of Contents


WALTER ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(IN THOUSANDS)

 
  For the six months
ended June 30,
 
 
  2014   2013  

OPERATING ACTIVITIES

             

Net loss

  $ (243,569 ) $ (83,936 )

Adjustments to reconcile net loss to net cash flows used in operating activities:

             

Depreciation and depletion

    146,240     149,510  

Deferred income tax benefit

    (41,257 )   (77,717 )

Amortization of debt issuance costs

    8,356     8,014  

Loss on extinguishment of debt

    2,492     6,001  

Other

    39,183     8,402  

Decrease (increase) in current assets:

             

Receivables

    34,710     (2,302 )

Inventories

    30,774     (24,281 )

Prepaid expenses and other current assets

    (6,437 )   (8,826 )

Increase (decrease) in current liabilities:

             

Accounts payable

    (32,227 )   24,483  

Accrued interest

    9,168     8,245  

Accrued expenses and other current liabilities

    13,559     (31,695 )
           

Cash flows used in operating activities

    (39,008 )   (24,102 )
           

INVESTING ACTIVITIES

             

Additions to property, plant and equipment

    (43,476 )   (80,251 )

Other

    (350 )   964  
           

Cash flows used in investing activities

    (43,826 )   (79,287 )
           

FINANCING ACTIVITIES

             

Proceeds from issuance of debt

    553,000     450,000  

Retirements of debt

    (414,124 )   (259,200 )

Dividends paid

    (1,284 )   (15,638 )

Debt issuance costs

    (21,325 )   (15,080 )

Other

    (191 )   (600 )
           

Cash flows provided by financing activities

    116,076     159,482  
           

Effect of foreign exchange rates on cash

    (588 )   (1,816 )
           

Net increase in cash and cash equivalents

    32,654     54,277  

Cash and cash equivalents at beginning of period

    260,818     116,601  
           

Cash and cash equivalents at end of period

  $ 293,472   $ 170,878  
           
           

   

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

5


Table of Contents


WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 1—Basis of Presentation

        Walter Energy, Inc., together with its consolidated subsidiaries (the "Company"), is a leading producer and exporter of metallurgical coal for the global steel industry from underground and surface mines with mineral reserves located in the United States, Canada and the United Kingdom. The Company also extracts, processes, markets and/or possesses mineral reserves of thermal coal and anthracite coal, as well as produces metallurgical coke and coal bed methane gas.

        The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. These financial statements should be read in conjunction with the audited financial statements and related notes as of and for the year ended December 31, 2013 included in the Company's Annual Report filed on Form 10-K with the U.S. Securities and Exchange Commission. The balance sheet at December 31, 2013 has been derived from the audited consolidated financial statements for the year ended December 31, 2013 included in the Company's 2013 Annual Report filed on Form 10-K.

New Accounting Pronouncements

        In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 improves the definition of discontinued operations by limiting the discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have or will have a major effect on an entity's operations and financial results, will require expanded disclosures for discontinued operations, and will require disclosure of the pre-tax profit or loss of an individually significant component of an entity that does not qualify for discontinued operations reporting. The amendments in ASU 2014-08 are effective prospectively for disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The implementation of the amended guidance is not expected to have a material impact on the Company's financial condition, results of operations, and cash flows.

        In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). In summary, the core principle of Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: identify the contract(s) with a customer; identify the performance obligations in the contract; determine the transaction price; allocate the transaction price to the performance obligations in the contract; and recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 supersedes the revenue recognition

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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 1—Basis of Presentation (Continued)

requirements in Accounting Standards Codification Topic No. 605, "Revenue Recognition," including most industry-specific guidance throughout the Industry Topics of the Accounting Standards Codification. ASU 2014-09 is effective for public entities within annual periods beginning after December 15, 2016, including interim periods within that reporting period, and early application is not permitted. Companies may use either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. The implementation of the amended guidance is not expected to have a material impact on the Company's financial condition, results of operations, and cash flows.

        In June 2014, the FASB issued ASU No. 2014-12, Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The amendments in ASU 2014-12 require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Accounting Standards Codification Topic No. 718, "Compensation—Stock Compensation" ("ASC 718"), as it relates to awards with performance conditions that affect vesting to account for such awards. The amendments in ASU 2014-12 are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. Entities may apply the amendments in ASU 2014-12 either: (a) prospectively to all awards granted or modified after the effective date; or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The implementation of the amended guidance is not expected to have a material impact on the Company's financial condition, results of operations, and cash flows.

Revision for Gain (Loss) on Extinguishment of Debt

        During the quarter ended June 30, 2014, we have corrected our classification of accelerated amortization of debt issuance costs that we recognized upon the extinguishment or partial extinguishment of debt to present these amounts as a component of the gain (loss) recognized upon the extinguishment of debt as one line item in the accompanying Condensed Consolidated Statements of Operations in accordance with FASB Accounting Standards Codification ("ASC") Section 470-50. Components of the gain (loss) on the extinguishment of debt were previously recognized within interest expense in the accompanying Condensed Consolidated Statements of Operations. We have concluded that this revision is not material to our previously issued financial statements, as the net effect of these revisions did not impact our operating loss, net loss, stockholders' equity or cash flows. Previously reported interest expense has decreased by the same amount to correct the classification and we also

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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 1—Basis of Presentation (Continued)

have elected to net interest income and interest expense. The following reflects the revisions for the relevant interim periods during 2014 and 2013:

 
  For the three
months
ended
 
 
  March 31  

2014

       

Interest expense, prior to revision

  $ 79,396  

Interest income

    (75 )

Revision of loss on extinguishment of debt

    (13,889 )
       

Interest expense, net, revised

  $ 65,432  
       
       

 

 
  For the three
months ended
  For the six
months
ended
 
 
  March 31   June 30   June 30  

2013

                   

Interest expense, prior to revision

  $ 52,618   $ 53,129   $ 105,747  

Interest income

    (650 )   (144 )   (794 )

Revision of loss on extinguishment of debt

    (6,001 )       (6,001 )
               

Interest expense, net, revised

  $ 45,967   $ 52,985   $ 98,952  
               
               

        We intend to make conforming revisions to our annual consolidated financial statements for 2013 and 2012 when we file our Annual Report on Form 10-K for the year ending December 31, 2014. We have concluded that this revision is not material to our annual financial statements, as the net effect of these revisions did not impact our operating loss, net loss, stockholders' equity or cash flows. Previously reported interest expense has decreased by the same amount and we have netted interest income and interest expense. The following reflects the revisions that will be reported in our Form 10-K for the year ending December 31, 2014.

 
  2013   2012  

Interest expense, prior to revision

  $ 233,854   $ 139,356  

Interest income

    (1,103 )   (804 )

Revision of loss on extinguishment of debt

    (11,168 )   (5,555 )
           

Interest expense, net, revised

  $ 221,583   $ 132,997  
           
           

Note 2—Restructuring and Asset Impairments

        In the second quarter of 2014, the Company idled the Canadian Operations, which included the Wolverine, Brule and Willow Creek mines in the Canadian and U.K. Operations segment. We placed the Wolverine mine on idle status in April and the Brazion operations (which includes the operations of Brule and Willow Creek) on idle status in June and recognized restructuring charges for this idling of approximately $7.1 million in the Canadian and U.K. Operations segment. The Company also

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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 2—Restructuring and Asset Impairments (Continued)

recognized restructuring charges of approximately $0.7 million in the U.S. Operations segment and $0.5 million in the Other segment for the three and six months ended June 30, 2014. For the three and six months ended June 30, 2013, the Company recognized a gain of approximately $17.0 million due to the release of a below market contract liability that was obtained through the acquisition of North River which was partially offset by asset impairment charges of approximately $8.0 million, all related to the accelerated closure of the North River mine. The Company also incurred $3.3 million and $10.7 million of costs related to the curtailment of the Willow Creek mine for the three and six months ended June 30, 2013, respectively. All of these charges are presented as restructuring and asset impairments in the Condensed Consolidated Statements of Operations.

Assets Held for Sale

        On May 2, 2014, the Company reached an agreement in principle with the Alabama State Port Authority to sell both the Blue Creek Coal Terminal located in the Port of Mobile and an additional parcel of more than 60 acres of land (collectively "BCCT") for a total consideration of $25.0 million. Additionally, the parties have agreed in principle to amend and extend the existing coal handling agreement and make certain improvements to the coal handling facility at the port. As of June 30, 2014, the Company classified the BCCT as assets held for sale in current assets in the Condensed Consolidated Balance Sheets. The BCCT assets are part of the U.S. Operations segment. The Company anticipates the sale closing in the third quarter of 2014. The Company recognized an impairment charge of approximately $23.0 million as of June 30, 2014 to reduce the carrying value of these assets to their fair value less costs to sell. The carrying value of the BCCT assets as of December 31, 2013 was $47.5 million and was included in property, plant and equipment, net, within the Condensed Consolidated Balance Sheets. Fair value was determined based upon the anticipated sales price of the BCCT asset sale and is categorized as a Level 3 in the fair value hierarchy. This charge is included in restructuring and asset impairments in the Condensed Consolidated Statements of Operations.

Note 3—Inventories

        Inventories are summarized as follows (in thousands):

 
  June 30,
2014
  December 31,
2013
 

Coal

  $ 211,874   $ 238,820  

Raw materials and supplies

    62,608     73,827  
           

Total inventories

  $ 274,482   $ 312,647  
           
           

Note 4—Income Taxes

        The Company estimates its annual effective tax rate based on projected financial income for the full year at the end of each interim reporting period unless projected financial income for the full year is close to break even, in which case the annual effective tax rate could distort the income tax provision for an interim period. When this happens, the Company calculates the interim income tax provision using actual year to date financial results for certain jurisdictions. This method results in an income tax provision based solely on the year to date financial taxable income or loss for those jurisdictions. In

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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 4—Income Taxes (Continued)

both cases, the tax effect of unusual or infrequently occurring items, including effects of changes in tax laws or rates, are reported in the interim period in which they occur.

        For the six months ended June 30, 2014, the income tax benefit was determined based on the annual effective tax rate method. The Company recognized an income tax benefit of $45.0 million for the six months ended June 30, 2014 compared to an income tax benefit of $115.8 million for the six months ended June 30, 2013. The decrease in the income tax benefit year over year was primarily due to a full valuation allowance provided against the U.S. net deferred tax assets recorded for U.S. operating losses in the current period. During the second quarter of 2014, the Canada Revenue Agency ("CRA") concluded its income tax audit of the tax years ended December 31, 2011 and March 31, 2011. As a result of settling these audit years, the Company recorded a charge of $3.2 million in the current quarter to reflect the reduction of certain tax attributes, including net operating loss carryovers. The Company's effective tax rate for the six months ended June 30, 2014 and 2013 reflects the benefits of the Canadian and U.K. Operations which are taxed at statutory rates lower than the U.S. rate and the effects of additional tax losses related to foreign financing activities.

        The Company utilizes the asset and liability method of accounting for income taxes and records deferred tax assets to the extent it believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Based upon the Company's review of all positive and negative evidence, including its three year U.S. cumulative pre-tax book loss, it concluded that a full valuation allowance should continue to be recorded against its U.S net deferred tax assets at June 30, 2014. In the future, if the Company determines that it is more likely than not that it will realize its U.S. net deferred tax assets, it will reverse the applicable portion of the valuation allowance and recognize an income tax benefit in the period in which such determination is made.

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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 5—Debt

        Debt consisted of the following (in thousands):

 
  June 30,
2014
  December 31,
2013
  Weighted Average
Stated Interest
Rate At
June 30, 2014
  Final
Maturity

2011 term loan A

  $   $ 406,566   N/A   N/A

2011 term loan B(1)

    978,178     978,178   7.25%   2018

Revolving credit facility(1)

          N/A   2016/2017

9.875% senior notes(2)

    465,000     500,000   9.875%   2020

8.50% senior notes

    450,000     450,000   8.50%   2021

9.50% senior secured notes

    450,000     450,000   9.50%   2019

9.50% add-on senior secured notes

    200,000       9.50%   2019

11.0% / 12.0% senior secured PIK toggle notes

    350,000       11.00%   2020

Other(3)

    26,373     14,876   Various   Various

Debt discount, net

    (23,247 )   (20,788 ) N/A   N/A
                 

Total debt

    2,896,304     2,778,832        

Less: current debt(3)

    (15,353 )   (9,210 )      
                 

Total long-term debt

  $ 2,880,951   $ 2,769,622        
                 
                 

(1)
As of June 30, 2014, the revolving credit facility and term loan B interest rates were tied to LIBOR or CDOR, plus a credit spread of 550 basis points for the revolver and 675 basis points with a minimum LIBOR floor of 100 basis points for the term loan B.

(2)
On April 23, 2014, the Company issued an aggregate of 3.15 million shares of its common stock in exchange for $35.0 million of its 9.875% Senior Notes due 2020. The Company recognized a net gain of $11.4 million in gain (loss) on extinguishment of debt in the Condensed Consolidated Statements of Operations in the current quarter.

(3)
Includes capital lease obligations and an equipment financing agreement.

        The Company's minimum debt repayment schedule, excluding interest, as of June 30, 2014 is as follows (in thousands):

 
  Payments Due  
 
  2014   2015   2016   2017   2018   Thereafter  

2011 term loan B

  $   $   $   $   $ 978,178   $  

9.875% senior notes

                        465,000  

8.50% senior notes

                        450,000  

9.50% senior secured notes

                        450,000  

9.50% add-on senior secured notes

                        200,000  

11.0% / 12.0% senior secured PIK toggle notes

                        350,000  

Other

    7,836     12,775     5,762              
                           

  $ 7,836   $ 12,775   $ 5,762   $   $ 978,178   $ 1,915,000  
                           
                           

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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 5—Debt (Continued)

        See Note 14 regarding subsequent events related to long-term debt.

Note 6—Pension and Other Postretirement Benefits

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

 
  Pension Benefits   Other Postretirement
Benefits
 
 
  For the three months
ended June 30,
  For the three months
ended June 30,
 
 
  2014   2013   2014   2013  

Components of net periodic benefit cost:

                         

Service cost

  $ 1,701   $ 1,766   $ 1,944   $ 2,486  

Interest cost

    3,316     3,070     7,726     7,198  

Expected return on plan assets

    (4,553 )   (4,235 )        

Amortization of prior service cost

    61     66     307     307  

Amortization of net actuarial loss

    550     2,434     3,892     4,734  

Settlement loss

    843              
                   

Net periodic benefit cost

  $ 1,918   $ 3,101   $ 13,869   $ 14,725  
                   
                   

 

 
  Pension Benefits   Other Postretirement
Benefits
 
 
  For the six months
ended June 30,
  For the six months
ended June 30,
 
 
  2014   2013   2014   2013  

Components of net periodic benefit cost:

                         

Service cost

  $ 3,402   $ 3,532   $ 3,888   $ 4,972  

Interest cost

    6,664     6,140     15,452     14,396  

Expected return on plan assets

    (9,106 )   (8,470 )        

Amortization of prior service cost

    122     132     614     614  

Amortization of net actuarial loss

    1,192     4,868     7,784     9,468  

Settlement loss

    1,627              
                   

Net periodic benefit cost

  $ 3,901   $ 6,202   $ 27,738   $ 29,450  
                   
                   

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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 7—Net Loss Per Share

        A reconciliation of the basic and diluted net loss per share computations for the three and six months ended June 30, 2014 and 2013 is as follows (in thousands, except per share data):

 
  For the three months ended June 30,  
 
  2014   2013  
 
  Basic   Diluted   Basic   Diluted  

Numerator:

                         

Net loss

  $ (151,391 ) $ (151,391 ) $ (34,492 ) $ (34,492 )

Denominator:

                         

Average number of common shares outstanding(1)

    65,024     65,024     62,632     62,632  
                   

Net loss per share

  $ (2.33 ) $ (2.33 ) $ (0.55 ) $ (0.55 )
                   
                   

 

 
  For the six months ended June 30,  
 
  2014   2013  
 
  Basic   Diluted   Basic   Diluted  

Numerator:

                         

Net loss

  $ (243,569 ) $ (243,569 ) $ (83,936 ) $ (83,936 )

Denominator:

                         

Average number of common shares outstanding(1)

    63,983     63,983     62,614     62,614  
                   

Net loss per share

  $ (3.81 ) $ (3.81 ) $ (1.34 ) $ (1.34 )
                   
                   

(1)
In periods of net loss, the number of shares used to calculate diluted earnings per share is the same as basic earnings per share; therefore, the effect of dilutive securities is zero for such periods. The weighted average number of stock options and restricted stock units outstanding for the three months ended June 30, 2014 and 2013 totaling 1,886 and 600, respectively, were excluded from the calculation above because their effect would have been anti-dilutive. Additionally, the weighted average number of stock options and restricted stock units outstanding for the six months ended June 30, 2014 and 2013 totaling 1,348 and 482, respectively, were excluded from the calculation above because their effect would have been anti-dilutive.

        The tables below sets forth stock options exercised and restricted stock units vested for the three and six months ended June 30, 2014 and 2013:

 
  For the three
months ended
June 30,
  For the six
months ended
June 30,
 
 
  2014   2013   2014   2013  

Stock options exercised

    8,659         18,300     24,831  

Restricted stock units vested

    42,849     8,803     78,552     25,676  
                   

Total

    51,508     8,803     96,852     50,507  
                   
                   

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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 8—Commitments and Contingencies

Income Tax Litigation

        On December 27, 1989, the Company and most of its U.S. subsidiaries each filed a voluntary petition for reorganization under Chapter 11 of Title 11 of the United States Bankruptcy Code (the "Bankruptcy Proceedings") in the United States Bankruptcy Court for the Middle District of Florida, Tampa Division (the "Bankruptcy Court"). The Company emerged from bankruptcy on March 17, 1995 (the "Effective Date") pursuant to the Amended Joint Plan of Reorganization dated as of December 9, 1994, as modified on March 1, 1995 (as so modified the "Consensual Plan"). Despite the confirmation and effectiveness of the Consensual Plan, the Bankruptcy Court continues to have jurisdiction over, among other things, the resolution of disputed prepetition claims against the Company and other matters that may arise in connection with or related to the Consensual Plan, including claims related to federal income taxes.

        In connection with the U.S. Bankruptcy Proceedings, the Internal Revenue Service ("IRS") filed a proof of claim in the Bankruptcy Court (the "Proof of Claim") for a substantial amount of taxes, interest and penalties with respect to fiscal years ended August 31, 1983 through May 31, 1994. The Company filed an adversary proceeding in the Bankruptcy Court disputing the Proof of Claim (the "Adversary Proceeding") and the various issues have been litigated in the Bankruptcy Court. An opinion was issued by the Bankruptcy Court in June 2010 as to the remaining disputed issues. The Bankruptcy Court instructed both parties to submit a final order addressing all issues that have been litigated for the tax years 1983 through 1995 in the Adversary Proceeding by late August 2010. At the request of both parties, the Bankruptcy Court granted an extension of time of 90 days from the initial submission date to submit the final order. Additional extensions of time to submit the proposed final order were granted in November 2010, February 2011, May 2011, September 2011, January 2013, May 2013 and December 2013. At the request of the IRS, in December 2013 the Bankruptcy Court granted an additional extension of time to submit the final order.

        The amounts initially asserted by the Proof of Claim do not reflect the subsequent resolution of various issues through settlements or concessions by the parties. The Company believes that any financial exposure with respect to those issues that have not been resolved or settled in the Proof of Claim is limited to interest and possible penalties and the amount of tax assessed has been offset by tax reductions in future years. All of the issues in the Proof of Claim, which have not been settled or conceded, have been litigated before the Bankruptcy Court and are subject to appeal but only at the conclusion of the entire Adversary Proceeding.

        The IRS completed its audit of the Company's federal income tax returns for the years ended May 31, 2000 through December 31, 2005. The IRS issued 30-Day Letters to the Company in June 2010, proposing changes to tax for these tax years. The Company believes its tax filing positions have substantial merit and filed a formal protest with the IRS within the prescribed 30-day time limit for those issues which have not been previously settled or conceded. The IRS filed a rebuttal to the Company's formal protest and the case was assigned to the Appeals Division of the IRS. The Appeals Division convened a hearing on March 8, 2011 and heard arguments from both parties as to issues not settled or conceded for the 2000 through 2005 audit period. As of June 30, 2014, a final resolution has not been reached with the Appeals Division pertaining to these matters. The disputed issues in this audit period are similar to the issues remaining in the Proof of Claim.

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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 8—Commitments and Contingencies (Continued)

        In 2012, the IRS completed its audit of the Company's federal income tax returns for the years 2006 through 2008 and proposed adjustments to tax for these periods. The IRS issued a 30-Day Letter with proposed adjustments and the Company responded to the IRS within the prescribed 30-day time limit. The proposed adjustments are similar to issues in the prior Proof of Claim and included a proposed adjustment to a worthless stock deduction reported in the Company's 2008 federal income tax return. Also in 2012, the Company received notification from the IRS that the audit of the 2006 through 2008 tax years had been reopened for further review. The IRS issued a revised IRS Appeals Transmittal Letter in April 2013 conceding the proposed adjustment to the worthless stock deduction. As of June 30, 2014, a final resolution has not been reached with the Appeals Division pertaining to the remaining disputed matters. The remaining disputed issues in this audit period are similar to the issues remaining in the Proof of Claim.

        The IRS is conducting an audit of the Company's income tax returns filed for 2009 through 2012. Since the examination is ongoing, any resulting tax deficiency or overpayment cannot be estimated at this time. During 2014, the statute of limitations for assessing additional income tax deficiencies will expire for certain tax years in several state tax jurisdictions. The expiration of the statute of limitations for these years is expected to have an immaterial impact on the total uncertain income tax positions and net income.

        It is reasonably possible that the amount of unrecognized tax benefits will change in the next twelve months. The Company anticipates a final order will be issued by the Bankruptcy Court in 2014 settling the issues in the Proof of Claim. A final order by the Bankruptcy Court would permit a resolution of similar issues for the tax years currently in Appeals Division (2000-2008) and currently under IRS Exam (2009-2012). As of June 30, 2014, the Company had $35.0 million of accruals for unrecognized tax benefits on the matters subject to disposition. Due to the uncertainty related to the potential outcome of these matters, any possible changes in unrecognized tax benefits cannot be reasonably estimated.

        The Company believes that all of its current and prior tax filing positions have substantial merit and intends to vigorously defend any tax claims asserted. The Company believes that it has sufficient accruals to address any claims, including interest and penalties, and does not believe that any potential difference between the final settlements and the amounts accrued will have a material effect on the Company's financial position, but such potential difference could be material to results of operations in a future reporting period.

Environmental Matters

        The Company is subject to a wide variety of laws and regulations concerning the protection of the environment, both with respect to the construction and operation of its plants, mines and other facilities and with respect to remediating environmental conditions that may exist at its own and other properties.

        The Company believes that it is in substantial compliance with federal, state and local environmental laws and regulations. The Company accrues for environmental expenses resulting from existing conditions that relate to past operations when the costs are probable and can be reasonably estimated.

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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 8—Commitments and Contingencies (Continued)

Walter Coke, Inc.

        Walter Coke entered into a decree order in 1989 (the "1989 Order") relative to a Resource Conservation Recovery Act ("RCRA") compliance program mandated by the Environmental Protection Agency ("EPA"). A RCRA Facility Investigation ("RFI") Work Plan was prepared which proposed investigative tasks to assess the presence of contamination at the Walter Coke facility. In 2004, the EPA re-directed Walter Coke's RFI efforts toward completion of the Environmental Indicator ("EI") determinations for the Current Human Exposures, which were approved and finalized for Walter Coke's Birmingham facility in 2005. In 2008, as a follow-up to the EI determination, the EPA requested that Walter Coke perform additional soil sampling and testing in the neighborhoods surrounding its facility. The results of this sampling and testing were submitted to the EPA for review in 2009. In conjunction with the plan, Walter Coke agreed to remediate portions of 23 properties based on the 2009 sampling and that process was completed in 2012.

        In 2011, the EPA notified Walter Coke in the form of a General Notice Letter that it proposed that the offsite remediation project be classified and managed as a Superfund site under Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), allowing other Potentially Responsible Parties (PRPs) to potentially be held responsible. Under CERCLA authority, the EPA proceeded directly with the offsite sampling work and deferred any further enforcement actions or decisions. In March 2013, the EPA released the North Birmingham Air Toxics Risk Assessment showing the air quality around Company facilities to be acceptable. In August 2013, the Agency for Toxic Substances and Disease Registry (ATSDR) released a report concerning past, present and future exposures to residential soils in North Birmingham and concluded that there is no public health hazard. In September 2013, the EPA sent an "Offer to Conduct Work" letter to Walter Coke and four other PRPs notifying them that the EPA had completed sampling at 1,100 residential properties and that 400 properties exceeded Regional Removal Management Levels (RML's) and offered the PRPs an opportunity to cleanup 50 Phase I properties. The Company has notified the EPA that it has declined the Offer to Conduct Work.

        A RCRA Section 3008(h) Administrative Order on Consent (the "2012 Order") with the effective date of September 24, 2012 was signed by Walter Coke and the EPA. The 2012 Order declared that all of the approved investigation tasks of the RFI Work Plans required by the 1989 Order had been completed by Walter Coke and that the 1989 Order was terminated and is no longer in effect. The objectives of the 2012 Order are to perform Corrective Measure Studies, implement remedies if necessary, and implement and maintain institutional controls if required at the Walter Coke facility.

        The Company has incurred costs to investigate the presence of contamination at the Walter Coke facility and to define remediation actions to address this environmental liability in accordance with the agreements reached with the EPA under the RFI and the residential soil sampling conducted by Walter Coke in the neighborhoods surrounding its facility. At June 30, 2014, the Company had an amount accrued that is probable and can be reasonably estimated for the costs to be incurred to identify and define remediation actions, as well as to perform certain remedial tasks which can be quantified. As of June 30, 2014, the amount of this accrual was not material to the Company's consolidated financial statements. While it is probable that the Company will incur additional future costs to remediate environmental liabilities at the Walter Coke facility, the amount of such additional costs cannot be reasonably estimated at this time. Although no assurances can be given that the Company will not be

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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 8—Commitments and Contingencies (Continued)

required in the future to make material expenditures relating to the Walter Coke site or other sites, management does not believe at this time that the cleanup costs, if any, associated with these sites will have a material adverse effect on the Company's consolidated financial statements, but such cleanup costs could be material to the Company's results of operations in a future reporting period.

        In 2011, the Company and Walter Coke were named in a suit filed by Louise Moore (Louise Moore v. Walter Energy, Inc. and Walter Coke, Inc., Case No. 2:11-CV-01391) in the federal District Court for the Northern District of Alabama. This is a putative civil class action alleging state law tort claims arising from the alleged presence on properties of substances, including arsenic, BaP, and other hazardous substances, allegedly as a result of current and/or historic operations in the area conducted by the defendants and/or their predecessors. Subsequently, the plaintiff filed an amended complaint eliminating Walter Energy as a defendant and amending the claims alleged against Walter Coke to relate to Walter Coke's alleged conduct for the period commencing after March 2, 1995. Thereafter, Walter Coke filed a Motion to Dismiss the amended complaint. On September 28, 2012, the Court issued a memorandum opinion and order granting in part and denying in part the motion. In partially granting Walter Coke's motion, the Court held that the plaintiff's claim for injunctive relief was not valid and that class action-related claims must be dismissed (with leave to re-plead) due to an improperly defined class. In partially ruling for the plaintiff, the Court held that at the pleading stage the plaintiff's claims could not be dismissed on rule of repose grounds or due to insufficient pleading. The plaintiff filed an amended complaint on October 29, 2012. On November 19, 2012, Walter Coke filed an answer and motion for partial dismissal of plaintiff's second amended complaint. The Court held a hearing on Walter Coke's motion for partial dismissal of the second amended complaint on January 10, 2013. On September 30, 2013, the Court issued a memorandum opinion and order denying the motion. On November 1, 2013, a joint motion to stay the proceeding was filed with the Court, which the Court granted on November 21, 2013. As a result of the Court's action, the case is currently stayed. The Company believes that there is no merit to the claims alleged in this action and intends to vigorously defend this matter.

Securities Class Actions and Shareholder Derivative Actions

        On January 26, 2012 and March 15, 2012, putative class actions were filed against Walter Energy, Inc. and some of its current and former senior executive officers in the U.S. District Court for the Northern District of Alabama (Rush v. Walter Energy, Inc., et al.). The three executive officers named in the complaints are: Keith Calder, Walter's former CEO; Walter Scheller, the Company's current CEO and a director; and Neil Winkelmann, former President of Walter's Canadian and U.K. Operations (collectively the "Individual Defendants"). The complaints were filed by Peter Rush and Michael Carney, purported shareholders of Walter Energy who each seek to represent a class of Walter Energy shareholders who purchased common stock between April 20, 2011 and September 21, 2011.

        These complaints allege that Walter Energy and the Individual Defendants made false and misleading statements regarding the Company's operations outlook for the second quarter of 2011. The complaints further allege that the Company and the Individual Defendants knew that these statements were misleading and failed to disclose material facts that were necessary in order to make the statements not misleading. Plaintiffs claimed violations of Section 10(b) of the Securities Exchange Act of 1934 (the "1934 Act"), Rule 10b-5 promulgated thereunder, and Section 20(a) of the 1934 Act. On

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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 8—Commitments and Contingencies (Continued)

May 30, 2012, the two actions were consolidated into In re Walter Energy, Inc. Securities Litigation. The court also appointed the Government of Bermuda Contributory and Public Service Superannuation Pension Plans as well as the Stephen C. Beaulieu Revocable Trust to be lead plaintiffs and approved lead plaintiffs' selection of Robbins Geller Rudman & Dowd LLP and Kessler Topaz Meltzer & Check, LLP as lead plaintiffs' counsel for the consolidated action. On August 20, 2012, Lead Plaintiffs filed a consolidated amended class action complaint in this action. The consolidated amended complaint names as an additional defendant Joseph Leonard, a current director and former interim CEO of Walter Energy, in addition to the previously named defendants. Defendants filed a Motion to Dismiss the amended complaint on October 4, 2012. On January 29, 2013, the court denied that motion without prejudice. Defendants answered the complaint on February 15, 2013. The parties are now in the process of discovery. Plaintiffs filed a motion for class certification on August 15, 2013. On March 18, 2014, the Court denied Plaintiffs' motion for class certification without prejudice to refiling and rebriefing and stayed this litigation pending a decision by the United States Supreme Court in Halliburton Co., et al. v. Erica P. John Fund, Inc. ("Halliburton II"). Following the U.S. Supreme Court's decision in Halliburton II on June 23, 2014, the parties have until August 22, 2014 to file a motion with the Court requesting the stay be lifted and also to submit a jointly proposed briefing schedule on a second motion for class certification, if such a motion is desired by Plaintiffs.

        Walter Energy and the other named defendants believe that there is no merit to the claims alleged and intend to vigorously defend these actions.

        On February 7, 2012, a shareholder derivative lawsuit was filed in the 10th Judicial Circuit of Alabama (Israni v. Clark et al.). On February 10, 2012, a second shareholder derivative suit was filed in the same court (Himmel v. Scheller et al.), and on February 16, 2012 a third derivative suit was filed (Walters v. Scheller et al.). All three complaints named as defendants the Company's then current Board of Directors, Keith Calder and Neil Winkelmann. The Company was named as a nominal defendant in each complaint. The three complaints allege similar claims to those alleged in the Rush complaint. The complaints variously assert state law claims for breaches of fiduciary duties for alleged failures to maintain internal controls and to properly manage the Company, unjust enrichment, waste of corporate assets, gross mismanagement and abuse of control. The three derivative actions seek among other things, recovery for the Company for damages that the Company suffered as a result of alleged wrongful conduct. On April 11, 2012, the Court consolidated these shareholder derivative suits. Walter Energy thereafter entered into a stipulation with the lead plaintiffs in the consolidated derivative suit, pursuant to which all proceedings in the derivative action were stayed pending the filing of the consolidated amended complaint in the class action. On September 19, 2012, lead plaintiffs filed a consolidated shareholder derivative complaint. This action has been stayed pending the resolution of summary judgment motions in the putative securities class action. The derivative plaintiffs will have certain rights to participate in discovery taken in the federal securities action.

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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 8—Commitments and Contingencies (Continued)

        On March 1, 2012, a shareholder derivative lawsuit was filed in the U.S. District Court for the Northern District of Alabama (Makohin v. Clark, et al.). On September 27, 2012, a second shareholder derivative lawsuit was filed in the same court (Sinerius v. Beatty, et al.). Both complaints name as defendants the Company's then current Board of Directors and Keith Calder. The Company is named as a nominal defendant in each complaint. These complaints, like the state court derivative claims, allege similar facts to those alleged in the Rush complaint. The Makohin complaint asserts state law claims for breaches of fiduciary duties and unjust enrichment, while the Sinerius complaint asserts these same claims as well as claims for abuse of control and gross mismanagement. Both actions seek, among other things, recovery for the Company for damages that the Company suffered as a result of alleged wrongful conduct and restitution from defendants of all profits, benefits and other compensation that they wrongfully obtained. Like the state court derivative action, both of these cases have been stayed pending resolution of summary judgment motions in the putative securities class action. The federal derivative plaintiffs will also have certain rights to participate in discovery taken in the federal securities action.

        Walter Energy and the other named defendants believe that there is no merit to the claims alleged in these shareholder derivative lawsuits and intend to vigorously defend these actions.

Miscellaneous Litigation

        The Company and its subsidiaries are parties to a number of other lawsuits arising in the ordinary course of their businesses. The Company records costs relating to these matters when a loss is probable and the amount can be reasonably estimated. The effect of the outcome of these matters on the Company's future results of operations cannot be predicted with certainty as any such effect depends on future results of operations and the amount and timing of the resolution of such matters. While the results of litigation cannot be predicted with certainty, the Company believes that the final outcome of such other litigation will not have a material adverse effect on the Company's consolidated financial statements.

Commitments and Contingencies—Other

        In the opinion of management, accruals associated with contingencies incurred in the normal course of business are sufficient. Resolution of existing known contingencies is not expected to significantly affect the Company's financial position and results of operations.

Note 9—Derivative Financial Instruments

Interest Rate Swaps

        On June 27, 2011, the Company entered into an interest rate swap agreement with a notional value of $450.0 million. The objective of the swap is to protect against the variability in expected future cash flows attributable to changes in the benchmark interest rate related to interest payments required under the 2011 Credit Agreement. The interest rate on the debt is subject to change due to fluctuations in the benchmark interest rate of 3-month LIBOR. The structure of the hedge is a three year amortizing interest rate swap based on a 1.17% fixed rate with quarterly fixed rate and floating rate payment dates beginning on July 18, 2011. The hedge will be settled upon maturity in July 2014

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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 9—Derivative Financial Instruments (Continued)

and is being accounted for as a cash flow hedge. Changes in the fair value of the effective portion of the hedge are reported in accumulated other comprehensive income (loss) and reclassified into earnings in the same period or periods during the hedged transactions affect earnings. The Company recognized $1.1 million related to the effective portion of the hedge for the six months ended June 30, 2014 in interest expense, net in the Condensed Consolidated Statements of Operations. Upon the prepayment of term loan A in the first quarter of 2014, the interest rate swap became fully ineffective. The ineffective portion of the change in the fair value of the hedge is recognized directly in earnings. The Company recognized income of approximately $1.0 million and expense of $0.7 million for the three and six months ended June 30, 2014, respectively, related to the ineffective portion of the hedge in other income (loss) in the Condensed Consolidated Statements of Operations.

Interest Rate Cap

        On June 27, 2011, the Company entered into an interest rate cap agreement related to interest payments required under the 2011 Credit Agreement with a notional value of $255.0 million. The objective of the cap is to protect against the variability in expected future cash flows attributable to changes in the benchmark interest rate above 2.00%. The interest rate on the debt is subject to change due to fluctuations in the benchmark interest rate of 3- month LIBOR. The structure of the hedge is a three year amortizing interest rate cap based on a strike price of 2.00% with quarterly fixed rate and floating rate payment dates beginning on July 7, 2011. The hedge will be settled upon maturity in July 2014 and is being accounted for as a cash flow hedge. Changes in the fair value of the hedge that take place through the date of maturity are reported in accumulated other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transactions affect earnings.

        The following table presents the fair values of the Company's derivative instruments as well as their classification within the Condensed Consolidated Balance Sheets (in thousands). See Note 11 for additional information related to the fair values of the Company's derivative instruments.

 
  June 30,
2014
  December 31,
2013
 

Asset derivatives designated as cash flow hedging instruments:

             

Interest rate cap(1)

  $   $ 1  

Liability derivatives designated as cash flow hedging instruments:

             

Interest rate swaps(2)

  $ 1,019   $ 3,080  

(1)
$1 thousand was included in other current assets within the Condensed Consolidated Balance Sheets as of December 31, 2013.

(2)
$1.0 million and $3.1 million were included within other current liabilities within the Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013, respectively.

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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 9—Derivative Financial Instruments (Continued)

        The following tables present the gains and losses from derivative instruments for the three and six months ended June 30, 2014 and 2013 and their location within the condensed consolidated financial statements (in thousands).

 
  Gain (loss),
net of tax,
recognized in
accumulated
other
comprehensive
income (loss)
  Gain, net of
tax, reclassified
from
accumulated
other
comprehensive
income (loss)
to earnings(1)
 
 
  Three months
ended
June 30,
  Three months
ended
June 30,
 
Derivatives designated as cash flow hedging instruments
  2014   2013   2014   2013  

Interest rate swaps

  $   $ 1,142   $   $ (614 )

Interest rate cap

        (2 )        
                   

Total

  $   $ 1,140   $   $ (614 )
                   
                   

 

 
  Gain (loss), net of
tax, recognized in
accumulated other
comprehensive
income (loss)
  Gain, net of tax,
reclassified from
accumulated other
comprehensive
income (loss) to
earnings(1)
  Loss, net of tax,
reclassified from
accumulated
other
comprehensive
income (loss)
to earnings
(ineffective
portion)(2)
 
 
  Six months ended
June 30,
  Six months ended
June 30,
  Six months ended
June 30,
 
Derivatives designated as cash flow hedging instruments
  2014   2013   2014   2013   2014   2013  

Interest rate swaps

  $ 1,303   $ 2,482   $ (677 ) $ (1,230 ) $ 1,053   $  

Interest rate cap

        (4 )                
                           

Total

  $ 1,303   $ 2,478   $ (677 ) $ (1,230 ) $ 1,053   $  
                           
                           

(1)
The effective portion of the interest rate swap amounts are reported within interest expense, net in the Condensed Consolidated Statements of Operations.

(2)
The ineffective portion of the interest rate swap is reported within other income (loss) in the Condensed Consolidated Statements of Operations.

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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 10—Accumulated Other Comprehensive Income (Loss)

        The following table presents the changes in accumulated other comprehensive income (loss) by component for the six months ended June 30, 2014, net of tax (in thousands).

 
  Pension and
other
postretirement
plans
  Unrealized
gain/(loss)
on hedges
  Foreign
currency
translation
adjustment
  Total  

Beginning balance as of December 31, 2013

  $ (165,150 ) $ (1,679 ) $ 4,571   $ (162,258 )

Other comprehensive income before reclassifications

        1,303     13,428     14,731  

Amounts reclassified from accumulated other comprehensive income (loss)

    7,017     376     —(1 )   7,393  
                   

Net current-period other comprehensive income

    7,017     1,679     13,428     22,124  
                   

Ending balance as of June 30, 2014

  $ (158,133 ) $   $ 17,999   $ (140,134 )
                   
                   

(1)
Foreign currency translation adjustments are reclassified from accumulated other comprehensive income (loss) to earnings upon sale or substantially complete liquidation of an investment in a foreign entity.

        The following table presents amounts reclassified out of each component of accumulated other comprehensive income (loss) for the six months ended June 30, 2014 (in thousands).

Details about Accumulated Other Comprehensive Income (Loss) Components
  Amount Reclassified
from Accumulated
Other Comprehensive
Income (Loss)
  Affected Line Item in the
Condensed Consolidated
Statements of Operations

Gains and losses on cash flow hedges:

         

Interest rate swaps (effective portion)

  $ (1,095 ) Interest expense, net

Interest rate swaps (ineffective portion)

    1,701   Other loss
         

    606   Total before tax

    (230 ) Income tax benefit
         

  $ 376   Net of tax
         
         

Amortization of pension and postretirement benefit plans:

         

Prior service cost

  $ 736   (a)

Net actuarial loss

    8,976   (a)

Settlement loss

    1,627   (a)
         

    11,339   Total before tax

    (4,322 ) Income tax benefit
         

  $ 7,017   Net of tax
         
         

(a)
Amortization of pension benefit items is included in cost of sales (exclusive of depreciation and depletion) and selling, general and administrative expense while amortization of postretirement benefit items is included in postretirement benefits within the Condensed Consolidated Statements of Operations.

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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 11—Fair Value of Financial Instruments

        Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three level hierarchy has been established for valuing assets and liabilities based on how transparent (observable) the inputs are that are used to determine fair value, with the inputs considered most observable categorized as Level 1 and those that are the least observable categorized as Level 3. Hierarchy levels are defined as follows:

Level 1:   Quoted prices in active markets for identical assets and liabilities;
Level 2:   Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and
Level 3:   Unobservable inputs that are supported by little or no market data which require the reporting entity to develop its own assumptions.

        The following table presents information about the Company's assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013 and indicates the fair value hierarchy of the valuation techniques utilized to determine such values. For some assets, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. When this is the case, the asset is categorized based on the level of the most significant input to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement requires judgment and considers factors specific to the assets being valued.

 
  June 30, 2014  
 
  Fair Value
Measurements Using
   
 
 
  Total
Fair Value
 
(in thousands)
  Level 1   Level 2   Level 3  

Liabilities:

                         

Interest rate swaps

  $   $ 1,019   $   $ 1,019  

 

 
  December 31, 2013  
 
  Fair Value
Measurements Using
   
 
 
  Total
Fair Value
 
(in thousands)
  Level 1   Level 2   Level 3  

Assets:

                         

Interest rate cap

  $   $ 1   $   $ 1  

Liabilities:

                         

Interest rate swaps

  $   $ 3,080   $   $ 3,080  

        The Company uses quoted dealer prices for similar contracts in active over-the-counter markets for determining fair value of Level 2 financial assets and liabilities.

        The following methods and assumptions were used to estimate the fair value for which the fair value option was not elected:

        Cash and cash equivalents, receivables and accounts payable—The carrying amounts reported in the balance sheet approximate fair value.

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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 11—Fair Value of Financial Instruments (Continued)

        Debt—All of the Company's outstanding debt is carried at cost. There were no borrowings outstanding under the Revolver at June 30, 2014 or December 31, 2013. The estimated fair value of the Company's debt is based on observable market data (Level 2). The carrying amounts and fair values of the Company's long-term debt (excluding capital obligations, equipment financing agreements and a discount on the Revolver of $7,437 as of June 30, 2014) are presented below (in thousands):

 
  June 30, 2014   December 31, 2013  
 
  Carrying
Amount
  Fair Value   Carrying
Amount
  Fair Value  

2011 term loan A(1)

  $   $   $ 401,052   $ 403,517  

2011 term loan B(2)

  $ 964,684   $ 912,152   $ 968,581   $ 959,838  

9.875% senior notes(3)

  $ 462,200   $ 287,138   $ 496,831   $ 431,250  

8.50% senior notes

  $ 450,000   $ 255,375   $ 450,000   $ 374,625  

9.50% senior secured notes(4)

  $ 447,656   $ 455,625   $ 447,492   $ 474,750  

9.50% add-on senior secured notes(5)

  $ 202,828   $ 202,500   $   $  

11.0%/12.0% senior secured PIK toggle notes

  $ 350,000   $ 288,750   $   $  

(1)
Net of debt discount of $5,514 as of December 31, 2013.

(2)
Net of debt discount of $13,494 and $9,597 as of June 30, 2014 and December 31, 2013, respectively.

(3)
Net of debt discount of $2,800 and $3,169 as of June 30, 2014 and December 31, 2013, respectively.

(4)
Net of debt discount of $2,344 and $2,508 as of June 30, 2014 and December 31, 2013, respectively.

(5)
Includes a premium of $2,828 as of June 30, 2014.

Note 12—Segment Information

        The Company's reportable segments are strategic business units arranged geographically which have separate management teams. These reportable segments are U.S. Operations, Canadian and U.K. Operations, and Other. Both the U.S. Operations and Canadian and U.K. Operations reportable segments' primary business is that of mining, processing and exporting metallurgical coal for the steel industry. The Other segment primarily includes unallocated corporate expenses.

        The accounting policies of the segments are the same as those described in Note 2 of the Notes to Consolidated Financial Statements included in the Company's Annual Report filed with the Securities and Exchange Commission on Form 10-K for the fiscal year ended December 31, 2013. The Company evaluates performance primarily based on operating income of the respective business segments.

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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 12—Segment Information (Continued)

        Summarized financial information of the Company's reportable segments is shown in the following tables (in thousands):

 
  For the three months
ended June 30,
  For the six months
ended June 30,
 
 
  2014   2013   2014   2013  

Revenues:

                         

U.S. Operations

  $ 298,685   $ 321,009   $ 629,349   $ 660,234  

Canadian and U.K. Operations

    79,044     119,873     160,621     271,317  

Other

    622     614     2,266     1,288  
                   

Total revenues

  $ 378,351   $ 441,496   $ 792,236   $ 932,839  
                   
                   

Segment operating income (loss):

                         

U.S. Operations

  $ (30,409 ) $ 37,333   $ (24,539 ) $ 30,376  

Canadian and U.K. Operations

    (66,426 )   (66,347 )   (119,044 )   (115,113 )

Other

    (2,604 )   (1,539 )   (2,918 )   (9,436 )
                   

Total operating loss

    (99,439 )   (30,553 )   (146,501 )   (94,173 )

Less interest expense, net

    (73,402 )   (52,985 )   (138,834 )   (98,952 )

Gain (loss) on extinguishment of debt

    11,397         (2,492 )   (6,001 )

Other income (loss)

    978     (714 )   (778 )   (609 )
                   

Loss before income tax benefit

    (160,466 )   (84,252 )   (288,605 )   (199,735 )

Income tax benefit

    (9,075 )   (49,760 )   (45,036 )   (115,799 )
                   

Net loss

  $ (151,391 ) $ (34,492 ) $ (243,569 ) $ (83,936 )
                   
                   

Depreciation and depletion:

                         

U.S. Operations

  $ 37,694   $ 31,189   $ 76,760   $ 78,662  

Canadian and U.K. Operations

    31,509     36,620     68,219     69,852  

Other

    613     511     1,261     996  
                   

Total

  $ 69,816   $ 68,320   $ 146,240   $ 149,510  
                   
                   

Capital expenditures:

                         

U.S. Operations

  $ 29,490   $ 38,803   $ 39,741   $ 66,204  

Canadian and U.K. Operations

    1,435     7,231     2,044     13,545  

Other

    270     190     1,691     502  
                   

Total

  $ 31,195   $ 46,224   $ 43,476   $ 80,251  
                   
                   

 

 
  June 30,
2014
  December 31,
2013
 

Segment assets:

             

U.S. Operations

  $ 1,230,287   $ 1,265,255  

Canadian and U.K. Operations

    3,667,691     3,687,925  

Other

    563,920     637,680  
           

Total

  $ 5,461,898   $ 5,590,860  
           
           

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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 13—Supplemental Guarantor and Non-Guarantor Financial Information

        In accordance with the indentures governing the 9.875% senior notes due December 2020 and the 8.50% senior notes due April 2021 (collectively the "Senior Notes"), as of June 30, 2014 certain 100% owned U.S. domestic restricted subsidiaries of the Company have fully and unconditionally guaranteed the Senior Notes on a joint and several basis. The following tables present unaudited condensed consolidating financial information for (i) the Company, (ii) the issuer of the senior notes, (iii) the subsidiaries which are guarantors under the senior notes, and (iv) the subsidiaries which are not guarantors of the senior notes:


WALTER ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS (UNAUDITED)
JUNE 30, 2014
(in thousands)

 
  Parent
(Issuer)
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Total
Consolidated
 

ASSETS

                               

Cash and cash equivalents

  $ 255,620   $ 27   $ 37,825   $   $ 293,472  

Receivables, net

    102,008     103,686     25,338         231,032  

Intercompany receivables

        179,412     60,357     (239,769 )    

Intercompany loans receivable

            352     (352 )    

Inventories

        130,447     144,035         274,482  

Deferred income taxes

    26,390     4,733     956         32,079  

Prepaid expenses

    1,457     38,683     5,221         45,361  

Assets held for sale

        24,150             24,150  

Other current assets

    9,666     478     2,360         12,504  
                       

Total current assets

    395,141     481,616     276,444     (240,121 )   913,080  

Mineral interests, net

        6,897     2,880,715         2,887,612  

Property, plant and equipment, net

    7,680     712,731     826,869         1,547,280  

Deferred income taxes

    3,046     7,990         (11,036 )    

Investment in subsidiaries

    3,435,398     81,384         (3,516,782 )    

Other long-term assets

    85,925     18,718     9,283         113,926  
                       

  $ 3,927,190   $ 1,309,336   $ 3,993,311   $ (3,767,939 ) $ 5,461,898  
                       
                       

LIABILITIES AND STOCKHOLDERS' EQUITY

                               

Current debt

  $   $ 7,461   $ 7,892   $   $ 15,353  

Accounts payable

    6,968     42,342     11,141         60,451  

Accrued expenses

    45,962     60,237     36,632         142,831  

Intercompany payables

    239,769             (239,769 )    

Intercompany loans payable

    352             (352 )    

Accumulated other postretirement benefits obligation

    945     29,942             30,887  

Other current liabilities

    179,634     21,313     24,766         225,713  
                       

Total current liabilities

    473,630     161,295     80,431     (240,121 )   475,235  

Long-term debt

    2,869,931     9,355     1,665         2,880,951  

Accumulated other postretirement benefits obligation

    (497 )   575,353             574,856  

Deferred income taxes

            794,627     (11,036 )   783,591  

Other long-term liabilities

    26,791     81,079     82,060         189,930  
                       

Total liabilities

    3,369,855     827,082     958,783     (251,157 )   4,904,563  

Stockholders' equity

    557,335     482,254     3,034,528     (3,516,782 )   557,335  
                       

Total liabilities and stockholders' equity

  $ 3,927,190   $ 1,309,336   $ 3,993,311   $ (3,767,939 ) $ 5,461,898  
                       
                       

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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 13—Supplemental Guarantor and Non-Guarantor Financial Information (Continued)

WALTER ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS (Unaudited)
DECEMBER 31, 2013
(in thousands)

 
  Parent
(Issuer)
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Total
Consolidated
 

ASSETS

                               

Cash and cash equivalents

  $ 234,150   $ 101   $ 26,567   $   $ 260,818  

Receivables, net

    113,936     90,460     77,367         281,763  

Intercompany receivables

        30,126     57,778     (87,904 )    

Intercompany loans receivable

    63,549     1,104,282         (1,167,831 )    

Inventories

        168,434     144,213         312,647  

Deferred income taxes

    23,957     12,154     956         37,067  

Prepaid expenses

    2,245     34,011     2,766         39,022  

Other current assets

    15,257     440     2,334         18,031  
                       

Total current assets

    453,094     1,440,008     311,981     (1,255,735 )   949,348  

Mineral interests, net

        7,294     2,897,708         2,905,002  

Property, plant and equipment, net

    7,248     764,406     865,898         1,637,552  

Deferred income taxes

    3,049     4,458         (7,507 )    

Investment in subsidiaries

    4,409,683     86,357         (4,496,040 )    

Other long-term assets

    73,564     10,323     15,071         98,958  
                       

  $ 4,946,638   $ 2,312,846   $ 4,090,658   $ (5,759,282 ) $ 5,590,860  
                       
                       

LIABILITIES AND STOCKHOLDERS' EQUITY

                               

Current debt

  $   $ 1,313   $ 7,897   $   $ 9,210  

Accounts payable

    5,604     64,678     22,430         92,712  

Accrued expenses

    34,551     53,582     45,737         133,870  

Intercompany payables

    87,904             (87,904 )    

Intercompany loans payable

    1,104,282         63,549     (1,167,831 )    

Accumulated other postretirement benefits obligation

    94     29,942             30,036  

Other current liabilities

    164,364     27,062     22,647         214,073  
                       

Total current liabilities

    1,396,799     176,577     162,260     (1,255,735 )   479,901  

Long-term debt

    2,763,957         5,665         2,769,622  

Accumulated other postretirement benefits obligation

    263     570,449             570,712  

Deferred income taxes

            830,374     (7,507 )   822,867  

Other long-term liabilities

    32,925     73,420     88,719         195,064  
                       

Total liabilities

    4,193,944     820,446     1,087,018     (1,263,242 )   4,838,166  

Stockholders' equity

    752,694     1,492,400     3,003,640     (4,496,040 )   752,694  
                       

Total liabilities and stockholders' equity

  $ 4,946,638   $ 2,312,846   $ 4,090,658   $ (5,759,282 ) $ 5,590,860  
                       
                       

27


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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 13—Supplemental Guarantor and Non-Guarantor Financial Information (Continued)

WALTER ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, 2014
(in thousands)

 
  Parent
(Issuer)
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Total
Consolidated
 

Revenues:

                               

Sales

  $   $ 277,856   $ 100,126   $   $ 377,982  

Miscellaneous income (loss)

    324     1,822     (1,777 )       369  
                       

    324     279,678     98,349         378,351  
                       

Cost and expenses:

                               

Cost of sales (exclusive of depreciation and depletion)

        226,588     117,173         343,761  

Depreciation and depletion

    613     31,840     37,363         69,816  

Selling, general and administrative

    1,961     10,935     6,106         19,002  

Postretirement benefits

    (44 )   13,913             13,869  

Restructuring and asset impairments

    514     23,686     7,142         31,342  
                       

    3,044     306,962     167,784         477,790  
                       

Operating loss

    (2,720 )   (27,284 )   (69,435 )       (99,439 )

Interest expense, net

    (72,338 )   (292 )   (772 )       (73,402 )

Gain on extinguishment of debt

    11,397                 11,397  

Other income (loss)

    981         (3 )       978  
                       

Loss before income tax expense (benefit)

    (62,680 )   (27,576 )   (70,210 )       (160,466 )

Income tax expense (benefit)

    16,128     (7,753 )   (17,450 )       (9,075 )
                       

Equity in net losses of subsidiaries

    (72,583 )           72,583      
                       

Net loss

  $ (151,391 ) $ (19,823 ) $ (52,760 ) $ 72,583   $ (151,391 )
                       
                       

28


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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 13—Supplemental Guarantor and Non-Guarantor Financial Information (Continued)


WALTER ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, 2013
(in thousands)

 
  Parent
(Issuer)
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Total
Consolidated
 

Revenues:

                               

Sales

  $   $ 299,198   $ 138,600   $   $ 437,798  

Miscellaneous income

    220     779     2,699         3,698  
                       

    220     299,977     141,299         441,496  
                       

Cost and expenses:

                               

Cost of sales (exclusive of depreciation and depletion)

        211,314     156,302         367,616  

Depreciation and depletion

    511     33,673     34,136         68,320  

Selling, general and administrative

    3,939     13,921     9,269         27,129  

Postretirement benefits

    (55 )   14,780             14,725  

Restructuring and asset impairments

        (9,063 )   3,322         (5,741 )
                       

    4,395     264,625     203,029         472,049  
                       

Operating income (loss)

    (4,175 )   35,352     (61,730 )       (30,553 )

Interest income (expense), net

    (57,131 )   6,303     (2,157 )       (52,985 )

Other loss

            (714 )       (714 )
                       

Income (loss) before income tax expense (benefit)

    (61,306 )   41,655     (64,601 )       (84,252 )

Income tax expense (benefit)

    (22,108 )   8,533     (36,185 )       (49,760 )
                       

Equity in earnings of subsidiaries

    4,706             (4,706 )    
                       

Net income (loss)

  $ (34,492 ) $ 33,122   $ (28,416 ) $ (4,706 ) $ (34,492 )
                       
                       

29


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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 13—Supplemental Guarantor and Non-Guarantor Financial Information (Continued)

WALTER ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2014
(in thousands)

 
  Parent
(Issuer)
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Total
Consolidated
 

Revenues:

                               

Sales

  $   $ 583,898   $ 199,313   $   $ 783,211  

Miscellaneous income

    979     3,694     4,352         9,025  
                       

    979     587,592     203,665         792,236  
                       

Cost and expenses:

                               

Cost of sales (exclusive of depreciation and depletion)

        461,954     231,682         693,636  

Depreciation and depletion

    1,261     67,048     77,931         146,240  

Selling, general and administrative

    3,114     23,871     12,796         39,781  

Postretirement benefits

    (88 )   27,826             27,738  

Restructuring and asset impairments

    514     23,686     7,142         31,342  
                       

    4,801     604,385     329,551         938,737  
                       

Operating loss

    (3,822 )   (16,793 )   (125,886 )       (146,501 )

Interest income (expense), net

    (144,742 )   6,962     (1,054 )       (138,834 )

Loss on extinguishment of debt

    (2,492 )               (2,492 )

Other loss

    (719 )         (59 )       (778 )
                       

Loss before income tax benefit

    (151,775 )   (9,831 )   (126,999 )       (288,605 )

Income tax benefit

    (2,433 )   (4,359 )   (38,244 )       (45,036 )
                       

Equity in net losses of subsidiaries

    (94,227 )           94,227      
                       

Net loss

  $ (243,569 ) $ (5,472 ) $ (88,755 ) $ 94,227   $ (243,569 )
                       
                       

30


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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 13—Supplemental Guarantor and Non-Guarantor Financial Information (Continued)


WALTER ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2013
(in thousands)

 
  Parent
(Issuer)
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Total
Consolidated
 

Revenues:

                               

Sales

  $   $ 614,010   $ 313,397   $   $ 927,407  

Miscellaneous income

    773     2,969     1,690         5,432  
                       

    773     616,979     315,087         932,839  
                       

Cost and expenses:

                               

Cost of sales (exclusive of depreciation and depletion)

        458,991     329,559         788,550  

Depreciation and depletion

    996     74,083     74,431         149,510  

Selling, general and administrative

    10,150     27,254     20,399         57,803  

Postretirement benefits

    (110 )   29,560             29,450  

Restructuring and asset impairments

        (8,947 )   10,646         1,699  
                       

    11,036     580,941     435,035         1,027,012  
                       

Operating income (loss)

    (10,263 )   36,038     (119,948 )       (94,173 )

Interest income (expense), net

    (108,627 )   13,283     (3,608 )       (98,952 )

Loss on extinguishment of debt

    (6,001 )               (6,001 )

Other loss

            (609 )       (609 )
                       

Income (loss) before income tax expense (benefit)

    (124,891 )   49,321     (124,165 )       (199,735 )

Income tax expense (benefit)

    (48,775 )   5,137     (72,161 )       (115,799 )
                       

Equity in net losses of subsidiaries

    (7,820 )           7,820      
                       

Net income (loss)

  $ (83,936 ) $ 44,184   $ (52,004 ) $ 7,820   $ (83,936 )
                       
                       

31


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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 13—Supplemental Guarantor and Non-Guarantor Financial Information (Continued)

WALTER ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE
INCOME (LOSS) (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 2014
(in thousands)

 
  Parent
(Issuer)
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Total
Consolidated
 

Net loss

  $ (151,391 ) $ (19,823 ) $ (52,760 ) $ 72,583   $ (151,391 )

Other comprehensive income (loss):

                               

Change in pension and postretirement benefit plans, net of tax

    3,498     3,187         (3,187 )   3,498  

Change in foreign currency translation adjustment

    11,264         11,264     (11,264 )   11,264  
                       

Total other comprehensive income

    14,762     3,187     11,264     (14,451 )   14,762  
                       

Total comprehensive loss

  $ (136,629 ) $ (16,636 ) $ (41,496 ) $ 58,132   $ (136,629 )
                       
                       

32


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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 13—Supplemental Guarantor and Non-Guarantor Financial Information (Continued)


WALTER ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE
INCOME (LOSS) (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 2013
(in thousands)

 
  Parent
(Issuer)
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Total
Consolidated
 

Net income (loss)

  $ (34,492 ) $ 33,122   $ (28,416 ) $ (4,706 ) $ (34,492 )

Other comprehensive income (loss):

                               

Change in pension and postretirement benefit plans, net of tax

    4,658                 4,658  

Change in unrealized gain on hedges, net of tax

    526     16         (16 )   526  

Change in foreign currency translation adjustment

    (1,461 )       (1,461 )   1,461     (1,461 )

Change in unrealized gain on investments

    (1 )       (1 )   1     (1 )
                       

Total other comprehensive income (loss)

    3,722     16     (1,462 )   1,446     3,722  
                       

Total comprehensive income (loss)

  $ (30,770 ) $ 33,138   $ (29,878 ) $ (3,260 ) $ (30,770 )
                       
                       

33


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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 13—Supplemental Guarantor and Non-Guarantor Financial Information (Continued)

WALTER ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE
INCOME (LOSS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2014
(in thousands)

 
  Parent
(Issuer)
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Total
Consolidated
 

Net loss

  $ (243,569 ) $ (5,472 ) $ (88,755 ) $ 94,227   $ (243,569 )

Other comprehensive income (loss):

                               

Change in pension and postretirement benefit plans, net of tax

    7,017     6,991         (6,991 )   7,017  

Change in unrealized gain on hedges, net of tax

    1,679     3         (3 )   1,679  

Change in foreign currency translation adjustment

    13,428         13,428     (13,428 )   13,428  
                       

Total other comprehensive income

    22,124     6,994     13,428     (20,422 )   22,124  
                       

Total comprehensive income (loss)

  $ (221,445 ) $ 1,522   $ (75,327 ) $ 73,805   $ (221,445 )
                       
                       

34


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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 13—Supplemental Guarantor and Non-Guarantor Financial Information (Continued)


WALTER ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE
INCOME (LOSS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2013
(in thousands)

 
  Parent
(Issuer)
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Total
Consolidated
 

Net income (loss)

  $ (83,936 ) $ 44,184   $ (52,004 ) $ 7,820   $ (83,936 )

Other comprehensive income (loss):

                               

Change in pension and postretirement benefit plans, net of tax

    9,317                 9,317  

Change in unrealized gain on hedges, net of tax

    1,248     37         (37 )   1,248  

Change in foreign currency translation adjustment

    (17,086 )       (17,086 )   17,086     (17,086 )

Change in unrealized gain on investments

    43         43     (43 )   43  
                       

Total other comprehensive income (loss)

    (6,478 )   37     (17,043 )   17,006     (6,478 )
                       

Total comprehensive income (loss)

  $ (90,414 ) $ 44,221   $ (69,047 ) $ 24,826   $ (90,414 )
                       
                       

35


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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 13—Supplemental Guarantor and Non-Guarantor Financial Information (Continued)

WALTER ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2014
(in thousands)

 
  Parent
(Issuer)
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Total
Consolidated
 

Cash flows provided by (used in) operating activities

  $ (112,535 ) $ 95,649   $ (22,122 ) $   $ (39,008 )
                       

INVESTING ACTIVITIES

                               

Additions to property, plant and equipment           

    (1,691 )   (37,428 )   (4,357 )       (43,476 )

Intercompany loans made

    (3,700 )           3,700      

Intercompany loans received

    1,828             (1,828 )    

Other

            (350 )       (350 )
                       

Cash flows used in investing activities

    (3,563 )   (37,428 )   (4,707 )   1,872     (43,826 )
                       

FINANCING ACTIVITIES

                               

Proceeds from issuance of debt

    553,000                 553,000  

Retirements of debt

    (406,566 )   (3,590 )   (3,968 )       (414,124 )

Dividends paid

    (1,284 )               (1,284 )

Debt issuance costs

    (21,325 )               (21,325 )

Advances from (to) consolidated entities

    13,934     (54,705 )   40,771          

Intercompany borrowings

            3,700     (3,700 )    

Intercompany payments made

            (1,828 )   1,828      

Other

    (191 )               (191 )
                       

Cash flows provided by (used in) financing activities

    137,568     (58,295 )   38,675     (1,872 )   116,076  
                       

Effect of foreign exchange rates on cash

            (588 )       (588 )
                       

Net increase (decrease) in cash and cash equivalents

    21,470     (74 )   11,258         32,654  

Cash and cash equivalents at beginning of period

    234,150     101     26,567         260,818  
                       

Cash and cash equivalents at end of period

  $ 255,620   $ 27   $ 37,825   $   $ 293,472  
                       
                       

36


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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 13—Supplemental Guarantor and Non-Guarantor Financial Information (Continued)


WALTER ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2013
(in thousands)

 
  Parent
(Issuer)
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Total
Consolidated
 

Cash flows provided by (used in) operating activities

  $ (130,045 ) $ 112,000   $ (6,057 ) $   $ (24,102 )
                       

INVESTING ACTIVITIES

                               

Additions to property, plant and equipment           

    (459 )   (58,130 )   (21,662 )       (80,251 )

Intercompany notes issued

    (54,736 )           54,736      

Intercompany notes proceeds

    23,500             (23,500 )    

Investments in subsidiaries

    (50,103 )           50,103      

Other

            964         964  
                       

Cash flows used in investing activities

    (81,798 )   (58,130 )   (20,698 )   81,339     (79,287 )
                       

FINANCING ACTIVITIES

                               

Proceeds from issuance of debt

    450,000                 450,000  

Retirements of debt

    (250,000 )   (4,903 )   (4,297 )       (259,200 )

Dividends paid

    (15,638 )               (15,638 )

Debt issuance costs

    (15,080 )               (15,080 )

Advances from (to) consolidated entities

    95,962     (49,028 )   (46,934 )        

Intercompany notes borrowings

            54,736     (54,736 )    

Intercompany notes payments

            (23,500 )   23,500      

Investment from Parent

            50,103     (50,103 )    

Other

    (600 )               (600 )
                       

Cash flows provided by (used in) financing activities

    264,644     (53,931 )   30,108     (81,339 )   159,482  
                       

Effect of foreign exchange rates on cash

            (1,816 )       (1,816 )
                       

Net increase (decrease) in cash and cash equivalents

    52,801     (61 )   1,537         54,277  

Cash and cash equivalents at beginning of period

    83,833     61     32,707         116,601  
                       

Cash and cash equivalents at end of period

  $ 136,634   $   $ 34,244   $   $ 170,878  
                       
                       

Note 14—Subsequent Events

Credit Agreement Amendments

        On July 7, 2014, the Company entered into an amendment (the "Seventh Amendment") to the 2011 Credit Agreement dated as of April 1, 2011 (as amended, the "Credit Agreement"), which, among other things, modified the financial maintenance ratio to be unlimited for the quarter ended June 30, 2014 so long as the Company issued at least $275.0 million of additional first lien notes within seven days (or such longer period during the fiscal quarter ending September 30, 2014 as may be determined by the administrative agent of the Credit Agreement) of the effective date of the Seventh Amendment.

37


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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SIX MONTHS ENDED JUNE 30, 2014 (Unaudited)

Note 14—Subsequent Events (Continued)

On July 14, 2014, concurrently with the closing of the issuance of $320.0 million aggregate principal amount of 9.50% Senior Secured Notes (the "New First Lien Notes"), the financial maintenance ratio for the second quarter of 2014 became unlimited.

        On July 8, 2014, the Company entered into an amendment (the "Eighth Amendment") to the Credit Agreement, which, among other things, provided the Company with an additional tranche of revolving loan commitments (the "New Revolving Credit Facility Tranche") in the amount of $61.2 million, thereby increasing the total available commitments under the revolving credit facility in the Credit Agreement to $375.0 million. The New Revolving Credit Facility Tranche would have matured in 2017. Effectiveness of the Eighth Amendment was conditioned upon the Company pricing a bond offering in an aggregate principal amount of no less than $275.0 million and certain other conditions, including making arrangements so that, immediately after giving effect to the funding of any loans under the New Revolving Credit Facility Tranche, proceeds of such bond issuance are applied to repay certain revolving loans and permanently terminate certain revolving commitments (including the New Revolving Credit Facility Tranche), required under the Credit Agreement. The Eighth Amendment also reduced the amount available under the 2016 revolver from $69.0 million to $16.9 million and reduced the amount available under the 2017 revolver from $244.8 million to $60.0 million for total availability of $76.9 million. On July 14, 2014, concurrently with the closing of the issuance of the New First Lien Notes, the Eighth Amendment became effective and the New Revolving Credit Facility Tranche was terminated.

New First Lien Notes

        On July 14, 2014, the Company issued the New First Lien Notes. The New First Lien Notes are an addition to the $450.0 million aggregate principal amount of the Company's 9.50% Senior Secured Notes due 2019 that were issued on September 27, 2013 and the $200.0 million aggregate principal amount of 9.50% Senior Secured Notes due 2019 (the "9.50% Add-On Senior Secured Notes") that were issued on March 27, 2014 (collectively, the "First Lien Notes"). The First Lien Notes will mature on October 15, 2019, and interest is payable on April 15 and October 15 of each year. The next interest payment date for the First Lien Notes is October 15, 2014.

        The First Lien Notes are unconditionally guaranteed, jointly and severally, by the Guarantors. The First Lien Notes and the guarantees are secured on a first priority basis, equally and ratably with the Company's Credit Agreement and any future pari passu secured obligations (subject to permitted liens) on substantially all of the Company's and the Guarantor's property and assets, which also secure the Company's 11.0%/12.0% Senior Secured PIK Toggle Notes due 2020 (the "Second Lien Notes") on a second priority basis.

        At any time prior to October 15, 2016, the Company may redeem up to 35% of the aggregate principal amount of the First Lien Notes with the net cash proceeds from certain equity offerings, at a redemption price of 109.50% of the aggregate principal amount. The Company may redeem the First Lien Notes, in whole or in part, prior to October 15, 2016, at a redemption price equal to 100% of the aggregate principal amount of the First Lien Notes plus a "make-whole" premium. The Company may redeem the First Lien Notes, in whole or in part at redemption prices equal to 107.125% for the year commencing October 15, 2016, 102.375% for the year commencing October 15, 2017 and 100% beginning on October 15, 2018. Upon the occurrence of a change of control, unless the Company has exercised its right to redeem the First Lien Notes, the Company will be required to offer to repurchase each holder's First Lien Notes at a price equal to 101% of the aggregate principal amount.

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ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussion and analysis should be read in conjunction with our financial statements and related notes included elsewhere in this Quarterly Report and our Annual Report filed on Form 10-K for the fiscal year ended December 31, 2013.

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, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), 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:

    Unfavorable economic, financial and business conditions;

    A substantial or extended decline in pricing, demand, and other factors beyond our control;

    Failure of our customers to honor or renew contracts;

    Our ability to collect payments from our customers;

    Inherent difficulties and challenges in coal mining that are beyond our control;

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

    Concentration of our mining operations in a limited number of areas;

    A significant reduction of or loss of purchases by our largest customers;

    Unavailability or uneconomical transportation for our coal;

    Significant competition and foreign currency fluctuation;

    Significant cost increases and fluctuations, and delay in the delivery of raw materials, mining equipment and purchased components;

    Work stoppages, labor shortages and other labor relations matters within our operations and those of our suppliers and customers;

    Our ability to hire and retain a skilled labor force;

    Our obligations surrounding reclamation and mine closure;

    Inaccuracies in our estimates of coal reserves;

    Our ability to develop or acquire coal reserves in an economically feasible manner;

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    Challenges to our licenses, permits and other authorizations;

    Failure to meet project development and expansion targets;

    Challenges associated with operating in foreign jurisdictions;

    Challenges associated with environmental, health and safety laws and regulations;

    Regulatory requirements associated with federal, state and provincial regulatory agencies, authority to order temporary or permanent closure of our mines;

    Increased focus by regulatory authorities on the effects of surface coal mining on the environment;

    Climate change concerns;

    Our operations' impact on the environment;

    Our indebtedness;

    Our ability to generate cash for our financial obligations, to refinance our indebtedness or to obtain additional financing;

    Our ability to incur additional indebtedness;

    Restrictions in our existing and future debt agreements;

    Events beyond our control may result in an event of default under one or more of our debt instruments;

    Downgrades in our credit ratings;

    Failure to obtain or renew surety bonds on acceptable terms could affect our ability to secure reclamation and coal lease obligations;

    Costs associated with our pension and benefits, including post-retirement benefits;

    Costs associated with our workers' compensation and certain medical and disability benefits;

    Adverse rulings in current or future litigation;

    Our ability to attract and retain key personnel;

    Our ability to identify or integrate suitable acquisition candidates to promote growth;

    Volatility in the price of our common stock;

    Our ability to pay regular dividends to stockholders;

    Our exposure to indemnification obligations;

    Potential terrorist attacks and threats and escalation of military activity in response to such attacks;

    Potential cyber-attacks or other security breaches; and

    Other factors, including the other factors discussed in Part I, Item 1A, "Risk Factors," in our Annual Report filed on Form 10-K for the year ended December 31, 2013 and as updated by any subsequent Form 10-Qs, including this Form 10-Q, or other documents that we file with the Securities and Exchange Commission.

        When considering forward-looking statements made by us in this Quarterly Report on Form 10-Q ("Form 10-Q"), or elsewhere, such statements speak only as of the date on which we make them. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or

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how they may affect us. We have no duty to, and do not intend to, update or revise the forward-looking statements in this Form 10-Q after the date of this Form 10-Q, except as may be required by law. In light of these risks and uncertainties, keep in mind that any forward-looking statement made in this Form 10-Q or elsewhere might not occur.

Overview

        We are a leading producer and exporter of metallurgical coal for the global steel industry from underground and surface mines with mineral reserves located in the United States, Canada and the United Kingdom. We also extract, process, market and/or possess mineral reserves of thermal coal and anthracite coal, as well as produce metallurgical coke and coal bed methane gas.

        We currently operate five active coal mines, a coke plant and a coal bed methane extraction operation located in Alabama and West Virginia. We have curtailed and idled mines in Northeast British Columbia in Canada and South Wales in the U.K. We operate our business through the U.S. Operations and Canadian and U.K. Operations principal business segments. The U.S. Operations segment includes the operations of our underground mines, surface mines, coke plant and natural gas operations located in Alabama and our underground and surface mining operations located in West Virginia.

        The Canadian and U.K. Operations segment includes surface mines in Northeast British Columbia (Canada) and an underground development mine in South Wales (U.K.). The Canadian mining operations consist of three metallurgical coal surface mines in Northeast British Columbia (the Wolverine mine, the Brule mine, and the Willow Creek mine). The Willow Creek mine operations were curtailed during the first half of 2013, the Wolverine mine was idled in April 2014 and the Brazion operations (which include the Company's Brule and Willow Creek mines) were idled in June 2014. The Company will continue to operate the preparation plant at the Willow Creek mine to complete processing of coal inventory that has already been mined. Our U.K. mining operation consists of an underground development mine located in South Wales that produces anthracite coal, which can be sold as low-volatile PCI coal.

        Sales of metallurgical coal for the three months ended June 30, 2014 were 2.7 million metric tons and accounted for approximately 92% of our coal sales volume. Comparatively, for the three months ended June 30, 2013, sales of metallurgical coal were 2.4 million metric tons and accounted for approximately 89% of our coal sales volume.

        Sales of thermal coal for the three months ended June 30, 2014 were 222 thousand metric tons and accounted for approximately 8% of our coal sales volume. Comparatively, for the three months ended June 30, 2013, sales of thermal coal were 317 thousand metric tons and accounted for approximately 11% of our coal sales volume.

Industry Overview and Outlook

        The global metallurgical coal market remains challenged due to issues of overcapacity in the global steel and metallurgical coal mining industries. The metallurgical coal benchmark for the third quarter of 2014 settled at approximately $120 per metric ton which is consistent with the second quarter of 2014 benchmark and represents a $25 per metric ton decrease from the negotiated third quarter 2013 benchmark price.

        Although the current metallurgical coal market remains weak, there are some positive signs in the market. According to the World Steel Association, world crude steel production in the six months ended June 30, 2014 increased 2.5% compared to the same period in the prior year. In Europe, for the six months ended June 30, 2014 steel production grew by approximately 4% as compared to the prior year. Germany's steel production increased approximately 4% due to the strong automotive market and

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the U.K. increased more than 7%. China's crude steel production for the six months ended June 30, 2014 increased approximately 3% over the prior year. Elsewhere in Asia, South Korea's steel production increased approximately 9% due to the start of a third blast furnace by Hyundai Steel and steel production in Japan and India increased approximately 1%. On the global metallurgical coal production side, there have been global production cuts of approximately 22 million tons announced in 2014, the majority of which have been in the U.S. and Canada. Although there still remains an excess of metallurgical coal in the market, we believe these signs reflect positive trends in both supply and demand that are encouraging. Global metallurgical coal demand is projected to continue to grow modestly with an expected increase in global steel production. Global steel production grew by 3.6% in 2013 and is expected to grow an additional 3.1% in 2014 and 3.3% in 2015 driven largely by the Chinese market, which accounts for 45-50% of global steel production. Steel consumption in the Europe Union is also expected to grow 3.1% in 2014 according to the World Steel Association, following a decline in 2013 and 2012. At current prices, we believe a significant portion of global metallurgical coal production is uneconomic and, if the current prices were to continue, additional idling would be expected.

        We believe the long-term demand for metallurgical coal within all of our markets to be strong as industry projections indicate that global steelmaking will continue to require increasing amounts of high quality metallurgical coal. As such, we are focused on the long-term metallurgical coal market. We remain committed to aggressively controlling costs and improving operating performance. Although we have responded to the short-term deterioration in market conditions by curtailing, and in some cases idling, higher-cost and lower-quality coal mines, which include our Canadian operations, we have the capability to increase our metallurgical coal production when the market rebounds to take advantage of potential opportunities in this highly volatile market.

        In conjunction with the announcement of our idling of the remaining Canadian operations, we have revised our full year 2014 target metallurgical coal production to be between 9.0 and 10.0 million metric tons and full year 2014 metallurgical coal sales volumes are estimated to total between 9.5 and 10.5 million metric tons, a reduction from the previous sales volume outlook of 10.5 to 11.5 million metric tons, primarily due to the Company's principal coal transportation provider at the Brule mine within the Canada and U.K. Operations segment ceasing operations in June 2014.

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RESULTS OF OPERATIONS

Summary Operating Results for the
Three Months Ended June 30, 2014 and 2013

 
  For the three months ended June 30, 2014  
(in thousands)
  U.S.
Operations
  Canadian
and U.K.
Operations
  Other   Total  

Sales

  $ 297,077   $ 80,845   $ 60   $ 377,982  

Miscellaneous income (loss)

    1,608     (1,801 )   562     369  
                   

Revenues

    298,685     79,044     622     378,351  

Cost of sales (exclusive of depreciation and depletion)

    242,198     101,542     21     343,761  

Depreciation and depletion

    37,694     31,509     613     69,816  

Selling, general and administrative

    11,566     5,314     2,122     19,002  

Postretirement benefits

    13,913         (44 )   13,869  

Restructuring and asset impairments

    23,723     7,105     514     31,342  
                   

Operating loss

  $ (30,409 ) $ (66,426 ) $ (2,604 )   (99,439 )
                     
                     

Interest expense, net

                      (73,402 )

Gain on extinguishment of debt

                      11,397  

Other income, net

                      978  

Income tax benefit

                      9,075  
                         

Net loss

                    $ (151,391 )
                         
                         

 

 
  For the three months ended June 30, 2013  
(in thousands)
  U.S.
Operations
  Canadian
and U.K.
Operations
  Other   Total  

Sales

  $ 320,591   $ 117,207   $   $ 437,798  

Miscellaneous income

    418     2,666     614     3,698  
                   

Revenues

    321,009     119,873     614     441,496  

Cost of sales (exclusive of depreciation and depletion)

    231,536     136,053     27     367,616  

Depreciation and depletion

    31,189     36,620     511     68,320  

Selling, general and administrative

    15,235     10,225     1,669     27,129  

Postretirement benefits

    14,779         (54 )   14,725  

Restructuring and asset impairments

    (9,063 )   3,322         (5,741 )
                   

Operating income (loss)

  $ 37,333   $ (66,347 ) $ (1,539 )   (30,553 )
                     
                     

Interest expense, net

                      (52,985 )

Other loss, net

                      (714 )

Income tax benefit

                      49,760  
                         

Net loss

                    $ (34,492 )
                         
                         

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  Dollar variance for the three months ended
June 30, 2014 versus 2013
 
(in thousands)
  U.S.
Operations
  Canadian
and U.K.
Operations
  Other   Total  

Sales

  $ (23,514 ) $ (36,362 ) $ 60   $ (59,816 )

Miscellaneous income (loss)

    1,190     (4,467 )   (52 )   (3,329 )
                   

Revenues

    (22,324 )   (40,829 )   8     (63,145 )

Cost of sales (exclusive of depreciation and depletion)

    10,662     (34,511 )   (6 )   (23,855 )

Depreciation and depletion

    6,505     (5,111 )   102     1,496  

Selling, general and administrative

    (3,669 )   (4,911 )   453     (8,127 )

Postretirement benefits

    (866 )       10     (856 )

Restructuring and asset impairments

    32,786     3,783     514     37,083  
                   

Operating income (loss)

  $ (67,742 ) $ (79 ) $ (1,065 )   (68,886 )
                     
                     

Interest expense, net

                      (20,417 )

Gain on extinguishment of debt

                      11,397  

Other income, net

                      1,692  

Income tax benefit

                      (40,685 )
                         

Net loss

                    $ (116,899 )
                         
                         

Summary of Second Quarter Consolidated Results of Operations

        Our net loss for the three months ended June 30, 2014 was $151.4 million, or $2.33 per diluted share, which compares to a net loss of $34.5 million, or $0.55 per diluted share, for the three months ended June 30, 2013. The net loss was primarily due to a decrease of $36.20, or 24.1%, in the average selling price of our metallurgical coal due to excess supply within the global market. Earnings before interest, income taxes, depreciation, depletion and amortization ("EBITDA") for the second quarter of 2014 decreased $54.3 million as compared with the second quarter of 2013 due to a decrease in gross profit as a result of a decrease in the average net selling price of coal, an increase in restructuring and asset impairment charges as a result of idling the Canadian operations and an impairment charge due to reducing the Blue Creek Coal Terminal assets held for sale to their fair value less costs to sell. These items were partially offset by a decrease in selling, general and administrative expenses. A reconciliation of net loss to EBITDA is presented in the following Liquidity and Capital Resources section.

        The $63.1 million decrease in revenues for the three months ended June 30, 2014 as compared with the second quarter of 2013 was primarily due to a $98.1 million decrease in revenues as a result of a $36.20, or 24.1%, decrease in the average selling price per metric ton of our metallurgical coal resulting from lower worldwide sales prices for metallurgical coal and a net $4.1 million decrease in revenue due to a decrease in thermal coal sales volume offset partially by an increase in thermal coal prices. These decreases in revenues were offset partially by an increase in revenue of $40.6 million due to increased metallurgical coal sales volume.

        The $23.9 million decrease in cost of sales, exclusive of depreciation and depletion, for the three months ended June 30, 2014 as compared with the second quarter of 2013 was primarily the result of significant decreases in per metric ton cash cost of sales for our metallurgical coal within all of our operations due to the Company's improvement in cost performance. Cost of sales decreased approximately $60.6 million due to a decrease in the average cash cost of sales per metric ton of metallurgical coal sold of approximately 18.3%, decreased approximately $10.5 million due to a decrease in thermal coal sales volume and average cash cost of sales and decreased $7.1 million due to a decrease in cost of sales within our metallurgical coke and coal bed methane gas operations. This

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decrease was offset by an increase in cost of sales of $33.1 million due to a 270 thousand metric ton, or 11.1%, increase in metallurgical tons sold and an increase of $10.9 million in cost of sales related to the idling of the Canadian operations, of which $6.4 million relates to transportation take or pay charges and $4.5 million relates to idle mine costs.

        Consolidated gross margin percentage, calculated as consolidated revenues less consolidated cost of coal sales, exclusive of depreciation and depletion, divided by consolidated revenues, was 9.1% for the three months ended June 30, 2014 compared with 16.7% in the prior year period. Consolidated gross margin percentage for our U.S. Operations and Canadian and U.K. Operations was 18.9% and (28.5)%, respectively, for the three months ended June 30, 2014 compared with 27.9% and (13.5)%, respectively, in the prior year period.

        The decrease in margins within our U.S. Operations and Canadian and U.K. Operations primarily reflects the deterioration in metallurgical coal market conditions. As a result, we have curtailed, and in some cases idled, higher-cost and lower-quality coal mines. We will continue to monitor margins within all of our operations and will continue to idle operations that are not economic under current conditions.

        The $8.1 million, or 30.0%, decrease in selling, general and administrative expense for the three months ended June 30, 2014 as compared with the second quarter of 2013 was primarily attributable to our cost containment initiatives that we began in 2013 and a reduction in professional fees as the prior year included professional fees associated with the proxy challenge.

        The operating results for the three months ended June 30, 2014 include restructuring and asset impairment charges of $31.3 million, which are comprised of an asset impairment charge of $23.0 million to reduce the carrying value of the Blue Creek Coal Terminal assets held for sale to their fair value less costs to sell and restructuring charges of $8.3 million primarily incurred in connection with the idling of the Canadian operations. The results for the three months ended June 30, 2013 include a restructuring and asset impairment benefit of $5.7 million, which includes a gain of $17.0 million due to the release of a below market contract liability that was acquired through the acquisition of North River offset by $8.0 million of expense related to the accelerated closure of the North River mine in the U.S. Operations segment and $3.3 million of expense related to the curtailment of the Willow Creek mine in the Canada and U.K. Operations segment.

        The $20.4 million increase in interest expense, net for the three months ended June 30, 2014 as compared with the second quarter of 2013 was primarily due to an increase in long-term debt combined with an increase in the effective interest rates on outstanding debt obligations due to the amendments to the 2011 Credit Agreement and the issuance of senior notes.

        The $11.4 million net gain on extinguishment of debt for the three months ended June 30, 2014 was recognized upon the extinguishment of $35.0 million of 9.875% Senior Notes in exchange for shares of common stock.

        The effective tax rate for the three months ended June 30, 2014 was 5.7% compared with 59.1% for the same period in the prior year. The difference between the rates was primarily due to a full valuation allowance provided against the U.S. net deferred tax assets recorded for U.S. operating losses in the current period. The effective tax rates for both periods also reflects the benefits of the losses of the Canadian and U.K. Operations which are taxed at statutory rates lower than the U.S. rate and the effects of additional tax losses related to foreign financing activities.

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

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Segment Analysis

    U.S. Operations

        Hard coking coal sales totaled 2.0 million metric tons for the three months ended June 30, 2014, representing an increase of 420 thousand metric tons, or 25.9%, compared with 1.6 million metric tons for the same period in 2013. Our hard coking coal production totaled 1.9 million metric tons in the second quarter of 2014, which is relatively consistent with the 2.1 million metric tons produced in the second quarter of 2013. The average selling price of hard coking coal in the second quarter of 2014 was $113.64 per metric ton, representing a 26.2% decrease from the average selling price of $153.99 per metric ton for the same period in 2013. The decrease in the average selling price of hard coking coal continues to reflect the pricing pressure experienced in the metallurgical coal market due to oversupply. Our average cash cost of sales per metric ton of hard coking coal sold during the second quarter of 2014 was $90.83, representing a decrease of $10.29, or 10.2%, from the $101.12 average cash cost of sales per ton sold during the second quarter of 2013.

        Thermal coal sales totaled 196 thousand metric tons for the three months ended June 30, 2014, representing a decrease of 109 thousand metric tons, or 35.7%, compared with 305 thousand metric tons sold during the same period in 2013. Our average selling price of thermal coal for the three months ended June 30, 2014 was $75.03 per metric ton, representing an increase of 10.3%, compared to $68.03 per metric ton for the same period in 2013. Thermal coal production totaled 140 thousand metric tons for the three months ended June 30, 2014, representing a decrease of 65.6%, compared with 407 thousand metric tons produced during the same period in 2013. This was primarily due to the closure of the Alabama North River mine in the fourth quarter of 2013. The average cash cost of sales per metric ton of thermal coal sold for the three months ended June 30, 2014 was $89.20 per metric ton compared with $92.48 per metric ton for the same period in 2013.

        Statistics for U.S. Operations are presented in the following table:

 
  Three months ended
June 30,
 
 
  2014   2013  

Tons of hard coking coal sold(1) (in thousands)

    2,041     1,621  

Tons of hard coking coal produced (in thousands)

    1,924     2,070  

Average hard coking coal selling price(1) (per metric ton)

  $ 113.64   $ 153.99  

Average hard coking coal cash cost of sales(1) (per metric ton)

  $ 90.83   $ 101.12  

Average hard coking coal cash cost of production (per metric ton)

  $ 70.34   $ 68.22  

Tons of thermal coal sold (in thousands)

    196     305  

Tons of thermal coal produced (in thousands)

    140     407  

Average thermal coal selling price (per metric ton)

  $ 75.03   $ 68.03  

Average thermal coal cash cost of sales (per metric ton)

  $ 89.20   $ 92.48  

Average thermal coal cash cost of production (per metric ton)

  $ 55.40   $ 63.34  

(1)
Includes sales of both produced and purchased coal.

        The $22.3 million decrease in our U.S. Operations segment reported revenues for the three months ended June 30, 2014 compared to the same period in the prior year was primarily attributable to a $82.4 million decrease due to a $40.35, or 26.2%, decrease in the average selling price of hard coking coal and a decrease of $6.0 million primarily due to a decrease in thermal coal sales. These decreases in revenue were offset partially by an increase in revenue of $64.7 million due to a 420 thousand or 25.9% increase in hard coking coal sales volume and an increase in revenue of $1.4 million within our metallurgical coke and gas operations.

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        The $10.7 million increase in cost of sales, exclusive of depreciation and depletion, as compared with the second quarter of 2013 is primarily due to an increase of $42.5 million due to a 420 thousand, or 25.9%, increase in hard coking coal sales offset partially by a decrease in cost of sales of $31.5 million due to a $10.29 per metric ton, or 10.2%, decrease in the average cash cost of sales per ton of hard coking coal sold, a 109 thousand, or 35.7%, decrease in thermal coal sales, and a $3.28 decrease in average thermal coal cash cost of sales. The decrease in per metric ton cash cost of sales was primarily due to increased volume and cost reduction driven by continued improvements in our cost performance within the operations. The decrease in thermal coal sales volume is due to the closure of the Alabama North River mine in the fourth quarter of 2013.

        Consolidated metallurgical coal margin per ton, calculated as average consolidated metallurgical coal selling price per ton less average consolidated cost of metallurgical coal sales per ton, was $22.81 and $52.87, respectively, for the three months ended June 30, 2014 and 2013. While margins within our U.S. Operations have decreased in the short-term, we believe global metallurgical coal demand will continue to grow modestly with global steel production in the long-term. At current prices, we believe a significant portion of global metallurgical coal production is uneconomic and, if the current prices were to continue, additional idling would be expected. We will continue to monitor the margins within our U.S. Operations and will idle operations that are not economic under current market conditions.

        The current quarter includes restructuring and asset impairment charges of $23.7 million which is comprised of an asset impairment charge of $23.0 million to reduce the carrying value of the Blue Creek Coal Terminal assets held for sale to their fair value less costs to sell and restructuring charges of $0.7 million. The restructuring and asset impairment benefit of $9.1 million in the prior year comparable quarter is attributable to a gain recognized due to the release of a below market contract liability that was obtained through the acquisition of North River offset by impairment charges related to the accelerated closure of the North River mine.

        Our U.S. Operations segment reported an operating loss of $30.4 million for the three months ended June 30, 2014, compared to operating income of $37.3 million in the same period in 2013. The decrease in operating income was primarily due to an increase in restructuring and asset impairment charges of $32.8 million combined with a decrease in revenues due to the decline in the average selling price of hard coking coal.

    Canadian and U.K. Operations

        Metallurgical coal sales for the three months ended June 30, 2014 consisted of 315 thousand metric tons of hard coking coal at an average selling price of $123.35 per metric ton and 354 thousand metric tons of low-volatile PCI coal at an average selling price of $109.37 per metric ton. Metallurgical coal sales in the second quarter of 2013 consisted of 354 thousand metric tons of hard coking coal at an average selling price of $153.51 per metric ton and 465 thousand metric tons of low-volatile PCI coal at an average selling price of $135.55 per metric ton. The declines in the average selling price of hard coking coal and low-volatile PCI coal reflect the global oversupply of metallurgical coal. The average cash cost of sales per metric ton of hard coking coal sold during the second quarter of 2014 was $128.18, representing a $40.55, or 24.0%, decrease from the average cash cost of sales per ton of hard coking coal sold during the second quarter of 2013 of $168.73. The average cash cost of sales per metric ton of low-volatile PCI coal sold during the second quarter of 2014 was $124.76 representing a $34.72, or 21.8%, decrease from the average cash cost of sales per ton of low-volatile PCI coal sold during the second quarter of 2013 of $159.48. The decreases in average cash cost of sales per ton were primarily driven by continued improvement in our company-wide cost performance.

        Our Canadian and U.K. Operations segment produced a total of 73 thousand metric tons of hard coking coal and 446 thousand metric tons of low-volatile PCI coal in the second quarter of 2014. During the second quarter of 2013, the segment produced 414 thousand metric tons of hard coking

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coal and 465 thousand metric tons of low-volatile PCI coal. The decrease in hard coking coal production was primarily due to the idling of the Wolverine mine in April 2014.

        Statistics for Canadian and U.K. Operations are presented in the following table:

 
  Three months ended
June 30,
 
 
  2014   2013  

Tons of metallurgical coal sold (in thousands)

    669     819  

Tons of metallurgical coal produced (in thousands)

    519     879  

Average metallurgical coal selling price (per metric ton)

  $ 115.96   $ 143.31  

Average metallurgical cash cost of sales (per metric ton)

  $ 126.78   $ 163.43  

Average metallurgical coal cash cost of production (per metric ton)

  $ 82.71   $ 102.62  

Tons of hard coking coal sold (in thousands)

    315     354  

Tons of hard coking coal produced (in thousands)

    73     414  

Average hard coking coal selling price (per metric ton)

  $ 123.35   $ 153.51  

Average hard coking coal cash cost of sales (per metric ton)

  $ 128.18   $ 168.73  

Average hard coking coal cash cost of production (per metric ton)

  $ 133.69   $ 123.24  

Tons of low-volatile PCI coal sold (in thousands)

    354     465  

Tons of low-volatile PCI coal produced (in thousands)

    446     465  

Average low-volatile PCI coal selling price (per metric ton)

  $ 109.37   $ 135.55  

Average low-volatile PCI coal cash cost of sales (per metric ton)

  $ 124.76   $ 159.48  

Average low-volatile PCI coal cash cost of production (per metric ton)

  $ 73.31   $ 84.24  

        The $40.8 million decrease in segment reported revenues for the second quarter of 2014 compared to the same period in the prior year was attributable to a decrease in revenue of $21.5 million due to a decrease of 150 thousand, or 18.3%, in hard coking and low-volatile PCI tons sold combined with a decrease in revenue of $18.3 million due to a decrease of 19.6% and 19.3% in the average selling price of hard coking coal and low-volatile PCI coal, respectively.

        The $34.5 million decrease in cost of sales, exclusive of depreciation and depletion, in the segment for the three months ended June 30, 2014 compared to the same period in 2013 was primarily due to a decrease in cost of sales of $49.0 million as a result of a decrease in metallurgical tons sold combined with a decrease in the average cash cost of sales per ton of metallurgical tons sold. The decrease is offset partially by an $10.9 million increase in cost of sales due to the idling of the Canadian operations, of which $6.4 million relates to transportation take or pay charges related to port shortfall commitments and $4.5 million relates to idle mine costs. The shortfall is the proportionate share of the total estimated shortfall penalty for the year allocated to the tons shipped in the current quarter.

        Consolidated metallurgical coal margin per ton, calculated as average consolidated metallurgical coal selling price per ton less average consolidated cost of metallurgical coal sales per ton, was $(10.82) and $(20.12), respectively, for the three months ended June 30, 2014 and 2013. Our margins within our Canadian and U.K. Operations in the short-term remain under pressure. As a result, we have responded to the short-term deterioration in market conditions by idling the Canadian operations. We believe the long-term demand for metallurgical and low-volatile PCI coal within our Canadian and U.K. Operations to be strong as industry projections indicate that global steel making will continue to require increasing amounts of high quality metallurgical coal.

        The current year includes restructuring and asset impairment charges of $7.1 million incurred in connection with the idling of the Canadian operations in the current quarter. The restructuring and

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asset impairment charge of $3.3 million in the prior year is attributable to charges incurred in connection with the curtailment of operations at our Willow Creek mine.

        Our Canadian and U.K. Operations segment reported an operating loss of $66.4 million for the three months ended June 30, 2014, which is consistent with an operating loss of $66.3 million in the prior period.


Summary Operating Results for the
Six Months Ended June 30, 2014 and 2013

 
  For the six months ended June 30, 2014  
(in thousands)
  U.S.
Operations
  Canadian
and U.K.
Operations
  Other   Total  

Sales

  $ 626,868   $ 156,283   $ 60   $ 783,211  

Miscellaneous income

    2,481     4,338     2,206     9,025  
                   

Revenues

    629,349     160,621     2,266     792,236  

Cost of sales (exclusive of depreciation and depletion)

    500,255     193,349     32     693,636  

Depreciation and depletion

    76,760     68,219     1,261     146,240  

Selling, general and administrative

    25,324     10,992     3,465     39,781  

Postretirement benefits

    27,826         (88 )   27,738  

Restructuring and asset impairments

    23,723     7,105     514     31,342  
                   

Operating loss

  $ (24,539 ) $ (119,044 ) $ (2,918 )   (146,501 )
                     
                     

Interest expense, net

                      (138,834 )

Loss on extinguishment of debt

                      (2,492 )

Other loss, net

                      (778 )

Income tax benefit

                      45,036  
                         

Net loss

                    $ (243,569 )
                         
                         

 

 
  For the six months ended June 30, 2013  
(in thousands)
  U.S.
Operations
  Canadian
and U.K.
Operations
  Other   Total  

Sales

  $ 657,332   $ 270,010   $ 65   $ 927,407  

Miscellaneous income

    2,902     1,307     1,223     5,432  
                   

Revenues

    660,234     271,317     1,288     932,839  

Cost of sales (exclusive of depreciation and depletion)

    501,084     287,424     42     788,550  

Depreciation and depletion

    78,662     69,852     996     149,510  

Selling, general and administrative

    29,500     18,508     9,795     57,803  

Postretirement benefits

    29,559         (109 )   29,450  

Restructuring and asset impairments

    (8,947 )   10,646         1,699  
                   

Operating income (loss)

  $ 30,376   $ (115,113 ) $ (9,436 )   (94,173 )
                     
                     

Interest expense, net

                      (98,952 )

Loss on extinguishment of debt

                      (6,001 )

Other loss, net

                      (609 )

Income tax benefit

                      115,799  
                         

Net loss

                    $ (83,936 )
                         
                         

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  Dollar variance for the six months ended
June 30, 2014 versus 2013
 
(in thousands)
  U.S.
Operations
  Canadian
and U.K.
Operations
  Other   Total  

Sales

  $ (30,464 ) $ (113,727 ) $ (5 ) $ (144,196 )

Miscellaneous income (loss)

    (421 )   3,031     983     3,593  
                   

Revenues

    (30,885 )   (110,696 )   978     (140,603 )

Cost of sales (exclusive of depreciation and depletion)

    (829 )   (94,075 )   (10 )   (94,914 )

Depreciation and depletion

    (1,902 )   (1,633 )   265     (3,270 )

Selling, general and administrative

    (4,176 )   (7,516 )   (6,330 )   (18,022 )

Postretirement benefits

    (1,733 )       21     (1,712 )

Restructuring and asset impairments

    32,670     (3,541 )   514     29,643  
                   

Operating income (loss)

  $ (54,915 ) $ (3,931 ) $ 6,518     (52,328 )
                     
                     

Interest expense, net

                      (39,882 )

Gain on extinguishment of debt

                      3,509  

Other loss, net

                      (169 )

Income tax benefit

                      (70,763 )
                         

Net loss

                    $ (159,633 )
                         
                         

Summary of Year to Date Consolidated Results of Operations

        Our net loss for the six months ended June 30, 2014 was $243.6 million, or $3.81 per diluted share, which compares to a loss of $83.9 million, or $1.34 per diluted share, for the six months ended June 30, 2013. The net loss was primarily due to a decrease of $31.08, or 20.5%, in the average selling price of our metallurgical coal due to excess supply within the global market. Earnings before interest, income taxes, depreciation, depletion and amortization ("EBITDA") for the six months ended June 30, 2014 decreased $52.3 million as compared to the six months ended June 30, 2013, primarily due to a decrease in gross profit combined with an increase in restructuring and asset impairment charges, offset by a decrease in selling, general and administrative costs. A reconciliation of net loss to EBITDA is presented in the following Liquidity and Capital Resources section.

        The $140.6 million decrease in revenues for the six months ended June 30, 2014 as compared with the six months ended June 30, 2013 was primarily due to a $165.4 million reduction to revenue due to a $31.08 per metric ton, or 20.5%, decrease in the average selling price of our metallurgical coal combined with a net $6.7 million decrease in thermal coal sales due primarily to a 138 thousand per metric ton decrease in sales volume, offset partially by an increase in revenue of $15.7 million due to increased metallurgical coal sales volume of 103 thousand metric tons and a $15.8 million increase in revenue within our metallurgical coke and coal bed methane gas operations.

        The $94.9 million decrease in cost of sales, exclusive of depreciation and depletion, for the six months ended June 30, 2014 as compared with the same period in 2013 was primarily the result of a decrease of $90.2 million due to a decrease in metallurgical coal average cash cost of sales, as average cash cost of sales per metric ton of metallurgical coal sold decreased approximately 14.0% from $120.67 in the six months ended June 30, 2013 to $103.72 in the six months ended June 30, 2014, and a decrease of $23.9 million due to a decrease in thermal coal sales volume and decrease in average cash cost of sales. These decreases in cost of sales were offset by a $12.3 million increase in cost of sales due to a 103 thousand metric ton increase in metallurgical coal sales combined with a $10.9 million increase in cost of sales related to the idling of the Canadian operations, of which $6.4 million relates to transportation take or pay charges and $4.5 million relates to idle mine costs.

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        Consolidated gross margin percentage, calculated as consolidated revenues less consolidated cost of coal sales, exclusive of depreciation and depletion, divided by consolidated revenues, was 12.4% for the six months ended June 30, 2014 compared with 15.5% in the prior year period. Consolidated gross margin percentage for our U.S. Operations and Canadian and U.K. Operations was 20.5% and (20.4)%, respectively, for the six months ended June 30, 2014 compared with 24.1% and (5.9)% in the prior year period.

        The decrease in margins within our U.S. Operations and Canadian and U.K. Operations primarily reflects the short-term deterioration in metallurgical coal market conditions. As a result, we have curtailed, and in some cases idled, higher-cost and lower-quality mines. We will continue to monitor margins within all of our operations and will continue to idle operations that are not economic under current conditions.

        The $18.0 million, or 31.2%, decrease in selling, general and administrative expense for the six months ended June 30, 2014 as compared with the same period of 2013 was primarily attributable to a reduction in proxy challenge cost combined with our cost containment initiatives that we began in 2013.

        The operating results for the six months ended June 30, 2014 include restructuring and asset impairment charges of $31.3 million, which are comprised of an asset impairment charge of $23.0 million to reduce the carrying value of the Blue Creek Coal Terminal assets held for sale to their fair value less costs to sell and restructuring charges of $8.3 million primarily incurred in connection with the idling of the Canadian operations. The results for the six months ended June 30, 2013 include restructuring and asset impairment charges of $1.7 million, which includes asset impairment charges of $8.0 million related to the accelerated closure of the North River mine and $10.7 million of cost related to the curtailment of the Willow Creek mine offset by a gain of $17.0 million due to the release of a below market contract liability that was acquired through the acquisition of North River.

        The $39.9 million increase in interest expense, net for the six months ended June 30, 2014 as compared with the six months ended June 30, 2013 was primarily due to an increase in long-term debt combined with an increase in the effective interest rates on outstanding debt obligations due to the amendments to the 2011 Credit Agreement and the issuance of senior notes.

        The $2.5 million loss on the extinguishment of debt for the six months ended June 30, 2014 includes $13.9 million of accelerated amortization of capitalized debt discount and issuance cost associated with the refinancing of term loan A debt in the first quarter of 2014 and a net gain of $11.4 million recognized upon the extinguishment of $35.0 million of 9.875% Senior Notes due 2020 in exchange for shares of common stock in the second quarter of 2014. The prior year comparable period includes accelerated amortization of $6.0 million associated with the prepayment of term loan A debt.

        The effective tax rate for the six months ended June 30, 2014 was 15.6% compared with 58.0% for the same period in the prior year. The difference between the rates resulted in a $70.8 million decrease in the income tax benefit for the six months ended June 30, 2014 and was primarily due to a full valuation allowance provided against the U.S. net deferred tax assets recorded for U.S. operating losses in the current period. The effective tax rates for both periods also reflects the benefits of the losses of the Canadian and U.K. Operations which are taxed at statutory rates lower than the U.S. rate and the effects of additional tax losses related to foreign financing activities.

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

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Segment Analysis

    U.S. Operations

        Hard coking coal sales totaled 4.1 million metric tons for the six months ended June 30, 2014, representing an increase of 727 thousand metric tons, or 21.9%, compared with 3.3 million metric tons for the same period in 2013. Our hard coking coal production totaled 4.0 million metric tons in the six months ended June 30, 2014, representing an increase of 4.8% compared to 3.8 million during the same period in the prior year due to increased production from our Alabama underground mines. The average selling price of hard coking coal for the six months ended June 30, 2014 was $120.46 per metric ton, representing a 22.6% decrease from the average selling price of $155.68 per metric ton for the same period in 2013. The decrease in the average selling price of hard coking coal continues to reflect the pricing pressure experienced in the metallurgical coal market due to oversupply. Our average cash cost of sales per metric ton of hard coking coal sold during the six months ended June 30, 2014 was $93.16, representing a decrease of $12.39, or 11.7%, from the $105.55 average cash cost of sales per ton sold during the same period in the prior year.

        Thermal coal sales totaled 524 thousand metric tons for the six months ended June 30, 2014, representing a decrease of approximately 164 thousand metric tons, or 23.8%, compared with 688 thousand metric tons sold during the same period in 2013. Our average selling price of thermal coal for the six months ended June 30, 2014 was $66.97 per metric ton, approximating the $65.91 per metric ton for the same period in 2013. Thermal coal production totaled 295 thousand metric tons for the six months ended June 30, 2014, representing a decrease of approximately 65% compared with 842 thousand metric tons produced during the same period in 2013. This was primarily due to the closure of the Alabama North River mine in the fourth quarter of 2013. The average cash cost of sales per metric ton of thermal coal sold for the six months ended June 30, 2014 was $70.39 per metric ton compared with $91.29 per metric ton for the same period in 2013.

        Statistics for U.S. Operations are presented in the following table:

 
  Six months ended
June 30,
 
 
  2014   2013  

Tons of hard coking coal sold(1) (in thousands)

    4,053     3,326  

Tons of hard coking coal produced (in thousands)

    3,990     3,808  

Average hard coking coal selling price(1) (per metric ton)

  $ 120.46   $ 155.68  

Average hard coking coal cash cost of sales(1) (per metric ton)

  $ 93.16   $ 105.55  

Average hard coking coal cash cost of production (per metric ton)

  $ 66.05   $ 72.73  

Tons of thermal coal sold (in thousands)

    524     688  

Tons of thermal coal produced (in thousands)

    295     842  

Average thermal coal selling price (per metric ton)

  $ 66.97   $ 65.91  

Average thermal coal cash cost of sales (per metric ton)

  $ 70.39   $ 91.29  

Average thermal coal cash cost of production (per metric ton)

  $ 55.85   $ 69.96  

(1)
Includes sales of both produced and purchased coal.

        The $30.9 million decrease in our U.S. Operations segment reported revenues for the six months ended June 30, 2014 compared to the same period in the prior year was primarily attributable to a decrease in revenue of $142.8 million as a result of a $35.22 decline in the average selling price of hard coking coal offset partially by an increase in revenue of $113.3 million due to increased sales volume of hard coking coal.

        The $829 thousand decrease in cost of sales, exclusive of depreciation and depletion, as compared to the six months ended June 30, 2013 is primarily due to a decrease of $76.2 million in the average

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cash cost of sales per ton of hard coking coal and thermal coal sales combined with a decrease in thermal coal sales volume. This decrease is offset by an increase in cost of sales of $76.8 million due to an increase in hard coking coal tons sold. The decrease in per metric ton cash cost of sales was primarily due to increased volume and cost reduction initiatives within the operations. The decrease in metric tons sold and the average cash cost of sales per ton of thermal coal was primarily due to the closure of the Alabama North River mine in the fourth quarter of 2013 and improved mining conditions immediately prior to the mine closure.

        Consolidated metallurgical coal margin per ton, calculated as average consolidated metallurgical coal selling price per ton less average consolidated cost of metallurgical coal sales per ton, was $27.30 and $50.13, respectively, for the six months ended June 30, 2014 and 2013. While margins within our U.S. Operations have decreased in the short-term, we believe global metallurgical coal demand will continue to grow modestly with global steel production in the long-term. At current prices, we believe a significant portion of global metallurgical coal production is uneconomic and, if the current prices were to continue, additional idling would be expected. We will continue to monitor the margins within our U.S. Operations and will idle operations that are not economic under current market conditions.

        The current year period includes restructuring and asset impairment charges of $23.7 million, which is comprised of an asset impairment charge of $23.0 million to reduce the carrying value of the Blue Creek Coal Terminal assets held for sale to their fair value less costs to sell and restructuring charges of $0.7 million. The restructuring and asset impairment benefit of $8.9 million in the prior year is attributable to a gain of approximately $17.0 million due to the release of a below market contract liability that was obtained through the acquisition of North River offset by impairment charges of approximately $8.0 million related to the accelerated closure of the North River mine.

        Our U.S. Operations segment reported an operating loss of $24.5 million for the six months ended June 30, 2014, compared to operating income of $30.4 million in the same period in 2013. The decrease in operating income was primarily due to an increase of $32.7 million in restructuring and asset impairment charges combined with a decrease in revenue due to a decline in the selling prices of our coal.

    Canadian and U.K. Operations

        Metallurgical coal sales for the six months ended June 30, 2014 consisted of 593 thousand metric tons of hard coking coal at an average selling price of $126.89 per metric ton and 674 thousand metric tons of low-volatile PCI coal at an average selling price of $113.12 per metric ton. Metallurgical coal sales for the six months ended June 30, 2013 consisted of 1.0 million metric tons of hard coking coal at an average selling price of $149.29 per metric ton and 884 thousand metric tons of low-volatile PCI coal at an average selling price of $137.29 per metric ton. The declines in the average selling price of hard coking coal and low-volatile PCI coal reflect the global oversupply of metallurgical coal. The average cash cost of sales per metric ton of hard coking coal sold during the six months ended June 30, 2014 was $138.44, representing a decrease of $13.01 from the average cash cost of sales per ton of hard coking coal sold for the six months ended June 30, 2013 of $151.45. The average cash cost of sales per metric ton of low-volatile PCI coal sold during the six months ended June 30, 2014 was $135.47, representing a 4.9% decrease from the average cash cost of sales per metric ton of low-volatile PCI coal sold in the six months ended June 30, 2013 of $142.49. The decreases in average cash cost of sales per ton primarily reflect the company-wide improvement in cost performance.

        Our Canadian and U.K. Operations segment produced a total of 563 thousand metric tons of hard coking coal and 1.0 million metric tons of low-volatile PCI coal in the six months ended June 30, 2014. During the same period in 2013, the segment produced 946 thousand metric tons of hard coking coal and 951 thousand metric tons of low-volatile PCI coal. The decrease in hard coking coal production is

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primarily due to the idling of the Wolverine mine in April 2014 and the curtailment of production at the Willow Creek mine in the first half of 2013.

        Statistics for Canadian and U.K. Operations are presented in the following table:

 
  Six months ended
June 30,
 
 
  2014   2013  

Tons of metallurgical coal sold (in thousands)

    1,267     1,891  

Tons of metallurgical coal produced (in thousands)

    1,578     1,898  

Average metallurgical coal selling price (per metric ton)

  $ 119.57   $ 143.68  

Average metallurgical coal cash cost of sales (per metric ton)

  $ 137.49   $ 147.26  

Average metallurgical coal cash cost of production (per metric ton)

  $ 82.07   $ 106.41  

Tons of hard coking coal sold (in thousands)

    593     1,007  

Tons of hard coking coal produced (in thousands)

    563     946  

Average hard coking coal selling price (per metric ton)

  $ 126.89   $ 149.29  

Average hard coking coal cash cost of sales (per metric ton)

  $ 138.44   $ 151.45  

Average hard coking coal cash cost of production (per metric ton)

  $ 92.08   $ 115.92  

Tons of low-volatile PCI coal sold (in thousands)

    674     884  

Tons of low-volatile PCI coal produced (in thousands)

    1,015     951  

Average low-volatile PCI coal selling price (per metric ton)

  $ 113.12   $ 137.29  

Average low-volatile PCI coal cash cost of sales (per metric ton)

  $ 135.47   $ 142.49  

Average low-volatile PCI coal cash cost of production (per metric ton)

  $ 76.03   $ 96.94  

        The $110.7 million decrease in segment reported revenues for the six months ended June 30, 2014 compared to the same period in the prior year was attributable to a decrease in revenues of $90.6 million due to a decrease of 414 thousand and 210 thousand tons sold of hard coking and low-volatile PCI coal, respectively, with the remainder of the decrease due to a 15.0% and 17.6% decrease in the average selling price of hard coking coal and low-volatile PCI coal, respectively.

        The $94.1 million decrease in cost of sales, exclusive of depreciation and depletion, for the six months ended June 30, 2014 compared to the same period in 2013 was primarily due to a decrease of $92.5 million due to a decrease in hard coking and low-volatile PCI coal tons sold, combined with a decrease of approximately $12.5 million due to a decrease in the average cash cost of sales per ton of hard coking coal and low-volatile PCI sold as a result of continued improvement in cost performance. These decreases to cost of sales were offset by a $10.9 million increase in cost of sales due to the idling of the Canadian operations, of which $6.4 million relates to transportation take or pay charges related to port shortfall commitments and $4.5 million relates to idle mine costs. The shortfall is the proportionate share of the total estimated shortfall penalty for the year allocated to the tons shipped in the six months ended June 30, 2014.

        Consolidated metallurgical coal margin per ton, calculated as average consolidated metallurgical coal selling price per ton less average consolidated cost of metallurgical coal sales per ton, was $(17.92) and $(3.58), respectively, for the six months ended June 30, 2014 and 2013. Our margins within our Canadian and U.K. Operations remain under pressure. As a result, we have responded to the deterioration in market conditions by idling the Canadian operations. We believe the long-term demand for metallurgical and low-volatile PCI coal within our Canadian and U.K. Operations to be strong as industry projections indicate that global steel making will continue to require increasing amounts of high quality metallurgical coal.

        The current year period includes restructuring and asset impairment charges of $7.1 million incurred in connection with the idling of the Canadian operations in the current quarter. The restructuring and asset impairment charge of $10.6 million in the prior year is attributable to charges incurred in connection with the curtailment of operations at our Willow Creek mine.

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        Our Canadian and U.K. Operations segment reported an operating loss of $119.0 million for the six months ended June 30, 2014 as compared to an operating loss of $115.1 million in the prior year period. The increase in the operating loss is due to a decrease in hard coking and low-volatile PCI coal sold combined with a decrease in the average selling prices as a result of excess supply within the global metallurgical coal market offset partially by reduced average cash cost per ton driven by continued improvement in cost performance.

FINANCIAL CONDITION

        Cash and cash equivalents increased by $32.7 million at June 30, 2014 compared with December 31, 2013, primarily due to net cash flows provided by financing activities of $116.1 million as a result of the issuance in the first quarter of 2014 of $200.0 million in principal amount of 9.50% Add-on Senior Secured Notes due 2019 and $350.0 million in principal amount of 11.0%/12.0% Senior Secured Second Lien PIK Toggle Notes due 2020. The majority of the proceeds received from the issuance of these notes was used to prepay the remaining $406.6 million of term loan A and debt issuance costs of $21.3 million. Cash flows provided by financing activities were partially offset by cash flows used in investing activities of $43.8 million, primarily for capital expenditures, and cash flows used in operating activities of $39.0 million.

        Net receivables were $231.0 million at June 30, 2014, representing a decrease of $50.7 million from December 31, 2013 primarily due to a decrease in revenues as a result of a decline in metallurgical coal prices and the timing of metallurgical coal sales during June 2014 as compared with December 2013.

        Net property, plant and equipment decreased by $90.3 million at June 30, 2014 as compared with December 31, 2013 primarily due to an increase in accumulated depreciation of $115.4 million and the reclassification of Blue Creek Coal Terminal assets of $47.2 million to assets held for sale, offset partially by accrual based capital expenditures of $62.7 million and the impact of foreign currency exchange of $4.2 million.

LIQUIDITY AND CAPITAL RESOURCES

Overview

        Our principal sources of short-term funding are our existing cash balances, operating cash flows and the unused portion of our revolving credit facility. Our principal sources of long-term funding are our term loan B entered into on April 1, 2011 and the proceeds received from our senior notes issued in 2012, 2013 and 2014, as discussed below. Our available liquidity as of June 30, 2014 was $563.9 million, consisting of cash and cash equivalents of $293.5 million and $270.4 million available under the Company's $313.8 million revolving credit facility, net of outstanding letters of credit of $43.4 million. In recent quarters, we have entered into the financing transactions and amendments discussed below which have enhanced liquidity, secured covenant relief and extended our debt maturities.

        As of June 30, 2014, the Revolver and term loan B interest rates were tied to LIBOR or CDOR, plus a credit spread ranging from 550 basis points for the Revolver and 625 basis points on the term loan B debt, adjusted quarterly based on the Company's total leverage ratio as defined by the amended 2011 Credit Agreement. The term loan B has a minimum LIBOR floor of 1.0%. The Revolver loans can be denominated in either U.S. dollars or Canadian dollars at our option. The commitment fee on the unused portion of the 2016 Revolver is 0.50% and on the 2017 Revolver is 0.625%. As of June 30, 2014, there were no borrowings outstanding under the Revolver, with $61.0 million available under the Company's $69.0 million 2016 Revolver, net of outstanding letters of credit of $8.0 million, and $209.4 million available under the Company's $244.8 million 2017 Revolver, net of outstanding letters of credit of $35.4 million, for a total availability of $270.4 million. All borrowings under the Revolver must be made pro-rata between the 2016 Revolver and 2017 Revolver through the maturity of the 2016 Revolver.

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        Borrowings at June 30, 2014 under the amended 2011 Credit Agreement consisted of a term loan B debt balance of $978.2 million with a weighted average interest rate of 7.25% and no borrowings under the Revolver, with $43.4 million in outstanding stand-by letters of credit.

        Based on current forecasts and anticipated market conditions, we believe that funding provided by operating cash flows and available sources of liquidity are sufficient to meet substantially all of our operating needs, to make planned capital expenditures, and all required interest and principal payments on indebtedness for the foreseeable future. Our operating cash flows and liquidity, however, are significantly influenced by numerous factors including prices of coal, coal production levels, mining conditions, costs of raw materials, interest rates and the general economy.

Credit Agreement Amendments

        On March 18, 2014, the Company entered into an amendment (the "Sixth Amendment") to the 2011 Credit Agreement (as amended, the "Credit Agreement") which, among other things, (i) permits the Company to repay the term loan A under its Credit Agreement without making a pro-rata repayment to the term loan B, (ii) extends the maturity of 81.6% of its revolving commitments (the "2017 Revolver") to October 2017, with such extending lenders having their revolving commitments reduced by 20%, (iii) provides for amendments to certain incurrence covenants to provide additional flexibility, (iv) eliminates the liquidity and fixed charge coverage maintenance covenants, (v) modifies the secured leverage ratio covenant, including to make it apply only to the commitments of the extending revolving lenders and (vi) provides for a 0.50% increase in the interest rate payable on the term loan B under the Credit Agreement. The Sixth Amendment also suspended the senior secured leverage ratio covenant until the aggregate amount outstanding under the Revolver exceeds 30%, or $94.1 million, of the total revolving commitment of $313.8 million, and became effective upon consummation of the offerings of the Add-on 2019 Notes (as defined below) and the Second Lien Notes (as defined below), the repayment in full of the term loan A and other customary conditions.

        On July 7, 2014, the Company entered into an amendment (the "Seventh Amendment") to the 2011 Credit Agreement dated as of April 1, 2011 (as amended, the "Credit Agreement"), which, among other things, modified the financial maintenance ratio to be unlimited for the quarter ended June 30, 2014 so long as the Company issued at least $275.0 million of additional first lien notes within seven days (or such longer period during the fiscal quarter ending September 30, 2014 as may be determined by the administrative agent of the Credit Agreement) of the effective date of the Seventh Amendment. On July 14, 2014, concurrently with the closing of the issuance of $320.0 million aggregate principal amount of 9.50% Senior Secured Notes (the "New First Lien Notes"), the financial maintenance ratio for the second quarter of 2014 became unlimited.

        On July 8, 2014, the Company entered into an amendment (the "Eighth Amendment") to the Credit Agreement, which, among other things, provided the Company with an additional tranche of revolving loan commitments (the "New Revolving Credit Facility Tranche") in the amount of $61.2 million, thereby increasing the total available commitments under the revolving credit facility in the Credit Agreement to $375.0 million. The New Revolving Credit Facility Tranche would have matured in 2017. Effectiveness of the Eighth Amendment was conditioned upon the Company pricing a bond offering in an aggregate principal amount of no less than $275.0 million and certain other conditions, including making arrangements so that, immediately after giving effect to the funding of any loans under the New Revolving Credit Facility Tranche, proceeds of such bond issuance are applied to repay certain revolving loans and permanently terminate certain revolving commitments (including the New Revolving Credit Facility Tranche), required under the Credit Agreement. The Eighth Amendment also reduced the amount available under the 2016 revolver from $69.0 million to $16.9 million and reduced the amount available under the 2017 revolver from $244.8 million to $60.0 million for total availability of $76.9 million. On July 14, 2014, concurrently with the closing of the issuance of the New

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First Lien Notes, the Eighth Amendment became effective and the New Revolving Credit Facility Tranche was terminated.

9.50% Add-on Senior Secured Notes due 2019

        On March 27, 2014, the Company issued $200.0 million aggregate principal amount of 9.50% Senior Secured Notes due October 15, 2019 (the "Add-on 2019 Notes"). These notes are an addition to the $450.0 million aggregate principal amount of the Company's 9.50% Senior Secured Notes due 2019 (collectively the "First Lien Notes") which were issued on September 27, 2013 for a total principal amount of $650.0 million. The Add-on 2019 Notes are unconditionally guaranteed, jointly and severally, by each of our current and future 100% owned domestic restricted subsidiaries that from time to time guarantee any of our indebtedness or any indebtedness of any of our restricted subsidiaries. The Add-on 2019 Notes and related guarantees are secured on a first priority basis by substantially all of the property and assets of the Company and the guarantors. Interest on the Add-on 2019 Notes is payable semi-annually in arrears on April 15 and October 15 of each year, commencing on April 15, 2014.

11.0%/12.0% Senior Secured Second Lien PIK Toggle Notes due 2020

        On March 27, 2014, the Company also issued $350.0 million aggregate principal amount of 11.0%/12.0% Senior Secured Second Lien Payment-in-Kind ("PIK") Toggle Notes due April 1, 2020 (the "Second Lien Notes"). These notes are unconditionally guaranteed, jointly and severally, by each of our current and future 100% owned domestic restricted subsidiaries that from time to time guarantee any of our indebtedness or any indebtedness of any of our restricted subsidiaries. The Second Lien Notes and the guarantees are secured on a second priority basis, equally and ratably with all future second lien obligations, on substantially all of the Company's and the guarantors property and assets, which also secure the Company's 2011 Credit Agreement and First Lien Notes on a first priority basis. Interest on these notes is payable on April 1 and October 1 of each year, commencing on October 1, 2014.

        The Company may elect to pay interest on the Second Lien Notes (1) entirely in cash, at a rate of 11.0% per annum, or (2) with a combination of (i) 50% cash and 50% by increasing the principal amount of the outstanding Second Lien Notes or issuing additional Second Lien Notes ("PIK Interest") or (ii) 75% cash and 25% PIK Interest. Interest on PIK Interest accrues on the Second Lien Notes at a rate equal of 12.0% per annum. The Company will pay the first and last interest payments entirely in cash.

        At any time prior to April 1, 2017, the Company may redeem up to 35% of the aggregate principal amount of the Second Lien Notes with the net cash proceeds of certain equity offerings, at a redemption price of 111.0% of the aggregate principal amount. The Company may redeem the Second Lien Notes, in whole or in part, prior to April 1, 2017 at a redemption price equal to 100% of the aggregate principal amount of the Second Lien Notes plus a "make-whole" premium of 1.625% and accrued and unpaid interest. The Company may redeem the Second Lien Notes, in whole or in part at redemption prices equal to 105.5% for the year commencing April 1, 2017, 102.75% for the year commencing April 1, 2018 and 100% beginning on April 1, 2019. Upon the occurrence of a change of control, unless the Company has exercised its right to redeem the Second Lien Notes, the Company will be required to offer to repurchase each holder's Second Lien Notes at a price equal to 101% of the aggregate principal amount.

Use of Proceeds from Notes Offerings

        The Company utilized the net proceeds of the Add-on 2019 Notes and Second Lien Notes to repay in full its term loan A debt, increase its liquidity and pay related fees and expenses. As the term loan A

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debt was extinguished, the unamortized debt issuance costs of $6.7 million and the unamortized debt discount of $7.2 million were expensed and are included in gain (loss) on extinguishment of debt in the Condensed Consolidated Statements of Operations.

New First Lien Notes

        On July 14, 2014, the Company issued the New First Lien Notes. The New First Lien Notes are an addition to the $450.0 million aggregate principal amount of the Company's 9.50% Senior Secured Notes due 2019 that were issued on September 27, 2013 and the $200.0 million aggregate principal amount of 9.50% Senior Secured Notes due 2019 (the "9.50% Add-On Senior Secured Notes") that were issued on March 27, 2014 (collectively, the "First Lien Notes"). The First Lien Notes will mature on October 15, 2019, and interest is payable on April 15 and October 15 of each year. The next interest payment date for the First Lien Notes is October 15, 2014.

        The First Lien Notes are unconditionally guaranteed, jointly and severally, by the Guarantors. The First Lien Notes and the guarantees are secured on a first priority basis, equally and ratably with the Company's Credit Agreement and any future pari passu secured obligations (subject to permitted liens) on substantially all of the Company's and the Guarantor's property and assets, which also secure the Company's 11.0%/12.0% Senior Secured PIK Toggle Notes due 2020 (the "Second Lien Notes") on a second priority basis.

        At any time prior to October 15, 2016, the Company may redeem up to 35% of the aggregate principal amount of the First Lien Notes with the net cash proceeds from certain equity offerings, at a redemption price of 109.50% of the aggregate principal amount. The Company may redeem the First Lien Notes, in whole or in part, prior to October 15, 2016, at a redemption price equal to 100% of the aggregate principal amount of the First Lien Notes plus a "make-whole" premium. The Company may redeem the First Lien Notes, in whole or in part at redemption prices equal to 107.125% for the year commencing October 15, 2016, 102.375% for the year commencing October 15, 2017 and 100% beginning on October 15, 2018. Upon the occurrence of a change of control, unless the Company has exercised its right to redeem the First Lien Notes, the Company will be required to offer to repurchase each holder's First Lien Notes at a price equal to 101% of the aggregate principal amount.

        As market conditions warrant, we may from time to time repurchase our debt securities in privately negotiated transactions, in open market purchases, by tender offer or otherwise.

Statements of Cash Flows

        Cash balances were $293.5 million and $260.8 million at June 30, 2014 and December 31, 2013, respectively. The increase in cash during the six months ended June 30, 2014 of $32.7 million primarily resulted from net cash provided by financing activities of $116.1 million due to the issuance of senior notes in the first quarter of 2014. This was partially offset by cash used in investing activities of $43.8 million, which included cash capital expenditures of $43.5 million, and cash used in operating activities of $39.0 million. The following table sets forth, for the periods indicated, selected consolidated cash flow information (in thousands):

 
  Six months ended
June 30,
 
 
  2014   2013  

Cash flows used in operating activities

  $ (39,008 ) $ (24,102 )

Cash flows used in investing activities

    (43,826 )   (79,287 )

Cash flows provided by financing activities

    116,076     159,482  

Effect of foreign exchange rates on cash

    (588 )   (1,816 )
           

Net increase in cash and cash equivalents

  $ 32,654   $ 54,277  
           
           

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        The increase of $14.9 million in cash used in operating activities was primarily attributable to an increase in cash used in operations of $98.8 million, resulting primarily from the decline in the average selling price of metallurgical coal, partially offset by an increase in cash flows provided by working capital of $83.9 million.

        The decrease in cash flows used in investing activities of $35.5 million was primarily attributable to a $36.8 million decrease in capital expenditures.

        The decrease in cash flows provided by financing activities of $43.4 million was primarily attributable to an increase in retirement of debt of $154.9 million partially offset by an increase in proceeds from the issuance of debt of $103.0 million and a decrease in dividends paid of $14.4 million.

EBITDA

        EBITDA is defined as earnings before interest, income taxes, and depreciation and depletion expense. Adjusted EBITDA is defined as EBITDA further adjusted to exclude restructuring and asset impairment charges, gain (loss) on interest rate swap hedge ineffectiveness, gain (loss) on extinguishment of debt, Canada transportation take or pay charges and other items including proxy contest expenses and foreign currency adjustments. Consolidated EBITDA as defined under the amended 2011 Credit Agreement is EBITDA further adjusted to exclude certain non-cash items, non-recurring items, and other adjustments permitted in calculating covenant compliance under the Credit Agreement. Certain items that may adjust Consolidated EBITDA in the compliance calculation are: (a) gains and losses on non-ordinary course asset sales, disposals or abandonments; (b) non-cash impairment charges; (c) gains and losses from equity method investments; (d) any long-term incentive plan accruals or any non-cash compensation expense recorded from grants of stock appreciation or similar rights, stock options or other rights to officers, directors and employees; (e) restructuring charges; (f) actuarial gains related to pension and other post-employment benefits; (g) gains and losses associated with the change in fair value of derivative instruments; (h) currency translation gains and losses related to currency remeasurements; (i) after-tax gains or losses from discontinued operations; (j) franchise taxes; and (k) other non-cash expenses that do not represent an accrual or reserve for future cash expense.

        EBITDA, Adjusted EBITDA, and Consolidated EBITDA are financial measures which are not calculated in conformity with GAAP and should be considered supplemental to, and not as a substitute or superior to financial measures calculated in conformity with GAAP. We believe that these non-GAAP measures provide additional insights into the performance of the Company, and they reflect how management analyzes Company performance and compares that performance against other companies. In addition, we believe that EBITDA, Adjusted EBITDA, and Consolidated EBITDA are useful measures as some investors and analysts use EBITDA, Adjusted EBITDA, and Consolidated EBITDA to compare us against other companies and to help analyze our ability to satisfy principal and interest obligations and capital expenditure needs. We believe that EBITDA, Adjusted EBITDA, and Consolidated EBITDA present a useful measure of our ability to incur and service debt based on ongoing operations. EBITDA, Adjusted EBITDA, and Consolidated EBITDA may not be comparable to similarly titled measures used by other entities.

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        Reconciliation of net loss to EBITDA, Adjusted EBITDA, and Consolidated EBITDA (in thousands):

 
  For the three months
ended June 30,
  For the six months
ended June 30,
 
 
  2014   2013   2014   2013  

Net loss

  $ (151,391 ) $ (34,492 ) $ (243,569 ) $ (83,936 )

Interest expense, net

    73,402     52,985     138,834     98,952  

Income tax benefit

    (9,075 )   (49,760 )   (45,036 )   (115,799 )

Depreciation and depletion expense

    69,816     68,320     146,240     149,510  
                   

Earnings before interest, income taxes, and depreciation and depletion (EBITDA)

    (17,248 )   37,053     (3,531 )   48,727  

Restructuring and asset impairments

    31,342     (5,741 )   31,342     1,699  

Gain (loss) on extinguishment of debt

    (11,397 )       2,492     6,001  

Canada transportation take or pay charges

    6,394         6,394      

Other items, including proxy contest expenses and foreign currency adjustments

    3,480     5,429     404     12,267  

(Gain) loss on interest rate swap hedge ineffectiveness

    (978 )       723      
                   

Adjusted EBITDA

    11,593     36,741     37,824     68,694  

Non-cash charges(1)

    8,861     11,632     18,940     17,212  

Other adjustments(1)

    (1,987 )   4,729     1,418     15,455  
                   

Consolidated EBITDA(1)

  $ 18,467   $ 53,102   $ 58,182   $ 101,361  
                   
                   

(1)
Calculated in accordance with the amended 2011 Credit Agreement.

Analysis of Material Covenants

        We believe we were in compliance with all covenants under the amended 2011 Credit Agreement and the indentures governing our notes as of June 30, 2014. A breach of the covenants in the amended 2011 Credit Agreement or the indentures governing our notes; including the applicable financial covenants under the amended 2011 Credit Agreement that measure ratios based on Consolidated EBITDA, as defined under the 2011 Credit Agreement, limits to capital spending, or other restricted cash outflows; could result in a default under the amended 2011 Credit Agreement or the indentures governing our notes and the respective lenders and note holders could elect to declare all amounts borrowed due and payable upon such default. Any acceleration under either the amended 2011 Credit Agreement or one of the indentures governing our notes would also result in a default under the other indentures governing our notes. Additionally, under the amended 2011 Credit Agreement and the indentures governing our notes, our ability to engage in activities such as incurring additional indebtedness and paying dividends is also tied to ratios based on Consolidated EBITDA.

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        Actual levels and specified covenant levels set forth in our amended 2011 Credit Agreement for the six months ended June 30, 2014 were:

 
  Actual Levels   Covenant Levels  

Capital Expenditures Covenant(1)

  $ 62.4 million   $ 220.0 million  

Maximum total senior secured debt less unrestricted cash to Consolidated EBITDA Ratio

    N/A     N/A (2)

(1)
The Sixth Amendment to the 2011 Credit Agreement contains a capital expenditure covenant limiting capital expenditures to $200.0 million in 2014 with a potential that up to $20.0 million in unused 2013 capital spending may be carried forward and utilized in the succeeding fiscal year increasing the 2014 capital spending limit up to $220.0 million. As 2013 capital expenditures were $136.7 million compared to the 2013 covenant limit of $175.0 million, the 2014 covenant limit is now $220.0 million. The Company expects 2014 capital expenditures to be approximately $120.0 million.

(2)
The Sixth Amendment to the 2011 Credit Agreement suspended the senior secured leverage ratio covenant until the aggregate amount outstanding under the Revolver excluding outstanding letters of credit exceeds 30%, or $94.1 million, of the total revolving commitment of $313.8 million. On July 14, 2014, the Seventh Amendment to the 2011 Credit Agreement suspended the senior secured leverage ratio covenant for the quarter ended June 30, 2014 and the Eighth Amendment to the 2011 Credit Agreement reduced the total revolving commitment from $313.8 million to $76.9 million. The senior secured leverage ratio covenant remains suspended until the aggregate amount outstanding under the Revolver excluding letters of credit exceeds 30%, or $23.1 million, of the total revolving commitment of $76.9 million. The required maximum senior secured leverage ratio covenant shall be the following for each period of four consecutive fiscal quarters then ending: September 30, 2014—7.5x; December 31, 2014—6.5x; March 31, 2015—5.5x; June 30, 2015—5.0x; September 30, 2015—4.5x; December 31, 2015 and each fiscal quarter ending thereafter—3.75x.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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, commodity price risk and foreign currency risks. We do not enter into derivatives or other financial instruments for trading or speculative purposes.

Interest Rate Risk

        We have exposure to changes in interest rates under the 2011 Credit Agreement through our term loan B and Revolver loans. As of June 30, 2014, the interest rates for the term loan B and revolver loans were tied to LIBOR or the Canadian Dealer Offered Rate ("CDOR"), plus a credit spread of 550 basis points for the revolver and 625 basis points on the term loan B adjusted quarterly based on our total leverage ratio as defined by the 2011 Credit Agreement. As of June 30, 2014, our borrowings due under the 2011 Credit Agreement totaled $978.2 million. As of June 30, 2014, a 100 basis point increase in interest rates would increase our quarterly interest expense by approximately $2.9 million, while a 100 basis point decrease in interest rates would have no impact on our quarterly interest expense due to a minimum LIBOR floor of 1.0%.

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Commodity Risks

        We are exposed to commodity price risk on sales of natural gas. Our natural gas business sold 12.1 billion cubic feet of gas during the year ended December 31, 2013. We occasionally utilize derivative commodity instruments to manage the exposure to changing natural gas price. Such derivative instruments are structured as cash flow hedges and not for trading. These swap contracts effectively convert a portion of forecasted sales at floating-rate natural gas prices to a fixed-rate basis. No derivative instruments were entered into during the second quarter of 2014 and as of June 30, 2014, none were outstanding.

Foreign Currency Risks

        We are exposed to the effects of changes in exchange rates primarily from the Canadian dollar and the British pound in regions for which we operate but also have competitive exposure in other regions where our competitors maintain operations, such as Australia. We historically have not entered into any foreign exchange contracts to mitigate this type of risk.

ITEM 4.    CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

        We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of June 30, 2014 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 officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

        There has been no change in our internal control over financial reporting as such term is defined in Rule 13a-15(f) of the Exchange Act, during the three months ended June 30, 2014 that would materially affect, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1.    Legal Proceedings

        See Note 8 of the "Notes to Condensed Consolidated Financial Statements" in this Form 10-Q for a description of current legal proceedings, which is incorporated by reference in this Part II, Item 1.

        We and our subsidiaries are parties to a number of other lawsuits arising in the ordinary course of our businesses. We record costs relating to these matters when a loss is probable and the amount can be reasonably estimated. The effect of the outcome of these matters on our future results of operations cannot be predicted with certainty as any such effect depends on future results of operations and the amount and timing of the resolution of such matters. While the results of litigation cannot be predicted with certainty, we believe that the final outcome of such litigation will not have a material adverse effect on our consolidated financial statements.

Item 1A.    Risk Factors

        Our business, financial condition, operating results and cash flows can be impacted by a number of factors, any one of which could cause actual results to vary materially from recent results or from anticipated future results. In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report filed on Form 10-K for the fiscal year ended December 31, 2013, and "Management's Discussion and Analysis of Financial Condition and Results of Operations—Industry Overview and Outlook," which could materially affect our business, financial condition or future results. Other than as described in this report, and except to supplement and update the risk factor set forth below, there have been no material changes to the risk factors disclosed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. The risks described in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Our ability to generate the significant amount of cash needed to service our debt and financial obligations, to refinance all or a portion of our indebtedness or obtain additional financing depends on many factors beyond our control.

        Our ability to make payments on and to refinance our indebtedness depends on our ability to generate cash in the future. We are subject to general economic, climatic, industry, financial, competitive, legislative, regulatory and other factors that are beyond our control. In particular, economic conditions have caused the price of coal to fall and our revenue to decline and in the future could cause the price of coal to remain at current levels or fall, which may have an adverse effect on our operations, liquidity, ability to remain in compliance with our covenants in our Credit Agreement, and our ability to service our indebtedness. As a result, we may need to refinance all or a portion of our indebtedness on or before maturity. Our ability to refinance our debt or obtain additional financing will depend on, among other things:

    our financial condition at the time;

    restrictions in the agreements governing our indebtedness; and

    other factors, including conditions in the financial and capital markets or coal industry.

        If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or

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restructure or refinance our indebtedness. We may not be able to affect any such alternative measures on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. The Credit Agreement and the indentures governing the Notes restrict our ability to dispose of assets and use the proceeds from those dispositions and may also restrict our ability to raise capital from debt or equity financings to repay other indebtedness when it becomes due. Additionally, we may not be able to consummate such dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations when due.

        In addition, we conduct a substantial portion of our operations through our subsidiaries. Accordingly, repayment of our indebtedness is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us by dividend, debt repayment or otherwise. Unless they are guarantors of the Notes or other indebtedness, our subsidiaries do not have any obligation to pay amounts due to our indebtedness or to make funds available for that purpose. Our subsidiaries may not be able to or be permitted to make distributions to enable us to make payments in respect to our indebtedness. Each subsidiary is a distinct legal entity and under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. While the Credit Agreement and the indentures governing the Notes limit the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to qualifications and exceptions. In the event that we do not receive distributions from our subsidiaries we may be unable to make required principal and interest payments on our indebtedness.

        We may not be able to refinance any of our indebtedness on commercially reasonable terms or at all. If our operations do not generate sufficient cash flows, and additional borrowings or refinancing are not available to us, we may not have sufficient cash to enable us to meet all of our obligations.

        If we cannot make scheduled payments on our debt or are not in compliance with our covenants and are not able to amend those covenants, we will be in default and holders of the Notes could declare all outstanding principal and interest to be due and payable, the lenders under the Credit Agreement could terminate their commitments to loan money, the lenders could foreclose against the assets securing their borrowings and we could be forced into bankruptcy or liquidation. If we are not able to generate sufficient cash flow from operations, we may need to seek an amendment to our Credit Agreement to prevent us from potentially being in breach of our covenants.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

Purchase of Equity Securities by Us and Affiliated Purchasers

        The following table provides a summary of all repurchases by Walter Energy of its common stock during the three-month period ended June 30, 2014:

Period
  Total
Number of
Shares
Purchased(1)
  Average
Price Paid
per Share
 

April 1, 2014 - April 30, 2014

    16,474   $ 7.65  

May 1, 2014 - May 31, 2014

      $  

June 1, 2014 - June 30, 2014

      $  
             

    16,474        
             
             

(1)
These shares were acquired to satisfy certain 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.

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Item 4.    Mine Safety Disclosures

        The information concerning mine safety violations and other regulatory matters is filed as Exhibit 95 to this quarterly report on Form 10-Q pursuant to the requirements of Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104).

Item 6.    Exhibits

Exhibit
Number
   
  3.1   Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K (File No. 001-13711), filed on April 28, 2009)
        
  3.2   Amended and Restated By-Laws (Incorporated by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K (File No. 001-13711), filed on February 23, 2012)
        
  4.1   Indenture, dated as of September 27, 2013, by and among Walter Energy, Inc., the subsidiary guarantors named therein and Wilmington Trust, National Association (as successor to Union Bank, N.A.), as trustee and collateral agent (Incorporated by reference to Exhibit 4.1 of the Company's Current Report on Form 8-K (File No. 001-13711) filed on September 30, 2013)
        
  4.1.1   Form of 9.500% Senior Secured Note due 2019 (Incorporated by reference to Exhibit 4.2 of the Company's Current Report on Form 8-K (File No. 001-13711) filed on September 30, 2013)
        
  10.1   First-Lien Notes Collateral Agreement, dated as of September 27, 2013, by and among Walter Energy, Inc., certain subsidiaries of Walter Energy, Inc. and Wilmington Trust, National Association (as successor to Union Bank, N.A.), as collateral agent (Incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K (File No. 001-13711) filed on September 30, 2013)
        
  10.2   Seventh Amendment, dated as of July 7, 2014, to Credit Agreement, by and among Walter Energy, Inc., certain subsidiaries of Walter Energy, Inc., the lenders party thereto and Morgan Stanley Senior Funding,  Inc., as Administrative Agent (Incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K (File No. 001-13711), filed on July 11, 2014)
        
  10.3   Eighth Amendment, dated as of July 8, 2014, to Credit Agreement, by and among Walter Energy, Inc., certain subsidiaries of Walter Energy, Inc., the lenders party thereto and Morgan Stanley Senior Funding,  Inc., as Administrative Agent (Incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K (File No. 001-13711), filed on July 11, 2014)
        
  10.4 Walter Energy, Inc. 2014 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K (File No. 001-13711), filed on April 28, 2014)
        
  10.5 *† Form of Restricted Stock Unit Agreement under 2014 Long-Term Incentive Plan (50% vesting on second and third anniversaries of grant date)
        
  31.1 * Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002—Chief Executive Officer
        
  31.2 * Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002—Chief Financial Officer
 
   

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Exhibit
Number
   
  32.1 * Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350—Chief Executive Officer
        
  32.2 * Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350—Chief Financial Officer
        
  95 * Mine Safety Disclosures Pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 299.104)
        
  101 * XBRL (Extensible Business Reporting Language)—The following materials from Walter Energy, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income (iv) the Condensed Consolidated Statement of Changes in Stockholders' Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements.

*
Filed herewith.

Denotes management contract or compensatory plan or arrangement.

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SIGNATURES

        Pursuant to the requirements 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.    

/s/ WALTER J. SCHELLER, III

Chief Executive Officer (Principal Executive Officer)

 

 

Date: August 6, 2014

 

 

/s/ WILLIAM G. HARVEY

Chief Financial Officer (Principal Financial Officer)

 

 

Date: August 6, 2014

 

 

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