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, 2010oro

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


Commission File Number 001-13711

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

Incorporated in Delaware(State or other jurisdiction of
incorporation or organization)

13-3429953IRS Employer
Identification No.4211 W. Boy Scout Boulevard, Tampa, Florida(Address of principal executive offices)

33607(Zip Code)


(813) 871-4811Telephone Number

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, 2010:53,664,909



---





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,
2010

December 31,
2009ASSETSCash and cash equivalents

$
214,424

$
165,279Receivables, net


111,994


70,500Inventories


80,852


99,278Deferred income taxes


95,974


110,576Other current assets


27,973


27,065Current assets of discontinued operations


13,165


15,197Total current assets


544,382


487,895Property, plant and equipment, net


514,602


522,931Deferred income taxes


157,431


178,338Other long-term assets


79,682


70,192$
1,296,097

$
1,259,356LIABILITIES AND STOCKHOLDERS' EQUITYAccounts payable

$
43,951

$
44,211Accrued expenses


43,207


39,034Current debt


8,851


13,351Accumulated postretirement benefits obligation


23,648


23,563Other current liabilities


16,670


18,513Current liabilities of discontinued operations


5,535


7,310Total current liabilities


141,862


145,982Long-term debt


161,020


163,147Accumulated postretirement benefits obligation


431,740


429,096Other long-term liabilities


259,881


261,736Total liabilities


994,503


999,961Commitments and contingencies (Note 8)Stockholders' equity:Common stock, $0.01 par value per share:Authorized200,000,000 sharesIssued53,641,191 and 53,256,904 shares, respectively


536


533Preferred stock, $0.01 par value per share:Authorized20,000,000 shares, issued0 shares





Capital in excess of par value


376,285


374,522Retained earnings


87,045


50,852Accumulated other comprehensive income (loss):Pension and other postretirement benefit plans, net of tax


(163,749
)

(167,037
)Unrealized gain on hedges, net of tax


1,477


525Total stockholders' equity


301,594


259,395$
1,296,097

$
1,259,356


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 31,2010

2009Net sales and revenues:Net sales

$
308,110

$
278,166Miscellaneous income


3,939


4,971312,049


283,137Costs and expenses:Cost of sales (exclusive of depreciation)


189,511


140,466Depreciation


22,169


17,734Selling, general and administrative


18,693


15,665Postretirement benefits


10,369


7,644Amortization of intangibles





112240,742


181,621Operating income


71,307


101,516Interest expense


(4,777
)

(4,799
)Interest income


181


274Income from continuing operations before income tax expense


66,711


96,991Income tax expense


24,016


24,141Income from continuing operations


42,695


72,850Income (loss) from discontinued operations


(1,144
)

253Net income

$
41,551

$
73,103Basic income per share:Income from continuing operations

$
0.80

$
1.37Loss from discontinued operations


(0.02
)

Net income

$
0.78

$
1.37Diluted income per share:Income from continuing operations

$
0.79

$
1.36Loss from discontinued operations


(0.02
)

Net income

$
0.77

$
1.36Dividends declared per common share

$
0.10

$
0.10


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, 2010 (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, 2009

$
259,395

$
533

$
374,522




$
50,852

$
(166,512
)Comprehensive income:Net income


41,551







$
41,551


41,551Other comprehensive income, net of tax:Change in pension and postretirement benefit plans


3,288








3,288





3,288Change in unrealized gain on hedges


952








952





952Comprehensive income










$
45,791Purchases of stock under stock repurchase program


(4,689
)

(1
)

(4,688
)Stock issued upon exercise of stock options


8,764


5


8,759Dividends paid, $0.10 per share


(5,358
)










(5,358
)Stock-based compensation


661





661Other


(2,970
)

(1
)

(2,969
)Balance at March 31, 2010

$
301,594

$
536

$
376,285




$
87,045

$
(162,272
)


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 31,2010

2009OPERATING ACTIVITIESNet income

$
41,551

$
73,103Loss (income) from discontinued operations


1,144


(253
)Income from continuing operations


42,695


72,850Adjustments to reconcile income from continuing operations to net cash provided by operating activities:Depreciation


22,169


17,734Non cash income tax provision


32,772


21,359Other


(828
)

1,325Decrease (increase) in current assets:Receivables


(41,552
)

(10,268
)Inventories


18,426


(23,755
)Other current assets


(909
)

3,597Increase (decrease) in current liabilities:Accounts payable


(260
)

(8,773
)Accrued expenses and other current liabilities


2,299


(11,427
)Cash flows provided by (used in) operating activities


74,812


62,642INVESTING ACTIVITIESAdditions to property, plant and equipment


(14,337
)

(35,126
)Other


(91
)

(28
)Cash flows provided by (used in) investing activities


(14,428
)

(35,154
)FINANCING ACTIVITIESRetirements of debt


(6,627
)

(16,880
)Dividends paid


(5,358
)

(5,327
)Purchases of stock under stock repurchase program


(4,689
)

(27,963
)Other


5,794


(278
)Cash flows provided by (used in) financing activities


(10,880
)

(50,448
)Cash flows provided by (used in) continuing operations


49,504


(22,960
)CASH FLOWS FROM DISCONTINUED OPERATIONSCash flows provided by (used in) operating activities


(1,635
)

20,091Cash flows provided by (used in) investing activities


599


5,854Cash flows provided by (used in) financing activities





(27,673
)Cash flows provided by (used in) discontinued operations


(1,036
)

(1,728
)Net increase (decrease) in cash and cash equivalents

$
48,468

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

$
165,279

$
116,074Add: Cash and cash equivalents of discontinued operations at beginning of period


1,254


1,598Net increase (decrease) in cash and cash equivalents


48,468


(24,688
)Less: Cash and cash equivalents of discontinued operations at end of period


577


5,543Cash and cash equivalents at end of period

$
214,424

$
87,441


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

4

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WALTER ENERGY, INC. AND SUBSIDIARIES        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2010
(Unaudited)

Note 1Basis of Presentation

Walter Energy, Inc. ("Walter"), together with its consolidated subsidiaries ("the Company"), is a leading U.S. producer and exporter of premium hard coking 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 (Walter Coke). Underground Mining includes
the Company's underground hard coking coal operations from the No. 4 and No. 7 mines and its coal bed methane operations. Surface Mining includes the Company's surface coal mining
operations for Tuscaloosa Resources, Inc. ("TRI") and Taft Coal Sales & Associates, Inc. ("Taft") as well as Walter Minerals, Inc. results. See Note 7 for segment
information. In December 2008, the Company announced the closure of its Homebuilding segment and on April 17, 2009, the Company spun off its Financing segment. As a result of the closure and
spin-off, amounts previously reported in those segments are presented as discontinued operations for all periods presented. See Note 2.

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, 2010 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2010.

Note 2Discontinued Operations

The accompanying unaudited condensed consolidated financial statements of the Company include the results of our discontinued businesses, Financing, Homebuilding and Kodiak
Mining Co. The Financing business was spun-off in April 2009, and, at that time, was merged with Hanover Capital Mortgage Holdings, Inc. creating Walter Investment Management
Corp. ("Walter Investment") which operates as a publicly traded real estate investment trust. Prior to the spin-off, Financing serviced non-conforming instalment notes and
loans that were secured by mortgages and liens. The Homebuilding business, which was closed in 2009, was an on-your-lot homebuilder. Kodiak Mining Co., which was closed
in 2008, operated an underground mine located near Birmingham, AL.

The
table below presents the significant components of operating results included in the income (loss) from discontinued operations for the three months ended March 31, 2010 and
2009 (in thousands):

For the three months
ended March 31,2010

2009Net sales and revenues

$
497

$
59,821(Loss) income from discontinued operations before income tax (benefit) expense

$
(1,616
)
$
3,981Income tax (benefit) expense


(472
)

3,728(Loss) income from discontinued operations

$
(1,144
)
$
253


5

---



WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2010 (Unaudited)

Note 2Discontinued Operations (Continued)

The
remaining assets and liabilities of Homebuilding and Kodiak included as discontinued operations in the condensed consolidated balance sheets as of March 31, 2010 and
December 31, 2009 are shown below (in thousands):

March 31,
2010(a)

December 31,
2009(a)Cash and cash equivalents

$
577

$
1,254Receivables, net


359


401Inventories


1,542


2,125Property, plant and equipment, net


4,979


5,310Other assets


5,708


6,107Total assets

$
13,165

$
15,197Accounts payable

$
633

$
700Accrued expenses


4,166


5,341Other liabilities


736


1,269Total liabilities

$
5,535

$
7,310


(a)Total
assets and liabilities of discontinued operations are shown as "current" in the condensed consolidated balance sheet at March 31, 2010 and
December 31, 2009 as liquidation is expected within the next twelve months.


In
order to facilitate the successful spin-off of Financing, the Company entered into a Support Letter of Credit Agreement (the "L/C Agreement") and a revolving credit
facility agreement with Walter Investment and certain of its subsidiaries on April 20, 2009. The L/C Agreement provides Walter Investments' financial lending institutions with a
stand-by letter of credit totaling $15.7 million and enabled Walter Investment to obtain third-party financing under a revolving credit agreement. The maximum amount of future
payments that the Company could be required to make under the L/C Agreement is $15.7 million, plus any unreimbursed fees, in the event of a default. To date, no event of default has
occurred that would trigger a draw under the stand-by letter of credit. The Company believes that the likelihood of a triggering event is remote. In addition, should a loss occur,
sufficient collateral is available for the recovery of any loss the Company might suffer in the event of a default by Walter Investment. Under the terms of the L/C Agreement, Walter Investment agrees
to reimburse the Company for all costs incurred in posting the support letter of credit for Walter Investment's bank credit agreement as well as any draws under bonds posted in support of Walter
Investment and its subsidiaries. All obligations of the L/C Agreement will terminate on April 20, 2011.

In
addition, the Company also entered into a revolving credit facility and security agreement with Walter Investment in which the Company has committed to make available up to
$10.0 million in the event that a major hurricane occurs and causes projected losses to Walter Investments greater than $2.5 million. A condition precedent to a draw under this facility
is the granting of a security interest in certain collateral. Under the terms of the revolving credit and security agreement, Walter Investment will pay all fees and repay all loans made under the
facility. Any obligations under the revolving credit

6

---



WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2010 (Unaudited)

Note 2Discontinued Operations (Continued)

and
security agreement will be due and payable on April 20, 2011. There have been no loans made to Walter Investment pursuant to this arrangement.

Note 3Inventories

Inventories are summarized as follows (in thousands):

March 31,
2010

December 31,
2009Finished goods

$
57,641

$
73,582Raw materials and supplies


23,211


25,696Total inventories

$
80,852

$
99,278


Note 4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 31,2010

2009

2010

2009Components of net periodic benefit cost:Service cost

$
1,105

$
1,039

$
753

$
762Interest cost


3,226


3,115


6,510


5,759Expected return on plan assets


(3,269
)

(2,826
)




Amortization of prior service cost (credit)


76


76


(524
)

(487
)Amortization of net actuarial loss


2,231


2,338


3,630


1,610Net periodic benefit cost

$
3,369

$
3,742

$
10,369

$
7,644


Note 5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, 2010 and 2009 was $45.8 million and $73.7 million, respectively.

7

---



WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2010 (Unaudited)

Note 6Net Income Per Share

A reconciliation of the basic and diluted net income per share computations for the three months ended March 31, 2010 and 2009 are as follows (in thousands, except per share
data):

For the three months ended March 31,2010

2009Basic

Diluted

Basic

DilutedNumerator:Income from continuing operations

$
42,695

$
42,695

$
72,850

$
72,850(Loss) income from discontinued operations

$
(1,144
)
$
(1,144
)
$
253

$
253Denominator:Average number of common shares outstanding


53,437


53,437


53,290


53,290Effect of dilutive securities:Stock options and restricted stock units ("units")(a)





661





29153,437


54,098


53,290


53,581Income from continuing operations

$
0.80

$
0.79

$
1.37

$
1.36Loss from discontinued operations


(0.02
)

(0.02
)




Net income per share

$
0.78

$
0.77

$
1.37

$
1.36


(a)Represents
the weighted average number of shares of common stock issuable on the exercise of dilutive employee stock options and restricted stock units less
the number of shares of common stock which could have been purchased with the proceeds from the exercise of such stock awards. These purchases were assumed to have been made at the average market
price of the common stock for the period. Weighted average number of stock options and restricted stock units outstanding for the three months ended March 31, 2010 and 2009 totaling 14,720 and
1,262,641, respectively, were excluded from the calculation above because their effect would have been anti-dilutive.


8

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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, 2010 (Unaudited)




Note 7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 31,2010

2009Sales and revenues:Underground Mining

$
240,301

$
244,200Surface Mining


31,333


26,618Walter Coke


51,182


21,907Other


778


319Consolidating eliminations of intersegment activity(a)


(11,545
)

(9,907
)Net sales and revenues

$
312,049

$
283,137Segment operating income (loss):Underground Mining

$
64,828

$
99,855Surface Mining


7,260


5,515Walter Coke


7,643


1,593Other


(8,119
)

(5,153
)Consolidating eliminations of intersegment activity


(305
)

(294
)Operating income


71,307


101,516Less interest expense, net of interest income


(4,596
)

(4,525
)Income from continuing operations before income tax expense


66,711


96,991Income tax expense


24,016


24,141Income from continuing operations

$
42,695

$
72,850Depreciation:Underground Mining

$
18,492

$
14,148Surface Mining


2,582


2,326Walter Coke


1,018


1,127Other


77


133Total

$
22,169

$
17,734


(a)Included
in consolidating eliminations are intersegment sales that consisted primarily of sales between Underground Mining and Walter Coke totaling
$5.1 million and $7.9 million, between Surface Mining and Walter Coke totaling $1.9 million and $1.4 million, and between Underground Mining and Surface Mining totaling
$4.4 million and $0.6 million for the three months ended March 31, 2010 and 2009, respectively.


9

---



WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2010 (Unaudited)

Note 8Commitments and Contingencies



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.

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, 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.

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 will
be offset by tax reductions in future 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
Internal Revenue Service ("IRS") completed its audit of the Company's federal income tax returns for the years ended May 31, 2000 through December 31, 2005. The
disputed issues in this audit period are similar to the issues remaining in the Proof of Claim and consequently, should the IRS prevail on its positions, the Company believes its financial exposure is
limited to interest and possible penalties.

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

10

---



WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2010 (Unaudited)

Note 8Commitments and Contingencies (Continued)

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.

Walter
Coke 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 Walter Coke facility. A 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 at the Walter Coke
facility were performed in 2000 and 2001 and are complete. At the end of 2004, the EPA re-directed Walter Coke's 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. Walter Coke
implemented the approved EI sampling plan in April 2005. The EPA approved/finalized the EI determinations for Walter Coke's Birmingham facility in September 2005. In an effort to refocus the RFI, the
EPA approved technical comments on the Phase II RFI report and the report submitted as part of the EI effort. A Phase III work plan was submitted to the EPA during the first quarter of
2007. The EPA commented on the Phase III plan and Walter Coke 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. Phase III sampling reports were submitted in March 2009 and June 2009. Beyond the scope of the Phase III activity performed in 2007 through 2009, additional
requests by EPA expanded the scope of the project which required additional sampling and testing. In January 2008, as a follow-up to the EI determination, the EPA requested that Walter
Coke perform soil sampling and testing in the neighborhoods surrounding its facility. Subsequent to the EPA's initial request and presentation of an initial plan to the EPA by Walter Coke, the plan
was finalized and community involvement initiated,
with sampling and testing commencing in July 2009. The results of this sampling and testing were submitted to the EPA for review in December 2009. Walter Coke is awaiting comments from the EPA.

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 per the findings in the Phase I and Phase II investigations and 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. At March 31, 2010, the Company has accrued an amount that is probable and can be
reasonably estimated for the costs to be incurred to identify and define remediation actions to address this environmental liability in accordance with the agreements reached with the EPA to date. 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 environmental liabilities at the Walter Coke
facility, the amount of these costs cannot be reasonably estimated at this time. Because the RCRA compliance program is in the study phase, until the studies are complete, the Company is unable to
estimate the cost of remediation activities that will be

11

---



WALTER ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2010 (Unaudited)

Note 8Commitments and Contingencies (Continued)

required.
Although no assurances can be given that the Company will not be 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 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.

Note 9Fair Value of Financial Instruments

The following methods and assumptions were used to estimate fair value for purposes of disclosure:

Cash and cash equivalents, restricted short-term investments, receivables and accounts payableThe carrying amounts reported in the
balance sheet approximate fair value.

DebtThe Company's term loan in the amount of $137.1 million and $137.5 million at March 31, 2010 and December 31, 2009,
respectively, is carried at cost. The estimated fair value of the Company's term loan was $137.5 million and $134.1 million at March 31, 2010 and December 31, 2009,
respectively, based on similar transactions and yields in an active market for similarly rated debt.

The
Company's equipment financing debt was $25.3 million and $26.6 million at March 31, 2010 and December 31, 2009, respectively, and is carried at cost. The
estimated fair value of this equipment financing debt as of March 31, 2010 and December 31, 2009 is $25.3 million and $26.0 million,
respectively, based on comparable equipment financing transactions that similarly rated companies entered into at that date.

The
Company's short term borrowing to finance the premium payments on certain of its property insurance was $0.0 million and $4.3 million at March 31, 2010 and
December 31, 2009, respectively, and is carried at cost. The carrying amount reported on the balance sheet at December 31, 2009 of this short term financing approximates fair value.

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, 2010 (Unaudited)

Note 10Adoption of New Accounting Pronouncements

In January 2010, the FASB amended its guidance in ASC Topic 932 "Extractive ActivitiesOil and Gas,"expanding the definition
of oil and gas producing activities to include the extraction of saleable hydrocarbons from oil sands, shale and coalbeds, clarifying that entities' equity method investments must be considered in oil
and gas activities, and requiring new disclosures. This updated guidance is generally effective for annual periods ending on or after December 31, 2009, but for entities becoming subject to
this standard because of the change in the definition of significant oil and gas producing activities, adoption is required for periods beginning after December 31, 2009. Since the Company is
subject to this guidance because it extracts hydrocarbons from coalbeds, the Company adopted ASC Topic 932 as of January 1, 2010. The Company uses the successful efforts method which thereby
required the Company to change its method of accounting for depreciation of the gas properties in its coal bed methane business from the straight-line method to the
unit-of-production method. The increase in depreciation from this change resulted in a decrease in income from continuing operations of approximately $2.5 million, a
decrease in net income of $1.7 million and a $0.03 decrease in earnings per diluted share in the first quarter of 2010. In addition, the Company expects the full-year effect of
applying the change in method will be to increase depreciation expense by approximately $10.0 million
in 2010. The Company does not consider the effect of this change to be material to its operating results or financial condition.

Note 11Subsequent Events

On April 28, 2010, the Company's wholly owned subsidiary, Walter Natural Gas, LLC, entered into a definitive purchase agreement to acquire the Alabama natural gas interests
of HighMount Exploration and Production LLC, for approximately $210.0 million in cash. The transaction is expected to close in the second quarter 2010 and is subject to a number of
customary closing conditions. The acquisition includes HighMount's Alabama coal bed methane operations, including approximately 1,300 existing conventional gas wells, pipeline infrastructure and
related equipment located adjacent to the Company's existing underground mining and coal bed methane business located in Tuscaloosa County, AL. Current proven reserves are approximately 190 bcf
(billion cubic feet), with current annual coal bed methane production of 8.5 bcf.

On
April 28, 2010, the Company announced that it has recently signed a non-binding letter of intent to lease mineral rights associated with approximately
52 million tons of Blue Creek coking coal reserves in Tuscaloosa County, AL and acquire the existing North River steam coal mine in Fayette County and Tuscaloosa County, AL from Chevron
Mining, Inc., a subsidiary of Chevron Corporation. The proposed transaction with Chevron Mining, Inc. is subject to a number of conditions, including, but not limited to, the negotiation
and execution of a definitive purchase and sale agreement, completion of due diligence, approval of the transactions by the boards of directors of Walter Energy and Chevron Mining, Inc. and the
receipt of required third party consents and approvals. Accordingly, there can be no assurance whether or when this transaction will be completed.

Also
on April 28, 2010, the Company announced that, in a separate transaction, it has signed a letter of intent to lease mineral rights associated with approximately
22 million tons of Blue Creek coking coal reserves, which are adjacent to the Chevron reserves and are of similar quality. Terms of the lease, including royalty rates, are consistent with
existing lease agreements.

During
the period from April 1 through May 6, 2010 the Company repurchased an additional 200,480 shares of Company common stock for $15.9 million, thereby
fulfilling the Company's $100 million share repurchase program.

13

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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 7 of "Notes to Condensed Consolidated Financial Statements," which provides our net sales and revenues and operating income by
reportable segment. The following discussion addresses our continuing operations, only. See Note 2 of "Notes to Condensed Consolidated Financial Statements," for information regarding our
discontinued operations.

Summary Operating Results of Continuing Operations for the  Three Months Ended March 31, 2010 and 2009

For the Three Months Ended March 31, 2010(in thousands)

Underground
Mining

Surface
Mining

Walter
Coke

Other

Cons
Elims

TotalNet sales

$
238,232

$
30,408

$
50,865

$
150

$
(11,545
)
$
308,110Miscellaneous income


2,069


925


317


628





3,939Net sales and revenues


240,301


31,333


51,182


778


(11,545
)

312,049Cost of sales (exclusive of depreciation)


140,002


20,066


40,760


(118
)

(11,199
)

189,511Depreciation


18,492


2,582


1,018


77





22,169Selling, general & administrative


6,057


1,375


1,927


9,375


(41
)

18,693Postretirement benefits


10,922


50


(166
)

(437
)




10,369Amortization of intangibles

















Operating income (loss)

$
64,828

$
7,260

$
7,643

$
(8,119
)
$
(305
)
$
71,307Less: Interest expense, net

















4,596Less: Income tax expense

















24,016Income from continuing operations
















$
42,695




For the Three Months Ended March 31, 2009(in thousands)

Underground
Mining

Surface
Mining

Walter
Coke

Other

Cons
Elims

TotalNet sales

$
241,879

$
24,418

$
21,737

$
39

$
(9,907
)
$
278,166Miscellaneous income


2,321


2,200


170


280





4,971Net sales and revenues


244,200


26,618


21,907


319


(9,907
)

283,137Cost of sales (exclusive of depreciation)


115,776


17,298


16,993


12


(9,613
)

140,466Depreciation


14,148


2,326


1,127


133





17,734Selling, general & administrative


6,371


1,374


2,326


5,594





15,665Postretirement benefits


8,050


(7
)

(132
)

(267
)




7,644Amortization of intangibles





112











112Operating income (loss)

$
99,855

$
5,515

$
1,593

$
(5,153
)
$
(294
)
$
101,516Less: Interest expense, net

















4,525Less: Income tax expense

















24,141Income from continuing operations
















$
72,850


14

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Dollar Variance for the Three Months Ended March 31, 2010 Versus 2009(in thousands)

Underground
Mining

Surface
Mining

Walter
Coke

Other

Cons
Elims

TotalNet sales

$
(3,647
)
$
5,990

$
29,128

$
111

$
(1,638
)
$
29,944Miscellaneous income


(252
)

(1,275
)

147


348





(1,032
)Net sales and revenues


(3,899
)

4,715


29,275


459


(1,638
)

28,912Cost of sales (exclusive of depreciation)


24,226


2,768


23,767


(130
)

(1,586
)

49,045Depreciation


4,344


256


(109
)

(56
)




4,435Selling, general & administrative


(314
)

1


(399
)

3,781


(41
)

3,028Postretirement benefits


2,872


57


(34
)

(170
)




2,725Amortization of intangibles





(112
)










(112
)Operating income (loss)

$
(35,027
)
$
1,745

$
6,050

$
(2,966
)
$
(11
)
$
(30,209
)Less: (Increase) decrease in interest expense, net

















(71
)Less: (Increase) decrease in income tax expense

















125Income from continuing operations
















$
(30,155
)


Overview

Our income from continuing operations for the three months ended March 31, 2010 was $42.7 million, or $0.79 per diluted
share, which compares to $72.9 million, or $1.36 per diluted share, for the three months ended March 31, 2009. In the three months ended March 31, 2010, net sales and revenues
increased $28.9 million and operating income decreased $30.2 million versus the same period in 2009. Net sales and revenues in the first quarter 2010 improved as compared to the first
quarter 2009 primarily due to higher metallurgical coke and coking coal sales volumes, partially offset by lower realized selling prices for coking coal. Although revenues grew, our operating income
for the quarter declined as a result of lower coking coal selling prices and higher production and royalty costs on a per ton basis at Underground Mining's No. 7 Mine.

Outlook and Strategic Initiatives



15

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Coking Coal Sales Committed and Priced
Estimated Delivery Schedule (short tons, in millions)

Q2
2010 E

Q3
2010 E

Q4
2010 E2008 - 2009 Carryover Tons ($286(1))


0.3


0.4


0.22009 - 2010 Contract Tons ($117(1))


0.6


0.1


2009 - 2010 Contract Tons ($213(1))


0.7


1.4


Total


1.6


1.9


0.2


(1)Prices
are approximate, per short ton FOB Port.




16

---







17

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Summary of First Quarter Consolidated Results of Continuing Operations

Net sales and revenues for the three months ended March 31, 2010 increased $28.9 million, or 10.2%, as compared to the
same period in 2009. This increase in revenues resulted primarily from increased revenues in the Walter Coke and Surface Mining segments. The revenue increase in the Walter Coke segment is principally
due to higher sales volumes of metallurgical coke. The majority of the increase in the Surface Mining segment is due to higher volumes of coal sales but a significant portion of the increase was due
to an increase in the average price of the coal. These increases in revenue were somewhat offset by a decrease in revenue in the Underground Mining segment primarily due to a reduction in the average
selling price of hard coking coal.

Cost
of sales, exclusive of depreciation, increased $49.0 million, or 34.9%, from the first quarter of 2009, and represented 61.5% of net sales for the three months ended
March 31, 2010 versus 50.5% of net sales for the same period in 2009. The increase in cost of sales as a percentage of net sales in the current quarter is predominately due to a $15.00 per ton
increase at Underground Mining's Mine No. 7, resulting from higher production costs due to unfavorable volume variances year over year, as Mine No. 7 was running two longwalls in the
prior year, versus one longwall for much of this year's first quarter, and resulting from increased royalty costs on a per ton basis, as a significant portion of production was on company-owned
property in the prior year period.

Depreciation
for the three months ended March 31, 2010 increased $4.4 million, compared to the same period in 2009. The increase was primarily due to higher depreciation in
Underground Mining resulting from a change to the unit-of-production method of depreciation on gas properties, as well as increased depreciation due to continued capital
investment throughout 2009 for the Mine No. 7 East longwall startup, which began in mid December 2009.

Selling,
general & administrative expense increased $3.0 million for the quarter ended March 31, 2010 compared to the same period in 2009, mostly attributable to
increases in salary related expenses, fringe benefits and professional expenses at parent. A majority of the salary related increases results from severance expense related to the planned relocation
of our corporate headquarters to Birmingham, AL.

The
effective tax rates for the three months ended March 31, 2010 and 2009 were 36.0% and 24.9%, respectively. Income tax expense in the current quarter includes a
one-time tax charge of $20.7 million related to the elimination of the favorable tax treatment of Medicare Part D subsidies due to the passage of the Health Care Reform Act
in March 2010. The current quarter also includes a one-time tax benefit of $17.4 million related to unconventional fuel source credits for our Walter Coke segment for the years 2006
through 2009. These items are not expected to recur. Additionally, the impact of percentage depletion resulted in a significantly larger favorable impact on the full year tax rate in 2009 compared
with the projected 2010 tax rate.

18

---



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
$240.3 million in the first quarter of 2010, a decrease of $3.9 million compared to the same period in 2009. The decrease in revenues was primarily due to a decrease in the average
selling price of hard coking coal, partially offset by the effect of an increase in coking coal sales volumes, as compared to the same period in 2009.

Three months ended
March 31,2010

2009Average coal selling price(1) (per short ton)

$
127.05

$
133.24Tons of coal sold(1) (in thousands)


1,816


1,754Average hedged natural gas selling price (per mcf)

$
5.49

$
6.05Billion cubic feet of natural gas sold


1.4


1.7Number of natural gas wells


386


432


(1)Includes
intersegment sales of both metallurgical and purchased steam coal.


Underground
Mining's $35.0 million decrease in operating income in the first quarter of 2010, compared to the same period in 2009 was primarily the result of a decrease in the
average selling price of coking coal and an increase in cost of sales (exclusive of depreciation) mostly due to higher average production and royalty costs at the No. 7 mine, as discussed
previously.



Surface Mining, which includes the operations of TRI, Taft and Walter Minerals, reported a revenue increase of $4.7 million in
the first quarter of 2010 compared to the same period last year. The increase in revenues was primarily attributable to a 14.0% increase in the volume of coal sold as well as an $8.41, or 11.9%
increase in the average coal selling price for the three months ended March 31, 2010 compared to the first quarter of 2009. Statistics for Surface Mining are presented in the following table:

Three months
ended
March 31,2010

2009Average coal selling price(1) (per short ton)

$
78.89

$
70.48Tons of coal sold(1) (in thousands)


375


329


(1)Includes
intersegment sales of steam coal.


Surface
Mining reported an operating income increase of $1.7 million in the first quarter of 2010 compared to the same period in 2009. The increase was primarily due to the effect
of increased selling prices and favorable production costs due to increased efficiency, partially offset by increased diesel fuel costs in the first quarter of 2010 as compared to the same period in
the prior year.

19

---







Walter Coke's net sales and revenues increased $29.3 million for the three months ended March 31, 2010 compared to the
same period in 2009 due to increased customer demand in the domestic steel market. The increase in demand resulted in a more than tripling in metallurgical coke sales volumes as shown below:

Three months ended
March 31,2010

2009Metallurgical coke average selling price per ton

$
327.37

$
308.26Metallurgical coke tons sold


139,081


45,200


Walter
Coke's operating income was $7.6 million for the three months ended March 31, 2010 compared to operating income of $1.6 million in the same period in 2009, an
increase of $6.0 million. This increased operating income was primarily the result of margins achieved on higher sales volumes.

FINANCIAL CONDITION

Cash and cash equivalents of continuing operations increased by $49.1 million from $165.3 million at December 31,
2009 to $214.4 million at March 31, 2010 due to $74.8 million in cash flows provided by operating activities, $14.4 million of cash flows used in investing activities and
$10.9 million of cash flows used in financing activities. See additional discussion in the Statement of Cash Flows section that follows.

Net
receivables were $112.0 million at March 31, 2010, an increase of $41.5 million from December 31, 2009 primarily attributable to $34.6 million in
higher trade receivables at Underground Mining due to higher revenues in March 2010 compared to December 2009 and a slight increase in the number of days sales outstanding. Trade receivables at Walter
Coke increased $6.0 million due to increased revenues.

Inventories
were $80.9 million at March 31, 2010, a decrease of $18.4 million from December 31, 2009 primarily due to decreases in inventory at Walter Coke
resulting from the significantly higher demand for coke in the first quarter of 2010.

Short
term deferred income tax assets decreased $14.6 million primarily due to the utilization of net operating loss carryforwards, partially offset by an increase due to the
recognition of unconventional fuel source credits for our Walter Coke segment.

Net
property, plant and equipment decreased $8.3 million to $514.6 million at March 31, 2010, primarily due to higher depreciation on machinery and equipment at
Underground Mining resulting from significant capital additions in recent years compared with relatively smaller capital additions of machinery and equipment in the first quarter of 2010.

Long
term deferred income tax assets decreased $20.9 million due to writing off the deferred tax associated with Medicare Part D subsidies as a result of the enactment of
the Health Care Reform Act in March 2010.

LIQUIDITY AND CAPITAL RESOURCES

Overview

Our principal sources of short-term funding are existing cash balances, operating cash flows and borrowings under the
revolving credit facility. Our principal source of long-term funding is the bank term loan. As of March 31, 2010, total debt decreased $6.6 million as compared to
December 31, 2009. See discussion below.

20

---



Based
on current forecasts and anticipated market conditions, we believe that funds generated from operating cash flows and available sources of liquidity will be sufficient to meet
substantially all operating needs, to make planned capital expenditures, to fund acquisitions and to make all required interest and principal payments on indebtedness for the next twelve to eighteen
months. However, our operating cash flows and liquidity are significantly influenced by numerous factors, including prices of
coal and natural gas, coal production, costs of raw materials, interest rates and the general economy. Although we have experienced an improvement in the market for our products, renewed deterioration
of economic conditions could adversely impact our operating cash flows. Additionally, although financial market conditions have improved, there remains volatility and uncertainty, less availability
and higher costs of credit, potential counterparty defaults, and commercial and investment bank stress. While we have no indication that the uncertainty in the financial markets would impact our
current credit facility or current credit providers, the possibility does exist.

2005 Walter Credit Agreement, as Amended

The 2005 Walter Credit Agreement ("Credit Agreement"), as amended, is a $438.2 million credit agreement that includes
(1) an amortizing term loan facility with an aggregate principal amount of $138.2 million and (2) a $300.0 million revolving credit facility ("Revolver") that, subject to
certain conditions, can be increased to $425.0 million. The term loan facility bears interest at LIBOR plus as much as 300 basis points and requires quarterly principal payments of
$0.4 million through October 3, 2012, at which time the remaining outstanding principal is due. The Revolver, which provides for loans and letters of credit, bears interest at LIBOR plus
as much as 400 basis points and matures on July 2, 2012. The commitment fee on the unused portion of the Revolver is 0.5% per year for all pricing levels. Our obligations under the Credit
Agreement are secured by substantially all of our and our guarantors' real, personal and intellectual property, and our ownership interest in the guarantors. Under the Credit Agreement, we are allowed
to pay dividends and repurchase our own capital stock up to a maximum of the sum of $25.0 million plus 50% of consolidated net income from the immediately preceding year, provided that after
such dividend and/or stock purchase, the remaining amount available to be drawn under the Revolver is at least $50.0 million.

As
of March 31, 2010, borrowings under the Credit Agreement consisted of a term loan balance of $137.1 million with a weighted average interest rate of 2.49% and, under the
Revolver, we had $0.0 borrowings, $61.8 million in outstanding stand-by letters of credit, of which $15.7 million relates to the support letter of credit discussed below and
$238.2 million of availability for future borrowings.

Other Debt

In October 2008, we entered into a $32.3 million equipment financing arrangement for certain mining equipment. This facility
requires monthly payments using a predetermined amortization schedule, carries an interest rate of 1-month LIBOR plus 375 basis points, will mature in the first quarter of 2014 and is
secured by the financed equipment. At March 31, 2010, there was $25.3 million outstanding at a stated interest rate of 3.97%. In addition, in 2008, we entered into a $9.4 million
capital lease arrangement to procure certain mining equipment.
The capital lease covers a sixty month period and has an implicit fixed interest rate of 9.78%. At March 31, 2010 there was a balance remaining of $7.5 million.

Contingent Obligations

On April 20, 2009, we entered into a Support Letter of Credit Agreement (the "L/C Agreement") with Walter Investment and certain
of its subsidiaries. The L/C Agreement provides Walter Investments' financial lending institutions with a stand-by letter of credit totaling $15.7 million. This stand-by
letter of credit was issued under our 2005 Walter Credit Agreement and enabled Walter Investment to obtain third-party financing under a revolving credit agreement. The maximum amount

21

---



of
future payments that we could be required to make under the L/C Agreement is $15.7 million, plus any unreimbursed fees, in the event of a default. To date, no event of default has occurred
that would trigger a draw under the stand-by letter of credit. We believe that the likelihood of a triggering event is remote. In addition, should a loss occur, sufficient collateral is
available for the recovery of any loss we might suffer in the event of a default by Walter Investment. Under the terms of the support letter of credit agreement, Walter Investment agrees to reimburse
us for all costs incurred in posting the support letter of credit for Walter Investment's bank credit agreement as well as any draws under bonds posted in support of Walter Investment and its
subsidiaries. All obligations of the L/C Agreement terminate on April 20, 2011.

In
addition, we also entered into a revolving credit facility and security agreement with Walter Investment in which we have committed to make available up to $10.0 million in the
event that a major hurricane has occurred and has caused projected losses to Walter Investment greater than $2.5 million. A condition precedent to a draw under this facility is the granting of
a security interest in certain collateral. Under the terms of the revolving credit and security agreement, Walter Investment will pay all fees and repay all loans made under the facility. Any
obligations under the revolving credit and security agreement will be due and payable on April 20, 2011. There have been no loans made to Walter Investment pursuant to this arrangement.

Statement of Cash Flows

Cash balances of continuing operations were $214.4 million and $165.3 million at March 31, 2010 and
December 31, 2009, respectively. The increase in cash for the three months ended March 31, 2010 was primarily attributable to cash provided by operating activities of
$74.8 million, partially offset by capital expenditures of $14.3 million, retirement of debt of $6.6 million and cash dividend payments of $5.4 million.

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

Three months ended
March 31,2010

2009Cash flows provided by (used in) operating activities

$
74,812

$
62,642Cash flows provided by (used in) investing activities


(14,428
)

(35,154
)Cash flows provided by (used in) financing activities


(10,880
)

(50,448
)Cash flows provided by (used in) continuing operations


49,504


(22,960
)Cash flows provided by (used in) discontinued operations


(1,036
)

(1,728
)Net increase (decrease) in cash and cash equivalents

$
48,468

$
(24,688
)


Net
cash provided by operating activities of continuing operations increased $12.2 million for the three months ended March 31, 2010 as compared to the same period in 2009.
The increase is primarily attributable to a $42.2 million improvement in cash flows provided as inventories declined $18.4 million in the first quarter of 2010, compared to an increase
in the same period of last year of $23.8 million, and a $13.7 million improvement in cash flow provided as accrued expenses and other current liabilities decreased $2.3 million in
the current quarter versus a decrease of $11.4 million in the first quarter of last year. These improvements were partially offset by an unfavorable change in receivables of
$31.3 million as the current quarter includes an increase in receivables of $41.6 million, while the first quarter of 2009 includes an increase in receivables of $10.3 million.
Additionally, the first quarter of 2010 experienced a $16.5 million decrease in income from continuing operations, adjusted for non-cash items when compared to Q1 of 2009.

22

---



Cash
flows used in investing activities in the first quarter of 2010 were primarily due to additions to property plant and equipment in the amount of $14.3 million, of which
$12.7 million were at Underground Mining, while cash flows used in investing activities in the first quarter of 2009 in the amount of $35.2 million were primarily due to additions of
$23.7 million of property, plant and equipment at Underground mining and $9.7 million at Surface Mining.

Cash
flows used in financing activities for the first quarter of 2010 were $10.9 million compared to $50.4 million for the first quarter of 2009. The major differences
included $6.6 million used for the retirement of debt in the current quarter versus $16.9 million in the first quarter of 2009 and purchases of stock under the stock repurchase program
totalling $4.7 million for the quarter ended March 2010 compared to $28.0 million for the quarter ended March 2009.

Adoption of New Accounting Pronouncements

In January 2010, the FASB amended its guidance in ASC Topic 932 "Extractive ActivitiesOil and
Gas,"expanding the definition of oil and gas producing activities to include the extraction of saleable hydrocarbons from oil sands, shale and coalbeds, clarifying that
entities' equity method investments must be considered in oil and gas activities, and requiring new disclosures. This updated guidance is generally effective for annual periods ending on or after
December 31, 2009, but for entities becoming subject to this standard because of the change in the definition of significant oil and gas producing activities, adoption is required for periods
beginning after December 31, 2009. Since we became subject to this guidance because we extract hydrocarbons from coalbeds, we adopted ASC Topic 932 as of January 1, 2010. We use the
successful efforts method for our gas properties which thereby required us to change our method of accounting for depreciation of our gas properties in our coal bed methane business from the
straight-line method to
the unit-of-production method. The increase in depreciation expense from this change resulted in a decrease in our income from continuing operations of approximately
$2.5 million, a decrease in net income of $1.7 million and a $0.03 decrease in earnings per diluted share in the first quarter of 2010. In addition, we expect the full-year
effect of applying the method change will be to increase depreciation expense by approximately $10.0 million in 2010. We do not consider the effect of this change to be material to our
operating results or financial condition.

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. The primary market risk exposures relate to interest rate risk and commodity risks. We do not enter into derivatives or other financial instruments for trading or
speculative purposes.

ITEM 4.    CONTROLS AND PROCEDURES



An evaluation was performed under the supervision and with the participation of our management, including our interim Chief Executive
Officer (principal executive officer) and our interim Chief Financial Officer (principal 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 officer and principal financial officer, concluded that our disclosure controls and procedures are effective as of
March 31, 2010 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. There
has been no change in our internal control over financial reporting during the three months ended March 31, 2010 that has materially affected, or is reasonably likely to materially affect,
internal control over financial reporting.

23

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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.

We
and our subsidiaries are parties to a number of other lawsuits arising in the ordinary course of our businesses. Most of these cases are in a preliminary stage and we are unable to
predict a range of possible loss, if any. We provide 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 our 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, we believe that the final outcome of such other litigation will not have a material adverse effect on our consolidated financial position.

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. For a discussion of our risk factors, please refer to Part 1, "Item 1A. Risk Factors" in
our Annual Report on Form 10-K for the year ended December 31, 2009.

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

Purchase of Equity Securities by Us and Affiliated Purchasers

In 2009, the Board of Directors approved a $100.0 million share repurchase program. Purchases are based on liquidity and market
conditions. Through March 31, 2010, a total of 2,817,338 shares for $84.1 million have been repurchased under this program. See the following table for a detail of equity security
purchases during the first three months of 2010:

Period

Total Number of
Shares
Purchased

Average Price
Paid per Share
Units

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

Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under
the Plans or
Programs
(in millions)January 1, 2010 - January 31, 2010


47,407

$
67.24


47,407

$
17.4February 1, 2010 - February 28, 2010


44,823
(1)
$
67.33


22,272

$
15.9March 1, 2010 - March 31, 2010


311
(2)
$
87.92




$
15.992,541





69,679


(1)In
February 2010, we acquired 22,551 shares from employees at an average price of $67.35 per share. These shares were acquired to satisfy the employees' tax
withholding obligations associated with the lapse of restrictions on certain stock awards granted under the 1995 Long-Term Incentive Stock Plan and the 2002 Long-Term Incentive
Award Plan. Upon acquisition, these shares were retired.(2)In
March 2010, we acquired 311 shares from employees at an average price of $87.92 per share. These shares were acquired to satisfy the employees' tax
withholding obligations associated with the lapse of restrictions on certain stock awards granted under the 1995 Long-Term Incentive Stock Plan and the 2002 Long-Term Incentive
Award Plan. Upon acquisition, these shares were retired.


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Item 6.    Exhibits



Exhibit
Number10.1*

Agreement dated July 30, 2007 between the Company and Charles C. Stewart10.2*

Amendment dated December 22, 2008 between the Company and Charles C. Stewart10.3*

Agreement dated October 24, 2006 between the Company and Michael T. Madden10.4*

Amendment dated December 18, 2008 between the Company and Michael T. Madden10.5*

Amended and Restated Change-in-Control Agreement dated December 18, 2008 between the Company and Michael T. Madden31.1

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002interim Chief Executive Officer31.2

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002interim Chief Financial Officer32.1

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350interim Chief Executive Officer32.2

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350interim Chief Financial Officer


The
Exhibits identified above with an asterisk (*) are management contracts or compensatory plans or arrangements.


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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/ JOSEPH B. LEONARD interim Chief Executive Officer
(Principal Executive Officer)Date: May 7, 2010/s/ LISA A. HONNOLD interim Chief Financial Officer
(Principal Financial Officer)Date: May 7, 2010


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