UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2009oro

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


Commission File Number 001-13711

WALTER ENERGY, INC.

Incorporated in Delaware

13-3429953IRS Employer Identification No.4211 W. Boy Scout Boulevard, Tampa, Florida

33607(813) 871-4811Telephone Number


Walter Industries, Inc.(Former Name or Former Address, if Changed from Last Report)

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for the past
90 days. 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 definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ý

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o


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

Number of shares of common stock outstanding as of April 30, 2009:52,862,524



---





PART IFINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

WALTER ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

March 31,
2009

December 31,
2008ASSETSCash and cash equivalents

$
92,984

$
117,672Short-term investments, restricted


51,539


56,275Instalment notes receivable, net of allowance of $18,482 and $18,969, respectively


1,734,873


1,769,688Receivables, net


190,418


176,601Inventories


158,331


133,129Prepaid expenses


23,022


26,418Property, plant and equipment, net


531,724


515,418Deferred income taxes


182,390


206,733Other assets


60,494


59,392Assets of discontinued operations


7,455


6,667$
3,033,230

$
3,067,993LIABILITIES AND STOCKHOLDERS' EQUITYAccounts payable

$
63,481

$
72,801Accrued expenses


66,699


91,213Accrued interest


11,114


11,362Debt:Mortgage-backed/asset-backed notes


1,345,160


1,372,821Other debt


208,505


225,385Accumulated postretirement benefits obligation


369,413


369,055Other liabilities


294,037


293,759Liabilities of discontinued operations


1,553


1,328Total liabilities


2,359,962


2,437,724Commitments and Contingencies (Note 13)Stockholders' equity:Common stock, $0.01 par value per share:Authorized200,000,000 sharesIssued52,862,524 and 54,143,958 shares, respectively


529


541Capital in excess of par value


688,802


714,174Retained earnings


118,766


50,990Accumulated other comprehensive income (loss):Pension and other post-retirement benefit plans, net of tax


(135,509
)

(137,364
)Unrealized gain on hedges, net of tax


680


1,928Total stockholders' equity


673,268


630,269$
3,033,230

$
3,067,993


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

1

---



WALTER ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

For the three months ended March 31,2009

2008Net sales and revenues:Net sales

$
289,764

$
240,104Interest income on instalment notes


45,385


48,710Miscellaneous income


7,806


3,786342,955


292,600Costs and expenses:Cost of sales (exclusive of depreciation)


149,494


167,647Depreciation


17,811


13,482Selling, general and administrative


31,197


37,748Provision for losses on instalment notes


4,357


4,325Postretirement benefits


7,527


6,592Interest expensemortgage-backed/asset-backed notes


23,089


28,308Interest rate hedge ineffectiveness





16,981Amortization of intangibles


315


365Restructuring and impairment charges


1,072


6,770234,862


282,218Operating income


108,093


10,382Interest expenseother debt


(4,806
)

(5,714
)Interest expenseother


275


181Income from continuing operations before income tax expense


103,562


4,849Income tax expense


28,844


1,677Income from continuing operations


74,718


3,172Loss from discontinued operations


(1,615
)

(2,673
)Net income

$
73,103

$
499Basic income (loss) per share:Income from continuing operations

$
1.40

$
0.06Loss from discontinued operations


(0.03
)

(0.05
)Net income

$
1.37

$
0.01Diluted income (loss) per share:Income from continuing operations

$
1.39

$
0.06Loss from discontinued operations


(0.03
)

(0.05
)Net income

$
1.36

$
0.01Dividends declared per common share

$
0.10

$
0.05


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

2

---





WALTER ENERGY, INC. AND SUBSIDIARIES        CONDENSED CONSOLIDATED STATEMENT OF CHANGES        IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME    
FOR THE THREE MONTHS ENDED MARCH 31, 2009 (UNAUDITED)        (IN THOUSANDS)

Total

Common
Stock

Capital in
Excess of
Par Value

Comprehensive
Income

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)Balance at December 31, 2008

$
630,269

$
541

$
714,174




$
50,990

$
(135,436
)Comprehensive income:Net income


73,103







$
73,103


73,103Other comprehensive income (loss), net of tax:Change in pension and postretirement benefit plans


1,855








1,855





1,855Change in unrealized gain (loss) on hedges


(1,248
)







(1,248
)




(1,248
)Comprehensive income










$
73,710Purchases of stock under stock repurchase programs


(27,963
)

(13
)

(27,950
)Dividends paid, $0.10 per share


(5,327
)










(5,327
)Stock-based compensation


2,145





2,145Other


434


1


433Balance at March 31, 2009

$
673,268

$
529

$
688,802




$
118,766

$
(134,829
)


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

3

---



WALTER ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(IN THOUSANDS)

For the three months
ended March 312009

2008OPERATING ACTIVITIESNet income

$
73,103

$
499Loss from discontinued operations


1,615


2,673Income from continuing operations


74,718


3,172Adjustments to reconcile income from continuing operations to net cash provided by operating activities:Provision for losses on instalment notes receivable


4,357


4,325Depreciation


17,811


13,482Non-cash loss from ineffective hedges





16,981Other


8,341


11,122Decrease (increase) in assets:Receivables


(13,869
)

(8,462
)Inventories


(25,202
)

(16,611
)Prepaid expenses


4,322


(6,810
)Instalment notes receivable


28,145


(1,177
)Increase (decrease) in liabilities:Accounts payable


(9,320
)

1,992Accrued expenses


(4,227
)

(13,755
)Accrued interest


(248
)

(478
)Cash flows provided by operating activities


84,828


3,781INVESTING ACTIVITIESPrincipal payments received on purchased loans


2,313


4,071Decrease in short-term investments, restricted


4,736


2,389Additions to property, plant and equipment


(36,976
)

(23,125
)Other


710


(444
)Cash flows used in investing activities


(29,217
)

(17,109
)FINANCING ACTIVITIESIssuance of mortgage-backed/asset-backed notes





25,000Payments on mortgage-backed/asset-backed notes


(27,673
)

(41,290
)Proceeds from issuance of other debt





30,000Retirements of other debt


(16,880
)

(3,856
)Dividends paid


(5,327
)

(2,605
)Purchases of stock under stock repurchase program


(27,963
)

(363
)Other


(278
)

4,319Cash flows (used in) provided by financing activities


(78,121
)

11,205Cash flows used in continuing operations


(22,510
)

(2,123
)CASH FLOWS FROM DISCONTINUED OPERATIONSCash flows used in operating activities


(2,095
)

(1,762
)Cash flows used in investing activities


(83
)

(335
)Cash flows used in discontinued operations


(2,178
)

(2,097
)Net decrease in cash and cash equivalents

$
(24,688
)
$
(4,220
)Cash and cash equivalents at beginning of period

$
117,672

$
30,614Net decrease in cash and cash equivalents


(24,688
)

(4,220
)Cash and cash equivalents at end of period

$
92,984

$
26,394


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

4

---





WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2009 (Unaudited)

Note 1Basis of Presentation

On April 23, 2009, Walter Industries, Inc. changed its name to Walter Energy, Inc. ("Walter"). Walter, together with its consolidated subsidiaries ("the Company"),
is a leading U.S. producer and exporter of premium metallurgical coal for the global steel industry (Underground Mining), operates surface mines for the steam coal and industrial coal markets (Surface
Mining) and produces metallurgical coke (Sloss). In December 2008, the Company announced the closure of its Homebuilding segment. On April 17, 2009, the Company spun off its Financing segment.
These segments are expected to qualify for discontinued operations treatment in the second quarter of 2009. See Note 2. These actions have completed the transformation of Walter
Industries, Inc. from a diversified corporation to a pure play natural resources and energy company, now renamed Walter Energy, Inc.

Prior
to the first quarter of 2009, the Company's underground and surface coal mining operations were reported together as the Natural Resources segment. Beginning with the first quarter
of 2009, the Company has revised its reporting segments to separate the Natural Resources segment into Underground Mining and Surface Mining. Underground Mining includes the Company's underground
metallurgical coal operations from the No. 4 and No. 7 mines and its natural gas operations. Surface Mining includes the Company's surface coal mining operations for Tuscaloosa
Resources, Inc. ("TRI") and Taft Coal Sales & Associates ("Taft") as well as the United Land Corporation results. See Note 12 for segment information.

The
accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted in the United States 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 months ended March 31, 2009 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2009.

Note 2Dispositions

Closure of Homebuilding and Separation and Merger of Financing

In December 2008, the Company decided to close its Homebuilding business. The Company continues the process of liquidating this
business and expects that homes under committed contracts will be substantially complete by the end of the second quarter of 2009. See also Note 3 for a discussion of charges taken due to this
decision.

On
April 17, 2009, the Company completed the spin-off of its Financing business and the merger of that business with Hanover Capital Mortgage Holdings, Inc. to
create Walter Investment Management Corporation ("Walter Investment Management"), which will operate as a publicly traded real estate investment trust. The subsidiaries and assets that Walter
Investment Management owned at the time of the spin-off included all assets of the Financing business except for those associated with the workers' compensation program and various other
runoff insurance programs within Cardem Insurance Co., Ltd.

As
noted above, the Company expects to classify the historical results of operations of the Financing and Homebuilding segments as discontinued operations by the end of the second
quarter.

5

---



WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2009 (Unaudited)

Note 2Dispositions (Continued)

The
following Unaudited Pro Forma Condensed Consolidated Balance Sheet as of March 31, 2009 is prepared as if the spin-off of the Financing segment and the closure of the
Homebuilding segment occurred as of March 31, 2009.

WALTER ENERGY, INC. AND SUBSIDIARIES    PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)    AS OF MARCH 31, 2009    (IN THOUSANDS)

Historical

Discontinued
Operations
Adjustments(1)

Pro Forma
Continuing
OperationsASSETSCash and cash equivalents

$
92,984

$
(5,543
)
$
87,441Short-term investments, restricted


51,539


(49,447
)

2,092Instalment notes receivable, net


1,734,873


(1,734,873
)

Receivables, net


190,418


(8,947
)

181,471Inventories


158,331


(59,404
)

98,927Prepaid expenses


23,022


(4,050
)

18,972Property, plant and equipment, net


531,724


(10,586
)

521,138Deferred income taxes


182,390


65,788


248,178Other assets


60,494


(23,257
)

37,237Assets of discontinued operations


7,455


28,539


35,994$
3,033,230

$
(1,801,780
)
$
1,231,450LIABILITIES AND STOCKHOLDERS' EQUITYAccounts payable

$
63,481

$
(1,742
)
$
61,739Accrued expenses


66,699


(19,862
)

46,837Accrued interest


11,114


(9,464
)

1,650Debt:Mortgage-backed/asset-backed notes


1,345,160


(1,345,160
)

Other debt


208,505





208,505Accumulated postretirement benefits obligation


369,413


(1,000
)

368,413Other liabilities


294,037


(15,052
)

278,985Liabilities of discontinued operations


1,553


8,464


10,017Total liabilities


2,359,962


(1,383,816
)

976,146Stockholders' equity


673,268


(417,964
)

255,304$
3,033,230

$
(1,801,780
)
$
1,231,450


---

6

---



WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2009 (Unaudited)

Note 2Dispositions (Continued)



Discontinued Operations

Kodiak Mining Co. and Crestline Homes, Inc.In December 2008, the Company announced the permanent closure of the
underground coal mine
operations owned by Kodiak Mining Company, LLC ("Kodiak"), the controlling interest of which is held by United Land Corporation, due to high operational costs, difficult operating conditions
and a challenging pricing environment for Kodiak's product. As such, the Company has reported the results of operations, assets, liabilities and cash flows of Kodiak as discontinued operations for all
periods presented. Kodiak's results were previously reported in the Natural Resources segment (which is now separated into Underground Mining and Surface Mining operations). Additionally, discontinued
operations for the quarter ended March 31, 2009 includes a charge of $0.7 million, net of tax, related to the resolution of a legal matter for Crestline Homes, Inc., which was
sold in May 2007.

The
table below presents the significant components of operating results included in the loss from discontinued operations for the three months ended March 31, 2009 and 2008 (in
thousands):

For the
three months
ended
March 31,2009

2008Net sales and revenues

$
3

$
2,909Loss from discontinued operations before income tax benefit

$
(2,590
)
$
(4,088
)Income tax benefit


975


1,415Loss from discontinued operations

$
(1,615
)
$
(2,673
)


The
Company allocated certain corporate expenses, limited to specifically identified costs and other corporate shared services which supported segment operations, to discontinued
operations. These costs represent expenses that have historically been allocated to and recorded by the Company's operating segments as selling, general & administrative expenses. The Company
did not elect to allocate interest expense to discontinued operations.

Note 3Restructuring

In 2008, the Company took several restructuring actions related to Homebuilding, but ultimately made the decision to close this business. As a result, the Company recognized charges in
2008 to accrue severance and lease obligations totaling $5.5 million and $0.8 million, respectively. Of that amount, $3.8 million had not been paid as of December 31, 2008.
During the first quarter of 2009, the Company recorded a charge of $1.1 million for additional severance payments provided to employees related to the Homebuilding closure. This charge appears
in the caption "restructuring and impairment charges" in the 2009 statement of income.

7

---



WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2009 (Unaudited)

Note 3Restructuring (Continued)

The
following table summarizes restructuring activity for the three months ended March 31, 2009 (in thousands):

Balance at
January 1,
2009

Restructuring
Charges

Cash
Payments

Balance at
March 31,
2009HomebuildingAccrued severance obligations

$
3,643

$
1,072

$
(1,430
)
$
3,285Accrued lease obligations


149





(124
)

25Total

$
3,792

$
1,072

$
(1,554
)
$
3,310


These
liabilities accrued at March 31, 2009 are expected to be paid in 2009.

Note 4Restricted Short-Term Investments

Restricted short-term investments at March 31, 2009 and December 31, 2008 include (i) temporary investments, primarily in commercial paper or money
market accounts, with maturities less than 90 days from collections on instalment notes receivable owned by various Mid-State Trusts (the "Trusts") ($49.0 million as of both
periods presented) which are available only to pay expenses of the Trusts and principal and interest on indebtedness of the Trusts, and (ii) miscellaneous other segregated accounts restricted
to specific uses ($2.5 million and $7.3 million at March 31, 2009 and December 31, 2008, respectively).

Note 5Instalment Notes Receivable and Mortgage Loans

Instalment notes receivable are summarized as follows (in thousands):

March 31,
2009

December 31,
2008Instalment notes receivable

$
1,547,096

$
1,572,173Mortgage loans


206,259


216,484Less: Allowance for losses


(18,482
)

(18,969
)Instalment notes receivable, net

$
1,734,873

$
1,769,688


As
indicated in Note 2, these Financing segment assets were spun off on April 17, 2009.

8

---



WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2009 (Unaudited)

Note 6Inventories

Inventories are summarized as follows (in thousands):

March 31,
2009

December 31,
2008Finished goods

$
71,049

$
45,641Goods in process


8,504


9,743Raw materials and supplies


27,894


29,547Repossessed houses held for resale


50,884


48,198Total inventories

$
158,331

$
133,129


Note 7Debt

Debt consisted of the following (in thousands):

March 31,
2009

December 31,
2008Mortgage-backed/asset-backed notes

$
1,345,160

$
1,372,821Other debt:2005 Walter term loan


138,575


138,9342005 Walter revolving credit facility


30,000


40,000Other


39,930


46,451208,505


225,385Total

$
1,553,665

$
1,598,206


2005 Walter Credit Agreement, as Amended

As of March 31, 2009, borrowings under the 2005 Walter Credit Agreement included (1) a term loan balance of
$138.6 million with a weighted average interest rate of 2.83% and (2) $30.0 million outstanding under the revolving credit facility, at a weighted average interest rate of 2.52%.
The 2005 Walter Credit Agreement is a secured obligation of the Company and substantially all of its wholly owned domestic subsidiaries. The term loan requires quarterly principal payments of
$0.4 million through October 3, 2012 at which time the remaining outstanding principal is due. The revolving credit facility and the term loan bear interest at LIBOR plus 200 and 225
basis points, respectively. The commitment fee on the unused portion of the revolving facility is 0.4% per year. In addition, the 2005 Walter Credit Agreement contains a reducing revolver commitment
feature, where the total available revolver commitment may not exceed $373.8 million at March 31, 2009, $350.0 million at June 30, 2009, $300.0 million at
September 30, 2009, and $250.0 million at December 31, 2009. As of March 31, 2009, the Company had $53.1 million in outstanding stand-by letters of
credit and $290.7 million of availability for future borrowings under the revolving credit facility.

9

---



WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2009 (Unaudited)

Note 7Debt (Continued)

Mortgage-Backed and Asset-Backed Notes and Variable Funding Loan Facilities

At March 31, 2009, non-recourse mortgage-backed/asset-backed notes outstanding totaled $1.3 billion and
consisted of eight separate series of public debt offerings and one issue of private debt providing long-term financing for instalment notes receivable and mortgage assets purchased by
Financing. This Financing segment-related debt has been spun off as of April 17, 2009.

Other Debt

In 2008, the Company entered into a financing arrangement and a capital lease arrangement to procure mining equipment. At
March 31, 2009, the Company had outstanding debt of $30.6 million at an interest rate of 4.22% related to the equipment financing arrangement, $8.6 million of debt outstanding at
an implicit rate of 9.78% related to the capital lease arrangement and $0.7 million of other debt.

Note 8Pension and Other Postretirement Benefits

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

Pension Benefits

Other BenefitsFor the three
months ended
March 31,

For the three
months ended
March 31,2009

2008

2009

2008Components of net periodic benefit cost:Service cost

$
1,039

$
1,002

$
762

$
753Interest cost


3,115


3,003


5,948


5,374Expected return on plan assets


(2,826
)

(3,632
)




Amortization of prior service cost (credit)


76


76


(740
)

(794
)Amortization of net actuarial loss


2,338


615


1,557


1,259Net periodic benefit cost

$
3,742

$
1,064

$
7,527

$
6,592


Note 9Comprehensive Income

Comprehensive income is comprised primarily of net income, gains or losses from the effect of cash flow hedges and changes in pension and postretirement benefits obligations.
Comprehensive income for the three months ended March 31, 2009 and 2008 was $73.7 million and $1.7 million, respectively.

Note 10Stockholders' Equity

In 2008, the Board of Directors approved a $100.0 million share repurchase program. Purchases are based on liquidity and market conditions. In the first quarter of 2009, 1,371,750
shares were repurchased for $28.0 million. A total of 2,648,493 shares have been repurchased for $73.1 million under this program. In addition, on April 23, 2009, shareholders
voted to grant the Company the authority to issue 20,000,000 shares of Preferred Stock, par value $.01 per share. The Board believes

10

---



WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2009 (Unaudited)

Note 10Stockholders' Equity (Continued)

the
ability to issue Preferred Stock is necessary in order to provide the Company with greater flexibility in structuring future capital raising transactions, acquisitions and/or joint ventures,
including taking advantage of financing techniques that receive favorable treatment from credit rating agencies.

Note 11Net Income Per Share

A reconciliation of the basic and diluted net income per share computations for the three months ended March 31, 2009 and 2008 are as follows (in thousands, except per share
data):

For the three months ended March 31,2009

2008Basic

Diluted

Basic

DilutedNumerator:Income from continuing operations

$
74,718

$
74,718

$
3,172

$
3,172Loss from discontinued operations

$
(1,615
)
$
(1,615
)
$
(2,673
)
$
(2,673
)Denominator:Average number of common shares outstanding


53,290


53,290


52,203


52,203Effect of dilutive securities:Stock options and restricted stock units ("units")(a)





291





64853,290


53,581


52,203


52,851Income from continuing operations

$
1.40

$
1.39

$
0.06

$
0.06Loss from discontinued operations


(0.03
)

(0.03
)

(0.05
)

(0.05
)Net income per share

$
1.37

$
1.36

$
0.01

$
0.01


---

11

---



WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2009 (Unaudited)

Note 12Segment Information

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

For the three months ended
March 31,2009

2008Sales and revenues:Underground Mining

$
244,200

$
143,204Surface Mining


26,618


14,477Sloss


21,907


50,871Financing


49,172


52,104Homebuilding


11,013


40,071Other


320


286Consolidating eliminations of intersegment activity(d)


(10,275
)

(8,413
)Net sales and revenues

$
342,955

$
292,600Segment operating income (loss):Underground Mining

$
99,855

$
19,326Surface Mining


5,515


2,631Sloss


1,593


18,700Financing(a)(b)


12,167


(6,712
)Homebuilding(c)


(2,587
)

(14,728
)Other


(8,156
)

(8,328
)Consolidating eliminations of intersegment activity


(294
)

(507
)Operating income


108,093


10,382Less other debt interest expense and other interest income


(4,531
)

(5,533
)Income from continuing operations before income tax expense


103,562


4,849Income tax expense


28,844


1,677Income from continuing operations

$
74,718

$
3,172Depreciation:Underground Mining

$
14,148

$
9,760Surface Mining


2,326


1,130Sloss


1,127


1,006Financing


78


135Homebuilding





1,219Other


132


232Total

$
17,811

$
13,482


---

12

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WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2009 (Unaudited)

Note 12Segment Information (Continued)

Note 13Commitments and Contingencies



The Internal Revenue Service ("IRS") has completed its audits of the Company's federal income tax returns for the years ended
May 31, 2000 through December 31, 2005. The IRS only issued a 30-day letter proposing tax deficiencies in the amount of $82.2 million for the years ended
May 31, 2000, December 31, 2000, and December 31, 2001. The unresolved issues relate primarily to the Company's method of recognizing revenue on the sale of homes and related
interest on the instalment notes receivable. The items at issue relate primarily to the timing of revenue recognition and consequently, should the IRS prevail on its positions, the Company's financial
exposure is limited to interest and penalties.

On
December 27, 1989, the Company and most of its subsidiaries each filed a voluntary petition for reorganization under Chapter 11 of Title 11 of the United States 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.

A
controversy exists with regard to Federal income taxes allegedly owed by the Company for fiscal years 1980 through 1994. In connection with the bankruptcy proceedings, the 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, 1980 and 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 and are
being litigated in the Bankruptcy Court.

13

---



WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2009 (Unaudited)

Note 13Commitments and Contingencies (Continued)

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. After adjustment for
these items, the Company estimates that the amount of tax presently claimed by the IRS is approximately $34.0 million for issues currently in dispute in the Adversary Proceeding. This amount is
subject to interest and penalties. Of the $34.0 million in claimed tax, $21.0 million represents issues in which the IRS is not challenging the deductibility of the particular expense
but only whether such expense is deductible in a particular year. Consequently, the Company believes that, should the IRS prevail on any such issues, the Company's financial exposure is limited to
interest and possible penalties and the amount of tax claimed will be offset by deductions in other years. Substantially 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
Company believes that those portions of the Proof of Claim which remain in dispute or are subject to appeal substantially overstate the amount of taxes allegedly owing. However,
because of the complexity of the issues presented and the uncertainties associated with litigation, the Company is unable to predict the ultimate outcome of the Adversary Proceeding.

The
Company believes that all of its current and prior tax filing positions have substantial merit and intends to defend vigorously any tax claims asserted. The Company believes that it
has sufficient accruals to address any claims, including interest and penalties.



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.

Sloss
Industries entered into a decree order in 1989 relative to a Resource Conservation Recovery Act ("RCRA") compliance program mandated by the EPA. A RCRA Facility Investigation
("RFI") Work Plan was prepared which proposed investigative tasks to assess the presence of contamination at the Sloss facility. The Work Plan was approved in 1994 and the Phase I
investigations were conducted and completed between 1995 and 1999. Phase II investigations for the Chemical Plant/Coke Plant and Biological Treatment Facility and Sewers/Land Disposal Areas
were performed in 2000 and 2001 and are substantially complete. At the end of 2004, the EPA re-directed Sloss' RFI efforts toward completion of the Environmental Indicator ("EI")
determinations for the Current Human Exposures. This EI effort was completed to assist the EPA in meeting goals set by the Government Performance Results Act ("GPRA") for RCRA by 2005. Sloss
implemented the approved EI Sampling Plan in April 2005. The EPA approved/finalized the EI determinations for Sloss' Birmingham facility in September 2005. In an effort to refocus the RFI, the EPA has
now provided technical comments on the Phase II RFI report and the report recently submitted as part of the EI effort. A Phase III work plan was

14

---



WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2009 (Unaudited)

Note 13Commitments and Contingencies (Continued)

submitted
to the EPA during the first quarter of 2007. The EPA commented on the Phase III plan and Sloss has responded. Subsequently, a meeting was held with the EPA during the third quarter of
2007 with the objective of finalization of the Phase III Plan. However, additional requests by EPA expanded the scope of the project which required additional sampling and testing.

The
Company has incurred costs to investigate the presence of contamination at the Sloss site and to define remediation actions to address this environmental liability in accordance with
the agreements reached with the EPA per the findings in the Phase I and Phase II investigations. In conjunction with the
Phase III work plan, the Company continues to incur costs related to defining remediation efforts and establishing a plan for remediation. The Phase III work plan was submitted in March,
2009 and the Company is awaiting comments from the EPA. At March 31, 2009, the Company has accrued an amount that is probable and can be reasonably estimated for the costs to be incurred to
identify necessary remediation actions and establish a remediation plan. The amount of this accrual was not material to the financial statements. While it is probable that the Company will incur
additional future costs to remediate liabilities defined by the Phase III analysis, the amount of these costs cannot be reasonably estimated at this time. Although no assurances can be given
that the Company will not be required in the future to make material expenditures relating to the Sloss 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 financial condition of the Company, but such cleanup costs could be material to results of operations in a future reporting
period.



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 materially adverse effect on the Company's consolidated financial statements.



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 result of operations.

15

---





ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY AND CAPITAL RESOURCES

This discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto of Walter
Energy, Inc. and its subsidiaries, particularly Note 12 of "Notes to Condensed Consolidated Financial Statements," which provides the Company's net sales and revenues and operating
income by reportable segment.

DISCONTINUED OPERATIONS

As more fully discussed in Note 2 of "Notes to Consolidated Financial Statements," the Company announced the permanent closure
of the underground coal mine owned by the Kodiak Mining Company LLC ("Kodiak") in December 2008, the controlling interest of which is held by United Land Corporation, due to high operational
costs, difficult operating conditions and a challenging pricing environment for Kodiak's product. As such, the operating results, assets and liabilities, and cash flows of Kodiak have been reported
apart from the Company's continuing operations as "discontinued operations" for all periods presented. Loss from discontinued operations includes the net operating results of the Kodiak business.
Additionally, discontinued operations for the quarter ended March 31, 2009, includes a charge of $0.7 million, net of tax, related to the resolution of a legal matter for Crestline of
NC, Inc., f/k/a Crestline Homes, Inc., which was sold in May 2007.

RESULTS OF OPERATIONS

Summary Operating Results of Operations for the Three Months Ended March 31, 2009 and 2008

For the three months ended March 31, 2009(in thousands)

Underground
Mining

Surface
Mining

Sloss

Financing

Homebuilding

Other

Cons
Elims

TotalNet sales

$
241,879

$
24,418

$
21,737

$
3,417

$
8,548

$
40

$
(10,275
)
$
289,764Interest income on instalment notes











45,385











45,385Miscellaneous income


2,321


2,200


170


370


2,465


280





7,806Net sales and revenues


244,200


26,618


21,907


49,172


11,013


320


(10,275
)

342,955Cost of sales (exclusive of depreciation)


115,776


17,298


16,993


1,562


7,833


13


(9,981
)

149,494Interest expense(1)











23,089











23,089Depreciation


14,148


2,326


1,127


78





132





17,811Selling, general & administrative


6,371


1,374


2,326


7,833


4,695


8,598





31,197Provision for losses on instalment notes











4,357











4,357Postretirement benefits


8,050


(7
)

(132
)

(117
)




(267
)




7,527Amortization of intangibles





112





203











315Restructuring & impairment charges














1,072








1,072Operating income (loss)

$
99,855

$
5,515

$
1,593

$
12,167

$
(2,587
)
$
(8,156
)
$
(294
)
$
108,093


---

16

---



For the three months ended March 31, 2008(in thousands)

Underground
Mining

Surface
Mining

Sloss

Financing

Homebuilding

Other

Cons
Elims

TotalNet sales

$
141,683

$
13,542

$
50,662

$
2,570

$
40,060

$
0

$
(8,413
)
$
240,104Interest income on instalment notes











48,710











48,710Miscellaneous income


1,521


935


209


824


11


286





3,786Net sales and revenues


143,204


14,477


50,871


52,104


40,071


286


(8,413
)

292,600Cost of sales (exclusive of depreciation)


102,734


9,884


28,329


1,770


32,757





(7,827
)

167,647Interest expense(1)











28,308











28,308Interest rate hedge ineffectiveness











16,981











16,981Depreciation


9,760


1,130


1,006


135


1,219


232





13,482Selling, general & administrative


4,097


766


2,997


7,117


14,205


8,645


(79
)

37,748Provision for losses on instalment notes











4,325











4,325Postretirement benefits


7,287


(6
)

(161
)

(113
)

(152
)

(263
)




6,592Amortization of intangibles





72





293











365Restructuring & impairment charges














6,770








6,770Operating income (loss)

$
19,326

$
2,631

$
18,700

$
(6,712
)
$
(14,728
)
$
(8,328
)
$
(507
)
$
10,382


---

Overview

The Company's net income for the three months ended March 31, 2009 was $73.1 million, or $1.36 per diluted share, which
compares to $0.5 million, or $0.01 per diluted share, for the three months ended March 31, 2008. In the three months ended March 31, 2009, net sales and revenues increased
$50.4 million and operating income increased $97.7 million versus the same period in 2008. These results were led by increased metallurgical coal pricing and volume from the Underground
Mining segment, partially offset by a decrease in revenues and operating income at Sloss due to unfavorable metallurgical coke volumes and pricing.

Outlook and Strategic Initiatives

Walter Industries, Inc. changed its name to Walter Energy, Inc. ("Walter") on April 23, 2009, after receiving
stockholder approval. In December 2008, the Company announced the closure of Homebuilding and on April 17, 2009, the Company spun off the Financing segment. These segments are expected to
qualify for discontinued operations treatment in the second quarter of 2009. These actions have completed the transformation of Walter Industries, Inc. from a diversified corporation to a pure
play natural resources and energy company, now named Walter Energy, Inc.

Beginning
with the first quarter of 2009, the reporting segments have been revised to separate the Natural Resources segment into Underground Mining and Surface Mining. Underground
Mining includes the Company's underground metallurgical coal operations from the No. 4 and No. 7 mines and the natural gas operations. Surface Mining includes the Company's surface coal
mining operations of Tuscaloosa Resources, Inc. ("TRI") and Taft Coal Sales & Associates ("Taft") as well as the United Land Corporation results.

17

---







18

---





Summary of First Quarter Consolidated Results of Continuing Operations

Net sales and revenues for the three months ended March 31, 2009 were $343.0 million, an increase of
$50.4 million, or 17.2% from $292.6 million in the same period in 2008. This increase in revenues primarily resulted from higher metallurgical coal pricing and sales volume in the
Underground Mining segment. Surface Mining also contributed to revenue growth due to the addition of revenues from Taft, which was acquired in September 2008. These revenue increases were somewhat
offset by declines in metallurgical coke pricing and volumes from Sloss, due to the increasingly softening steel market, and lower revenues from Homebuilding, due to the closure of that business, as
well as lower payment income from Financing.

Cost
of sales, exclusive of depreciation, decreased $18.2 million to $149.5 million and represented 51.6% of net sales for the three months ended March 31, 2009
versus $167.6 million or 69.8% of net sales for the same period in 2008. Cost of sales in the Underground Mining segment was 47.9% of net sales for the quarter ended March 31, 2009 as
compared to 72.5% of net sales for the quarter ended March 31, 2008. This improvement is primarily attributable to increased selling prices as cost of sales per ton remained comparable. Cost of
sales in the Surface Mining segment was 70.8% of net sales for the quarter ended March 31, 2009 as compared to 73.0% of net sales for the same period in 2008. This improvement is primarily
attributable to increased selling prices offset in part by increased operating costs. Cost of sales at Sloss was 78.2% of net sales versus 55.9% of net sales for the quarters ended March 31,
2009 and 2008, respectively. This deterioration is a result of lower selling prices and volumes on a relatively fixed cost structure as well as increased raw material costs. Cost of sales in the
Homebuilding segment also deteriorated to 91.6% of net sales from 81.8% of net sales for the three months ended March 31, 2009 and 2008, respectively, as this business winds down.

Depreciation
for the three months ended March 31, 2009 was $17.8 million, an increase of $4.3 million compared to the same period in 2008. The increase was primarily
due to continued investment in the expansion of mining operations as well as replacement of certain mining equipment.

Interest
expense on mortgage-backed notes was $23.1 million for the three months ended March 31, 2009, down $5.2 million compared to the same period in 2008. This
decrease was due to a reduction in the weighted average borrowings outstanding for the three months ended March 31, 2009 as compared to the same period in 2008 resulting primarily from the
pay-off and termination of the warehouse facilities in April 2008 totaling $214.0 million, as well as normal repayments on the other securitized notes. The weighted average interest
rate for the three months ended March 31, 2009 was also slightly lower as compared to the same period in 2008.

Selling,
general & administrative expenses decreased $6.6 million to $31.2 million for the quarter ended March 31, 2009 as compared to the quarter ended
March 31, 2008. This decrease was primarily attributable to the winding down of the Homebuilding segment offset in part by an increase in the Underground Mining segment primarily attributable
to increased compensation related costs.

19

---



Interest
expense on other debt decreased $0.9 million to $4.8 million for the three months ended March 31, 2009, primarily as a result of a reduction in both the
weighted average borrowings for the period and the weighted average interest rate.

The
effective tax rate for the three months ended March 31, 2009 and 2008 was 27.9% and 34.6%, respectively. Both the 2009 and 2008 effective tax rates differ from the Federal
statutory rate primarily due to the benefit from percentage depletion deductions. Percentage depletion deductions have a bigger effect on the effective tax rate in 2009 due to a change in mix of
income from various segments. For example, the Company has estimated income from Financing only through the date of spin-off of April 17, 2009, providing a shift in mix of income
from the Financing segment, which is taxed at a higher rate, to the Underground Mining segment, which is taxed at a lower rate, as compared to the mix of income in 2008.

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

Segment Analysis



Underground Mining, which includes the operations of Jim Walter Resources and Blue Creek Coal Sales, reported revenues of
$244.2 million in the first quarter of 2009, an increase of $101.0 million from the same period last year. The increase in revenues was primarily due to a 57.0% increase in selling
prices for metallurgical coal and an 18.8% increase in tons sold as compared to the same period in 2008 as shown in the table below:

Three months ended
March 31,2009

2008Average coal selling price (per short ton)

$
133.24

$
84.86Tons of coal sold (in thousands)


1,754


1,477Average hedged natural gas selling price (per mcf)

$
6.05

$
7.96Billion cubic feet of natural gas sold


1.7


1.6Number of natural gas wells


432


397


Underground
Mining reported operating income of $99.9 million in the first quarter of 2009, compared to $19.3 million in the same period in 2008. The $80.5 million
increase in operating income was primarily the result of the increase in net sales and revenues as discussed above, partially offset by a $13.0 million increase in cost of sales due to
additional volumes sold and a $4.4 million increase in depreciation expenses as a result of continued investment in the Mine No. 7 East expansion project and the replacement of certain
mining equipment.



Surface Mining, which includes the operations of TRI, Taft and United Land, reported revenues of $26.6 million in the first
quarter of 2009, an increase of $12.1 million from the same period last year. The increase in revenues was primarily due to the acquisition of Taft in September 2008 and an

20

---



increase
in the average selling price at TRI. Statistics for Surface Mining are presented in the following table:

Three months ended
March 31,2009

2008Average coal selling price (per short ton)

$
70.48

$
59.44Tons of coal sold (in thousands)


329


200


Surface
Mining reported operating income of $5.5 million in the first quarter of 2009, compared to $2.6 million in the same period in 2008. The $2.9 million increase
in operating income was almost entirely the result of the inclusion of Taft's results in the 2009 period.



Sloss' net sales and revenues were $21.9 million for the three months ended March 31, 2009, a decrease of
$29.0 million compared to the same period in 2008 reflecting decreased customer demand in the increasingly soft steel market. The decrease in demand resulted in a 56.5% decrease in
metallurgical coke sales volumes and a 20.7% decrease in metallurgical coke selling price as shown below:

Three months ended
March 31,2009

2008Metallurgical coke average selling price per ton

$
308.26

$
388.51Metallurgical coke tons sold


45,200


104,024


Sloss'
operating income was $1.6 million for the three months ended March 31, 2009 compared to $18.7 million in the same period in 2008, a decrease of
$17.1 million, primarily as a result of decreased revenues on a relatively fixed cost structure as well as increased raw material costs.



Net sales and revenues were $49.2 million for the three months ended March 31, 2009, a decrease of $2.9 million
from the same period in 2008 primarily due to lower payment income as a result of a lower loan portfolio balance. Financing had operating income of $12.2 million in the three months ended
March 31, 2009, an increase of $18.9 million from the same period in 2008. The increase in operating income was primarily due to the recognition of $17.0 million loss on interest
rate swaps in the first quarter of 2008, which was not repeated in the first quarter of 2009. In addition, operating income reflects a $5.2 million decrease in interest expense resulting from a
reduction in the weighted average borrowings outstanding for the three months ended March 31, 2009 as compared to the same period in 2008 primarily due to the pay-off and
termination of the warehouse facilities totaling $214.0 million in April 2008.

Delinquencies
(the percentage of amounts outstanding over 30 days past due) were 4.6% at March 31, 2009 compared to 5.4% at December 31, 2008 and 3.6% at
March 31, 2008. The calculation of delinquencies excludes from delinquent amounts those accounts that are in bankruptcy proceedings that are paying their mortgage payments in contractual
compliance with bankruptcy court approved mortgage payment obligations.

21

---







Net sales and revenues were $11.0 million for the three months ended March 31, 2009, a decrease of $29.1 million
from the same period in 2008 primarily as a result of a 83.9% decrease in unit completions resulting from the wind down of this business, offset in part by an increase in the average selling price per
homes shown below:

Three months ended
March 31,2009

2008Unit completions


71


442Average revenue per home sold(1)

$
120,400

$
89,800






Homebuilding's
operating loss was $2.6 million for the three months ended March 31, 2009 compared to an operating loss of $14.7 million for the same period in 2008.
The $12.1 million improvement in operating results was primarily due to favorable selling, general & administrative expense reductions as a result of branch closings and employee
reductions in 2008 and 2009 and a $2.4 million gain on the sale of land in the first quarter of 2009. As previously discussed in Note 2 of the "Notes to Condensed Consolidated Financial
Statements," the Company decided to close Homebuilding. Therefore, results in the remainder of 2009 will reflect the build-out of the homes in backlog, other costs to close the business
and gains or losses on the liquidation of property. These results are not expected to be material to the operating results or financial condition of the Company.

FINANCIAL CONDITION

Cash and cash equivalents of continuing operations decreased by $24.7 million from $117.7 million at December 31,
2008 to $93.0 million at March 31, 2009 reflecting $84.8 million in cash flows provided by continuing operating activities, $29.2 million of cash flows used in investing
activities and $78.1 million of cash flows used in financing activities. See additional discussion in the Statement of Cash Flows section that follows.

Net
instalment notes receivable were $1,734.9 million at March 31, 2009, down $34.8 million from December 31, 2008 as a result of payments received on
outstanding notes exceeding new loan originations. The reduction in new loan originations is the result of the closure and wind down of Homebuilding.

Net
receivables were $190.4 million at March 31, 2009, an increase of $13.8 million from December 31, 2008 primarily attributable to increased revenues in the
Underground Mining segment in addition to receivables from the sale of Homebuilding assets and used mining equipment in our Surface Mining segment, offset in part by a reduction in receivables from
Sloss as a result of decreased revenues.

Inventories
were $158.3 million at March 31, 2009, an increase of $25.2 million from December 31, 2008 primarily due to increased inventories at Underground
Mining and Sloss, as well as an increase in
repossessed property at Financing. The increase at Underground Mining results from increased production and production costs in the first quarter of 2009, as compared to the fourth quarter of 2008.
The increase at Sloss was mostly due to a decrease in metallurgical coke demand resulting from the downturn in the steel market, thereby resulting in increased coke inventory on hand. These increases
were partially offset by a reduction of goods in process at Homebuilding as a result of a decrease in the number of homes under construction as this business winds down.

22

---



Net
property, plant and equipment was $531.7 million at March 31, 2009, up $16.3 million from December 31, 2008 primarily due to continued investment in the
replacement of equipment and expansion at Underground Mining's operations.

Deferred
income taxes were $182.4 million at March 31, 2009, down $24.3 million from December 31, 2008 primarily due to the partial utilization of a net
operating loss carryforward generated in 2008 from the deemed liquidation of the Homebuilding business for tax purposes.

Accounts
payable was $63.5 million at March 31, 2009, down $9.3 million from December 31, 2008 primarily due to decreased demurrage and freight costs in the
Underground Mining segment and decreased raw material coal purchases at Sloss.

Accrued
expenses were $66.7 million at March 31, 2009, down $24.5 million from December 31, 2008 primarily due to the payment of employee bonuses and other
payroll related expenses in the first quarter of 2009 that were accrued as of December 31, 2008.

Mortgage-backed/asset-backed
notes were $1,345.2 million at March 31, 2009, down $27.7 million from December 31, 2008 as a result of debt principal payments.

Other
debt was $208.5 million at March 31, 2009, down $16.9 million from December 31, 2008 primarily due to payments of $10.0 million on the revolving
credit facility, $0.4 million on the term loan and $6.5 million on the financed property insurance premiums and equipment financing. See Note 7 of the "Notes to Condensed
Consolidated Financial Statements" for further discussion.

LIQUIDITY AND CAPITAL RESOURCES

Overview

The Company's principal sources of short-term funding are existing cash balances, operating cash flows and borrowings under
the revolving credit facility. The Company's principal source of long-term funding is the bank term loan. As of March 31, 2009, total debt decreased $44.5 million as compared
to December 31, 2008. See discussion below and Note 7 of "Notes to Condensed Consolidated Financial Statements."

Based
on current forecasts and anticipated market conditions, the Company believes that funding generated from operating cash flows and available sources of liquidity will be sufficient
to meet substantially all operating needs, to make planned capital expenditures and to make all required interest and principal payments on indebtedness for the next twelve to eighteen months.
However, the Company's operating cash flows and liquidity are significantly influenced by numerous factors, including prices of coal and natural gas, coal production, costs of raw materials and
interest rates and the general economy. The Company has experienced a reduction in prices and customer demand as a result of the current worldwide economic downturn, particularly in the worldwide
steel market, and continued deterioration of economic conditions could adversely impact the Company's operating cash flows. Additionally, there is unprecedented uncertainty in the financial markets,
less availability and higher costs of credit, potential counterparty defaults, and commercial and investment bank failures. While the Company has no indication that the uncertainty in the financial
markets would impact the Company's current credit facility or current credit providers, the possibility does exist.

2005 Walter Credit Agreement, as Amended

As of March 31, 2009, borrowings under the 2005 Walter Credit Agreement included (1) a term loan balance of
$138.6 million with a weighted average interest rate of 2.83%, and (2) $30.0 million outstanding under the revolving credit facility, at a weighted average interest rate of 2.52%.
The 2005 Walter Credit Agreement is a secured obligation of the Company and substantially all of its wholly

23

---



owned
domestic subsidiaries. The term loan requires quarterly principal payments of $0.4 million through October 3, 2012, at which time the remaining outstanding principal is due. The
revolving credit facility and the term loan bear interest at LIBOR plus 200 and 225 basis points, respectively. The commitment fee on the unused portion of the revolving facility is 0.4% per year. In
addition, the 2005 Walter Credit Agreement contains a reducing revolver commitment feature, where the total available revolver commitment may not exceed $373.8 million at March 31, 2009,
$350.0 million at June 30, 2009, $300.0 million at September 30, 2009, and $250.0 million at December 31, 2009. As of March 31, 2009, there was
$53.1 million in outstanding stand-by letters of credit and $290.7 million of availability for future borrowings under the revolving credit facility.

Mortgage-Backed and Asset-Backed Notes and Variable Funding Loan Facilities

At March 31, 2009, non-recourse mortgage-backed/asset-backed notes outstanding totaled $1.3 billion and
consisted of eight separate series of public debt offerings and one issue of private debt providing long-term financing for instalment notes receivable and mortgage assets purchased by
Financing. This Financing segment-related debt has been spun off as of April 17, 2009.

Other Debt

In 2008, the Company entered into a financing arrangement and a capital lease arrangement to procure mining equipment. At
March 31, 2009, $30.6 million was outstanding at an interest rate of 4.22% related to the equipment financing and $8.6 million of debt was outstanding at an implicit rate of 9.78%
related to the capital lease.

Statement of Cash Flows

Cash balances were $93.0 million and $117.7 million at March 31, 2009 and December 31, 2008, respectively.
The decrease in cash in the three months ended March 31, 2009 was attributable to capital expenditures of $37.0 million, stock repurchases of $28.0 million, net payments of
mortgage-backed/asset-backed notes of $27.7 million, net payments on other debt that totaled $16.9 million and cash dividend payments of $5.3 million. These uses of cash were
partially offset by cash provided by operating activities of $84.8 million, $4.7 million from short-term investments and $2.3 million from the receipt of payments on
purchased loans.

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

Three months ended
March 31,2009

2008Cash flows provided by operating activities

$
84,828

$
3,781Cash flows used in investing activities


(29,217
)

(17,109
)Cash flows provided by (used in) financing activities


(78,121
)

11,205Cash flows used in continuing operations


(22,510
)

(2,123
)Cash flows used in discontinued operations


(2,178
)

(2,097
)Net decrease in cash and cash equivalents

$
(24,688
)
$
(4,220
)


Net
cash provided by operating activities of continuing operations was $84.8 million for the three months ended March 31, 2009 as compared to $3.8 million for the
same period in 2008. The increase of $81.0 million is primarily attributable to $56.1 million of increased income from continuing operations, adjusted for non-cash items, a
$29.3 million decrease in instalment notes receivable, offset

24

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in
part by a $4.4 million decrease in cash flows from other operating assets and liabilities for the three months ended March 31, 2009 as compared to the same period in 2008.

Cash
flows used in investing activities of continuing operations for the three months ended March 31, 2009 were $29.2 million compared to $17.1 million for the same
period in 2008. Cash flows used in investing activities in the 2009 period were primarily related to additions to property, plant and equipment of $37.0 million for the replacement of equipment
and the expansion of Underground Mining and Surface Mining operations as compared to $23.1 million in the 2008 period. Given current market conditions, the Company expects to reduce capital
expenditures to about $50.0 million for the remainder of the year resulting in a $56.5 million decrease in full-year 2009 capital expenditures compared to
full-year 2008.

Cash
flows used in financing activities of continuing operations for the three months ended March 31, 2009 were $78.1 million compared to cash flows provided by financing
activities of $11.2 million in the same period in 2008. Cash flows used in financing activities in 2009 included: stock repurchases of $28.0 million, principal payments of
mortgage-backed/asset-backed notes of $27.7 million, net retirements of other debt of $16.9 million and dividend payments of $5.3 million. Cash flows provided by financing
activities for the three months ended March 31, 2008 were primarily attributable to $30.0 million of proceeds from the issuance of other debt partially offset by $16.3 million of
net payments of mortgage-backed/asset-backed notes, net retirements of other debt of $3.9 million and dividend payments of $2.6 million.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4.    CONTROLS AND PROCEDURES



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

25

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PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT

Except for historical information contained herein, the statements in this release are forward-looking and made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, including expressions such as "believe," "anticipate," "expect," "estimate," "intend," "may,"
"will," and similar expressions involve known and unknown risks, and uncertainties, and other factors that may cause Walter Energy's actual results in future periods to differ materially from the
expectations expressed or implied by such forward-looking statements. These factors include, among others, the following: the market demand for the Company's products as well as changes in costs and
the availability of raw material, labor, equipment and transportation; changes in weather and geologic conditions; changes in extraction costs and pricing and our assumptions and projections
concerning our reserves in the Company's mining operations; changes in customer orders; pricing actions by the Company's competitors, customers, suppliers and contractors; changes in governmental
policies and laws and changes in general economic conditions. Forward-looking statements made in this Form 10-Q, or elsewhere, speak only as of the date on which the statements were
made. Any forward-looking statements should be considered in context with the various disclosures made by Walter Energy, including the Risk Factors described in our 2008
Annual Report on Form 10-K and our other filings with the Securities and Exchange Commission. Walter Energy has no obligation to update its forward-looking statements as of any
future date.

26

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PART IIOTHER INFORMATION

Item 1.    Legal Proceedings

See Note 13 of the "Notes to Condensed Consolidated Financial Statements" in this Form 10-Q for a description
of current legal proceedings.

The
Company and its subsidiaries are parties to a number of other lawsuits arising in the ordinary course of their businesses. Most of these cases are in a preliminary stage and the
Company is unable to predict a range of possible loss, if any. The Company provides for 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 because 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 position.

Item 1A.    Risk Factors

The Company's 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. For a discussion of the Company's risk factors, please refer to Part 1, "Item 1A.
Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2008. In addition, the Company is updating its risk factor that was previously
disclosed in Item 1A. Risk Factors in the Company's Annual Report on Form 10-K for the year ended December 31, 2008 relating to the indemnification obligations of the
financing business following its spin-off and merger with Hanover Capital Mortgage Holdings, Inc., as follows:

Following the spin-off and merger of the Company's financing business, the surviving corporation, Walter Investment Management Corporation, may not be
able to satisfy certain indemnification obligations to the Company. In addition, the Company has contingent obligations in respect of Walter Investment Management Corporation which, in certain
circumstances, could become significant.

The
Company's financing business has merged with Hanover Capital Mortgage Holdings, Inc. and the surviving corporation, Walter Investment Management Corporation ("Walter
Investment Management") is now a separately traded independent public company. Walter Investment Management is a party to certain agreements with the Company, including a tax sharing agreement,
transition services, a joint litigation agreement, a support letter of credit agreement in the amount of $15.68 million and a revolving credit facility and security agreement in which the
Company has committed to make available up to $10.0 million in the event a major hurricane has occurred with projected losses greater than $2.5 million. Under the terms of the tax
sharing agreement, to the extent that the Company or Walter Investment Management takes any action that would be inconsistent with the treatment of the spin-off of the financing business
from the Company as a tax-free transaction under Section 355 of the Code, then any tax resulting from such actions will be attributable to the acting company and will result in
indemnification obligations that could be significant. Under the terms of the transition services agreement, the Company and Walter Investment Management will provide certain services to each party
for a limited duration. Under the terms of the joint litigation agreement, Walter Investment Management will indemnify the Company for certain liabilities arising from businesses and operations of the
financing business at the time of the spin-off. Under the terms of the support letter of credit agreement, Walter Investment Management agrees to reimburse the Company for all costs
incurred in posting the support letter of credit for Walter Investment Management's bank credit agreement as well as any draws under bonds posted in support of Walter Investment Management and its
subsidiaries. Under the terms of the revolving credit and security agreement, Walter Investment Management will pay all fees and repay all loans made under the facility. All

27

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obligations
of the support letter of credit and the revolving credit and security agreement will be due and payable on April 20, 2011. The ability to satisfy these indemnities if called upon to
do so will depend upon the future financial strength of Walter Investment Management. If Walter Investment Management is unable to satisfy its obligations under its indemnity to us, we may have to
satisfy those obligations. In the case of the support letter of credit agreement and the revolving credit facility and security agreement, if Walter Investment Management cannot pay its obligations
and the collateral backing those agreements is insufficient to satisfy the obligations, the Company could lose money in the satisfaction of those obligations.

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

Purchase of Equity Securities by the Company and Affiliated Purchasers

In 2008 the Board of Directors approved a $100.0 million share repurchase program. Purchases are based on liquidity and market
conditions. Through March 31, 2009, 2,648,493 shares for $73.1 million have been repurchased under this program. See following table for detail of equity security purchases during the
first quarter of 2009:

Period

Total Number
of Shares
Purchased

Average Price
Paid per Share

Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs

Approximate
Dollar Value
of Shares that
May Yet Be Purchased
Under the Plans
or Programs
(in millions)(1)January 1, 2009January 31, 2009


870,450

$
21.77


870,450

$
35.8February 1, 2009February 28, 2009


516,753
(2)
$
17.89


501,300

$
26.9March 1, 2009March 31, 2009


35
(3)
$
21.21




$
26.91,387,238





1,371,750


---

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

None.

28

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Item 5.    Other Information



Item 6.    Exhibits



Exhibit
Number31.1

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Principal Executive and Financial Officer32.1

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Session 1350Principal Executive and Financial Officer


29

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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/ VICTOR P. PATRICK Vice Chairman, Chief Financial Officer and General Counsel
(Principal Executive and Financial Officer)


Date:
May 8, 2009

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