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

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. These financial statements should be read in conjunction with the audited financial statements and related notes as of and for the year ended December 31, 2014 included in the Company's Annual Report filed on Form 10-K with the U.S. Securities and Exchange Commission. The balance sheet as of December 31, 2014 has been derived from the audited consolidated balance sheet for the year ended December 31, 2014 included in the Company's Annual Report filed on Form 10-K.

Filing Under Chapter 11 of the United States Bankruptcy Code

On July 15, 2015 (the "Petition Date"), Walter Energy and certain of its wholly owned domestic subsidiaries (the "Filing Subsidiaries" and together with Walter Energy, the "Debtors"), filed voluntary petitions for reorganization (the petitions collectively, the "Bankruptcy Petitions") under Chapter 11 of Title 11 of the U.S. Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Northern District of Alabama (the "Court"). The Company’s Canadian and U.K. Operations are not included in the filings. The Debtors' Chapter 11 Cases (collectively, the "Chapter 11 Cases") are being jointly administered under the caption In re Walter Energy, Inc., et al., Case No. 15-02741-TOM11. The Debtors will continue to operate their businesses as "debtors-in-possession" under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Court.

The filings of the Bankruptcy Petitions constituted an event of default under the indentures governing the outstanding senior notes, the 2011 Credit Agreement and the Company's other debt obligations, all as further described in Note 8 to the Condensed Consolidated Financial Statements, and all principal, interest and other amounts due thereunder became immediately due and payable. Any efforts to enforce such payment obligations are automatically stayed as a result of the Bankruptcy Petitions and the creditors' rights of enforcement are subject to the applicable provisions of the Bankruptcy Code.

Restructuring Support Agreement

In connection with the Bankruptcy Petitions, Walter Energy entered into a Restructuring Support Agreement, dated as of July 15, 2015 (the "Support Agreement"), among Walter Energy, on behalf of itself and the Filing Subsidiaries, certain holders of first-lien claims in connection with the 2011 Credit Agreement (the "First Lien Lenders") and certain holders of Walter Energy’s 9.50% Senior Secured Notes due 2019 (the "First Lien Noteholders" and collectively with the First Lien Lenders, the "First Lien Claimholders" and the First Lien Claimholders party to the Support Agreement, the "Supporting First Lien Creditors"), providing that the Supporting First Lien Creditors will support a restructuring of the Company, subject to the terms and conditions of the Support Agreement.

The Support Agreement provided for, among other things, (a) a consensual debt-to-equity conversion of the debt under the 2011 Credit Agreement and Walter Energy’s 9.50% Senior Secured Notes due 2019 pursuant to a Chapter 11 plan (the "Plan") and (b) Walter Energy’s consensual use of the First Lien Claimholders’ cash collateral (the "Cash Collateral") for no more than seven months to allow Walter Energy to pursue confirmation of the Plan, subject to the terms and conditions of the order authorizing the use of Cash Collateral and the Support Agreement.

The Support Agreement further provided that if a Triggering Event (as defined in the Support Agreement) occurred, holders of a majority in principal amount of First Lien Claims (as defined in the Support Agreement) held by the Supporting First Lien Creditors could, by providing notice to Walter Energy, cause Walter Energy to abandon the Plan process and to pursue a sale of substantially all of the assets of Walter Energy pursuant to Sections 105, 363 and 365 of the Bankruptcy Code on the terms set forth in the Support Agreement.

On July 15, 2015, the Debtors filed motions to approve the assumption of the Support Agreement (the “RSA Motion”) and the consensual use of cash collateral (the “Cash Collateral Motion”).

The Court conducted hearings on the Support Agreement and final approval of the Cash Collateral Motion, and thereafter entered orders approving each motion but with modifications unacceptable to the Supporting First Lien Creditors. As a result, the Supporting First Lien Creditors filed an Emergency Motion requesting that the Court (a) confirm that the Support Agreement was terminated, (b) terminate the Debtors’ use of cash collateral on a nonconsensual basis, and (c) authorize the Debtors’ use of cash collateral through October 21, 2015 pursuant to an amended final cash collateral order acceptable to the Supporting First Lien Creditors (the “Cash Collateral Order”) (the “Emergency Motion”).

On September 28, 2015, the Court entered (i) an order granting the Emergency Motion and (ii) the Cash Collateral Order. Pursuant to the Cash Collateral Order, the Debtors were granted the right to use cash collateral until October 21, 2015, which right was extended by agreement with the Supporting First Lien Creditors to November 20, 2015.

Agreement to Use Cash Collateral and Interim Approval of Same

The First Lien Claimholders' hold first priority liens on substantially all of the Debtors’ material assets, including, without limitation, (a) substantially all personal property, including cash, deposit accounts, accounts and investments, (b) equity interests in all material (direct and indirect) domestic subsidiaries of Walter Energy and (c) substantially all material real property holdings, including mineral leaseholds in Alabama and elsewhere and "as extracted" collateral (collectively, the "Collateral"). The Collateral includes Cash Collateral, as such term is defined in Section 363(a) of the Bankruptcy Code. The Debtors’ use of the Cash Collateral on which the holders of the First Lien Lenders hold liens is critical to the Debtors’ ability to operate in the ordinary course during the Chapter 11 Cases.

Accordingly, prior to the Petition Date, the Debtors' negotiated with the Supporting First Lien Creditors an agreement to use the Cash Collateral, in accordance with the terms of the Support Agreement and subject to approval of the Court. On the Petition Date, the Debtors filed with the Court a motion (the "Cash Collateral Motion") for entry of interim and final orders to authorize the use of the Cash Collateral, to grant the First Lien Claimholders adequate protection for the use of such Cash Collateral, and to modify the automatic stay to the extent necessary to implement such agreement.

In consideration of the Debtors’ use of Cash Collateral and to ensure that the First Lien Claimholders are adequately protected, the Cash Collateral Motion requested, among other things, that the First Lien Claimholders (i) be granted first-priority replacement liens on all real or personal property of the Debtors and their estates (including, subject to entry of the final order, avoidance actions arising under Chapter 5 of the Bankruptcy Code), subject only to designated carve-out for funding of certain administrative expenses and certain permitted liens, (ii) be paid interest in cash when due based on 80% of the applicable non-default rate, pursuant to the terms of the applicable first lien debt documents, and (iii) be granted superpriority administrative expense claims against the Debtors on account of any diminution in value under Section 507(b) of the Bankruptcy Code. The Debtors also sought the establishment of a carve-out on the terms set forth in the Cash Collateral Order to fund the payout of, among other things, certain specified allowed professionals' fees. As described above and in the Cash Collateral Motion, the Debtors’ use of Cash Collateral terminates upon the occurrence of certain Triggering Events set forth in the Support Agreement, and the Debtors are required to use the Cash Collateral in compliance with the terms of the Cash Collateral Order and related consolidated budget. At the first-day hearings held on the Petition Date, the Court entered an interim order approving the Cash Collateral Motion (the "Interim Cash Collateral Order"), pursuant to which the Debtors received interim approval to use the Cash Collateral in accordance with the terms of the Interim Cash Collateral Order and a consolidated cash collateral budget acceptable to the Supporting First Lien Creditors (the "Cash Collateral Budget").

On July 15, 2015, the Debtors filed motions to approve the assumption of the Support Agreement (the “RSA Motion”) and the consensual use of cash collateral (the “Cash Collateral Motion”).

Reorganization Process

On the Petition Date, the Court issued certain additional interim and final orders with respect to the Debtors’ other first-day motions and other operating motions that allow the Debtors to operate their businesses in the ordinary course. The first-day motions provided for, among other things, the payment of certain pre-petition employee and retiree expenses and benefits, the use of the Debtors' existing cash management system, the payment of certain pre-petition amounts to certain critical vendors and possessory lien holders, the ability to pay certain pre-petition taxes and regulatory fees, the payment of certain pre-petition claims owed on account of insurance policies and programs, and the continuation of the Debtors’ surety bond programs and utility services. With respect to those first-day motions for which only interim approval was granted, the Court granted such motions on August 18th and 19th of 2015.

Immediately after filing the Bankruptcy Petitions, the Company began notifying all known current or potential creditors of the Debtors of the bankruptcy filings. Subject to certain exceptions under the Bankruptcy Code, the filing of the Bankruptcy Petitions automatically enjoined, or stayed, the continuation of any judicial or administrative proceedings or other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the filing of the Bankruptcy Petitions. Thus, for example, most creditor actions to obtain possession of property from the Debtors, or to create, perfect or enforce any lien against the Debtors' property, or to collect on monies owed or otherwise exercise rights or remedies with respect to a pre-petition claim are enjoined unless and until the Court lifts the automatic stay.

On September 4, 2015, the Court entered an order establishing October 13, 2015 (the "General Bar Date") as the bar date for potential creditors, other than governmental units, to file claims. For governmental units to file claims, the bar date was established as January 11, 2016 (the "Government Bar Date"). The bar date is the date by which certain claims against the Debtors must be filed if the claimants wish to receive any distribution in the Chapter 11 Cases. Proof of claim forms received after the bar date are typically not eligible for consideration of recovery as part of the Chapter 11 Cases. All known potential creditors were notified of the applicable bar date and the requirement to file a claim with the Court. The Company also published notices in various publications available to the public. Differences between liability amounts estimated by the Company and claims filed by creditors will be investigated and, if necessary, the Court will make a final determination of the allowable claim. The ultimate amount or treatment of such liabilities is not determinable at this time.

Under Section 365 and other relevant sections of the Bankruptcy Code, the Debtors may assume, assume and assign, or reject certain executory contracts and unexpired leases, including leases of real property and equipment, subject to the approval of the Court and certain other conditions.

A Chapter 11 plan determines the rights and satisfaction of claims of various creditors and security holders and is subject to the ultimate outcome of negotiations and the Court's decisions through the date on which a Chapter 11 plan is confirmed.

On August 26, 2015, the Debtors filed a Chapter 11 Plan with the Court, which contemplated a comprehensive reorganization of the Debtors through a debt-to-equity conversion of approximately $1.9 billion of the Company's prepetition secured debt. As previously discussed, the Support Agreement was terminated and the Debtors are no longer seeking approval for the Plan but are working with the Supporting First Lien Creditors to negotiate a new path forward regarding the Chapter 11 Cases.

For periods subsequent to filing the Bankruptcy Petitions, the Company will apply the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 852, Reorganizations, in preparing its consolidated financial statements. ASC 852 requires that the financial statements distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain revenues, expenses, realized gains and losses and provisions for losses that are realized or incurred in the bankruptcy proceedings have been recorded in a reorganization line item on the consolidated statements of operations. In addition, the pre-petition obligations that may be impacted by the bankruptcy reorganization process have been classified on the balance sheet in liabilities subject to compromise. These liabilities are reported at the amounts expected to be allowed by the Court, even if they may be settled for lesser amounts.

Going Concern Matters

The accompanying unaudited Condensed Consolidated Financial Statements and related notes have been prepared assuming that the Company will continue as a going concern, although the Bankruptcy Petitions noted above, weak coal market industry conditions, depressed metallurgical coal prices, reduced steel production and reduced global steel demand raise substantial doubt about the Company's ability to continue as a going concern. Accordingly, the financial statements and related notes do not include any adjustments related to the recoverability and classification of recorded assets or to the amounts and classification of liabilities or any other adjustments that would be required should the Company be unable to continue as a going concern.

The Company's ability to continue as a going concern is dependent upon, among other things, market conditions and its ability to improve profitability and its ability to successfully implement a sale or Chapter 11 plan strategy. As a result of the Bankruptcy Petitions, the realization of assets and the satisfaction of liabilities are subject to uncertainty. While operating as a debtor-in-possession pursuant to the Bankruptcy Code, the Company may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Court or as otherwise permitted in the ordinary course of business, for amounts other than those reflected in the accompanying consolidated financial statements. Further, a Chapter 11 plan could materially change the amounts and classifications of assets and liabilities reported in the Company's Condensed Consolidated Financial Statements.

New Accounting Pronouncements

In April 2015, the FASB issued Accounting Standards Update ("ASU") No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30). ASU 2015-03 simplifies the presentation of debt issuance costs by requiring debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying amount of the recognized debt liability. The Company adopted ASU 2015-03 in the first quarter of 2015. Previously reported other current assets, other long-term assets and long-term debt have been revised to reflect the retrospective application.

The following reflects the retrospective application (in thousands):



	December 31, 2014
Other current assets, prior to revision	$	19,542
Revision of debt issuance costs	(10,257		)
Other current assets, as revised	$	9,285

Other long-term assets, prior to revision	$	112,256
Revision of debt issuance costs	(44,508		)
Other long-term assets, as revised	$	67,748

Long-term debt, prior to revision	$	3,123,643
Revision of debt issuance costs	(54,765		)
Long-term debt, as revised	$	3,068,878