Acquisitions

6 Months Ended

Jun. 30, 2011

Acquisitions

Acquisitions

Note 2—Acquisitions

        Western Coal Corp.    On November 18, 2010 the Company announced its intent to acquire all of the outstanding common shares of Western Coal. Western Coal was a producer of high quality metallurgical coal from mines in Northeast British Columbia (Canada), high quality metallurgical coal and compliant thermal coal from mines located in West Virginia (United States), and high quality anthracite coal from mines located in South Wales (United Kingdom). The acquisition of Western Coal substantially increased the Company's reserves available for future production, the majority of which is high-demand hard coking coal, and created a diverse geographical footprint with strategic access to high-growth steel-producing countries in both the Atlantic and Pacific basins.

        On November 17, 2010 the Company entered into a share purchase agreement with various funds advised by Audley Capital to purchase approximately 54.5 million common shares, or 19.8%, of the outstanding common shares of Western Coal for CAD$11.50 per share in two separate transactions. On December 2, 2010 the Company entered into an arrangement agreement with Western Coal to acquire all of the remaining outstanding common shares of Western Coal for CAD$11.50 per share in cash or 0.114 of a Walter Energy share, or for a combination thereof at the holder's election, subject to proration.

        In January 2011 the Company completed the first transaction to acquire 25,274,745 common shares of Western Coal, or 9.15% of the outstanding shares, from funds advised by Audley Capital. The shares were purchased for $293.7 million in cash and had a fair value of $314.4 million on April 1, 2011. The Company recognized a gain on April 1, 2011 of $20.6 million as a result of remeasuring to fair value the Western Coal shares acquired from Audley Capital which is included in other income in the Condensed Consolidated Statements of Operations for the periods ended June 30, 2011. On April 1, 2011 the Company acquired the remaining outstanding common shares of Western Coal (including the second Audley Capital transaction) for a combination of $2.2 billion in cash and the issuance of 8,951,558 common shares of Walter Energy valued at $1.2 billion. The fair value of Walter Energy's common stock on April 1, 2011 was $136.75 per share based on the closing value on the New York Stock Exchange. The cash portion was funded with part of the proceeds from the new $2.725 billion credit facility discussed in Note 4. All of the outstanding options to purchase Western Coal common shares that were not exercised prior to the acquisition were exchanged for fully-vested and immediately exercisable options to purchase shares of Walter Energy common stock. The Company issued 193,498 stock options in exchange for the Western Coal stock options outstanding as of April 1, 2011. The stock options issued had a fair value of $15.5 million, which was estimated using the Black-Scholes option pricing model.

        The purchase consideration has been preliminarily allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. A full and detailed valuation of the assets and liabilities is being completed with the assistance of an independent third party and certain information and analysis remains pending at this time. Accordingly, the allocation is preliminary and is expected to change as additional information becomes available and is assessed by the Company. The final allocation of the consideration transferred may include adjustment to the fair value estimates of identifiable assets and liabilities, including but not limited to depreciable tangible assets, proven and probable reserves, reserves related to current development projects, value beyond proven and probable reserves, intangible assets and contract-related liabilities after a full review has been completed. The impact of such changes may be material. Fair values were determined using the income, cost and market price valuation methods as deemed appropriate.

        The following table summarizes the purchase consideration and the preliminary estimated fair values of assets acquired and liabilities assumed (in thousands):

Purchase consideration:
	Cash		$	2,173,080
	Fair value of shares of common stock issued			1,224,126
	Fair value of stock options issued and warrants			16,302
		Fair value of consideration transferred		3,413,508
	Fair value of equity interest in Western Coal held before the acquisition			314,231
	Total consideration		$	3,727,739
Fair value of assets acquired and liabilities assumed:
	Cash and cash equivalents		$	34,065
	Receivables			161,355
	Inventories			122,642
	Other current assets			58,742
	Mineral interests			4,399,000
	Property, plant and equipment			565,038
	Goodwill			249,415
	Other long-term assets			71,708
		Total assets	$	5,661,965
	Accounts payable and accrued liabilities		$	178,754
	Other current liabilities			77,241
	Deferred tax liability			1,576,820
	Other long-term liabilities			101,411
		Total liabilities	$	1,934,226
	Net assets acquired		$	3,727,739

        Goodwill is calculated as the excess of the purchase consideration transferred over the fair value of the identifiable assets acquired and liabilities assumed. The factors that contribute to the recognition of goodwill, which may also influence the purchase price allocation, include Western Coal's (i) historical cash flows and income levels, (ii) reputation in its markets, (iii) strength of its management team, (iv) efficiency of its operations, and (v) future cash flows and income growth projections. Goodwill has preliminarily been assigned to the Canadian and U.K. Operations segment and the U.S. Operations segment in the amounts of $227.8 million and $21.6 million, respectively. None of the goodwill is expected to be tax deductible. The Company incurred acquisition costs related to the purchase of approximately $7.2 million and $17.1 million during the three and six months ended June 30, 2011, respectively, which are included in selling, general and administrative expenses within our Condensed Consolidated Statements of Operations.

        The amounts of revenue and earnings of Western Coal included in the Company's condensed consolidated statement of operations from the acquisition date to the periods ending June 30, 2011 are as follows (in thousands):

	Three and six months ended June 30, 2011
Revenues	$	306,365
Net income	$	7,479

        The unaudited supplemental pro forma information presented below includes the effects of the Western Coal acquisition as if it had been completed as of January 1, 2010. The pro forma results include (i) the impact of certain estimated fair value adjustments, including additional estimated depreciation and depletion expense associated with the acquired mineral interests and property, plant and equipment and (ii) interest expense associated with debt used to fund the acquisition. The pro forma results for the six months ended June 30, 2010 include adjustments for the financial impact of certain acquisition related items incurred during the six months ended June 30, 2011. Accordingly, the following unaudited pro forma financial information should not be considered indicative of either future results or results that might have occurred had the acquisition been consummated as of January 1, 2010 (in thousands):

			Six months ended June 30,
	Three months ended June 30, 2010
			2011		2010
Revenues	$	608,859	$	1,405,942	$	1,051,079
Net income	$	101,967	$	232,225	$	108,034

        North River Mine    On May 6, 2011 the Company acquired the existing North River thermal coal mine in Fayette and Tuscaloosa Counties of Alabama from a subsidiary of Chevron Corporation for approximately $1.1 million in cash and the assumption of certain liabilities totaling approximately $90.9 million including a $70.0 million below-market coal sales contract liability. The below-market contract has a remaining term of 32 months and such contracts acquired in a business combination are capitalized at their fair value and amortized into revenue over the tons of coal sold during the contract term. The Company has preliminarily recognized goodwill of $1.6 million. None of the goodwill is expected to be tax deductible. The purchase consideration has been preliminarily allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition and remain subject to change. The inclusion of this business for the current period did not have a material impact on either the Company's revenues or operating income, and the Company does not expect the results of this business to have a material impact on future operating results.