NOTE 3—Acquisitions

Western Coal Corp. On November 18, 2010, the Company announced its intent to acquire all of the outstanding common shares of Western Coal. Through this acquisition, the Company acquired high quality metallurgical coal mines in Northeast British Columbia (Canada), high quality metallurgical coal and compliant thermal coal mines located in West Virginia (United States), and a high quality anthracite coal mine 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-quality metallurgical 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 $11.50 Canadian dollars per share in two separate transactions. On December 2, 2010, the Company entered into an arrangement agreement with Western Coal to acquire all the remaining outstanding common shares of Western Coal for $11.50 Canadian dollars 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 $314.2 million on April 1, 2011. The Company recognized a gain on April 1, 2011 of $20.5 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 Consolidated Statements of Operations for the year ended December 31, 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 $2.7 billion credit facility discussed in Note 14. 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 outstanding warrants of Western Coal were not directly affected by the acquisition. Instead, upon exercise each warrant entitled the holder to receive cash and shares of Walter Energy common stock that would have been issued if the warrants had been exercised immediately before closing the acquisition. During the year ended December 31, 2012, the warrants were exercised (or expired) resulting in a cash payment of $11.5 million and the issuance of 18,938 additional shares of common stock. As of December 31, 2012 no warrants of Western Coal were outstanding.

The purchase consideration has been allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. Fair values were determined using the income, cost and market price valuation methods as deemed appropriate. During the 2012 first quarter, the Company completed the valuation of the assets and liabilities with the assistance of an independent third party and recorded refinement adjustments to the preliminary purchase price allocation. These refinements were primarily around the areas of acquired mineral interests including estimates for future costs, production volumes and timing which resulted in a $94.0 million increase in fair value allocated to mineral interests as compared to the December 31, 2011 preliminary fair value. This also resulted in a decrease in goodwill of $57.8 million and the deferred tax liability was increased by $25.5 million reflecting an increase in future depletion expense not deductible for tax. Retrospective application of the changes made to the allocation of the purchase consideration in the 2012 first quarter increased retained earnings, a component of stockholders' equity, as of December 31, 2011 and net income for the year ended December 31, 2011 by $14.4 million. The increase to retained earnings resulting from the change in net income was primarily due to a decrease in mineral interests depletion related to 2011.

The following table summarizes the Company's recast and previously reported December 31, 2011 Consolidated Balance Sheet amounts (in thousands):

	Recast December 31, 2011(1)		December 31, 2011(2)

ASSETS
Inventories	$	240,437	$	242,607
Other current assets	$	45,649	$	45,627
Mineral interests, net	$	3,056,258	$	2,946,113
Property, plant and equipment, net	$	1,631,333	$	1,637,182
Goodwill	$	1,066,754	$	1,124,597
LIABILITIES AND STOCKHOLDERS' EQUITY
Other current liabilities	$	63,757	$	59,827
Deferred income taxes	$	1,029,336	$	1,003,383
Retained earnings	$	744,939	$	730,517

(1): As presented in the accompanying consolidated financial statements contained herein within this Form 10-K.
(2): As previously presented in the 2011 consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

The following table summarizes the Company's recast and previously reported December 31, 2011 Consolidated Statement of Operations amounts (in thousands):

	Recast December 31, 2011(1)		December 31, 2011(2)

For the year ended:
Depreciation and depletion	$	230,681	$	245,509
Operating income		573,431		558,603
Income from continuing operations before income tax expense		494,823		479,995
Income tax expense		131,225		130,819
Income from continuing operations		363,598		349,176
Net income		363,598		349,176
Net income per share:
Basic	$	6.03	$	5.79

Diluted	$	6.00	$	5.76

(1): As presented in the accompanying consolidated financial statements contained herein within this Form 10-K.
(2): As previously presented in the 2011 consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

The following table summarizes the Company's recast and previously reported December 31, 2011 Consolidated Statement of Cash Flows amounts (in thousands):

	For the year ended December 31,

	Recast 2011(1)		2011(2)
Net Income	$	363,598	$	349,176
Adjustments to reconcile net income to net cash flows provided by (used in) operating activities:
Depreciation and depletion	$	230,681	$	245,509
Deferred income tax credit	$	66,803	$	66,397

(1): As presented in the accompanying consolidated financial statements contained herein within this Form 10-K.
(2): As previously presented in the 2011 consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

The following tables summarize the purchase consideration, the preliminary purchase price allocation reported in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011, the final purchase price allocation, and the applicable recast adjustments made upon finalization during the quarter ended March 31, 2012 (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		34,765

Fair value of consideration transferred		3,431,971
Fair value of equity interest in Western Coal held before the acquisition		314,231

Total consideration	$	3,746,202

	Preliminary December 31, 2011		Recast Adjustments			Final

Fair value of assets acquired and liabilities assumed:
Cash and cash equivalents	$	34,065	$	—		$	34,065
Receivables		163,668		—			163,668
Inventories		121,229		—			121,229
Other current assets		86,475		23			86,498
Mineral interests		2,992,000		94,000			3,086,000
Property, plant and equipment		560,894		(6,702	)		554,192
Goodwill		1,122,884		(57,844	)		1,065,040
Other long-term assets		54,150		—			54,150

Total assets		5,135,365		29,477			5,164,842

Accounts payable and accrued liabilities		184,983		—			184,983
Other current liabilities		82,175		3,930			86,105
Deferred tax liability		1,021,161		25,547			1,046,708
Other long-term liabilities		100,844		—			100,844

Total liabilities		1,389,163		29,477			1,418,640

Net assets acquired	$	3,746,202	$	—		$	3,746,202

Goodwill represents the excess of the purchase consideration transferred over the fair value of the identifiable assets acquired and liabilities assumed. The Company recognized goodwill of $1.1 billion. Goodwill was assigned to the Canadian and U.K. Operations segment and the U.S. Operations segment in the amounts of $992.4 million and $72.6 million, respectively. None of the goodwill is deductible for income tax purposes. The Company incurred acquisition costs related to the purchase of approximately $23.2 million during the year ended December 31, 2011, which is included in selling, general and administrative expenses in the Company's Consolidated Statements of Operations.

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 year ended December 31, 2010 include adjustments for the financial impact of certain acquisition related items incurred during the year ended December 31, 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):

	For the years ended December 31,

	Recast 2011		2010
Total revenues
As reported(1)	$	2,571,358	$	1,587,730
Pro forma	$	2,795,566	$	2,358,040
Income (loss) from continuing operations
As reported(1)	$	363,598	$	389,425
Pro forma	$	418,419	$	342,693

(1): As presented in the accompanying consolidated financial statements contained herein within this Form 10-K.

North River Mine On May 6, 2011, the Company acquired the North River thermal coal mine in Fayette and Tuscaloosa Counties of Alabama from a subsidiary of Chevron Corporation for $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 fourteen months as of December 31, 2012. Contracts acquired in this acquisition are recorded at fair value and are amortized into revenues over the tons of coal sold during the contract term. The Company recognized goodwill of $1.7 million. The purchase consideration has been allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. The results of this operation have been included in the consolidated financial statements of the Company since the acquisition date.

HighMount Exploration & Production Alabama, LLC On May 28, 2010, the Company acquired HighMount Exploration & Production Alabama, LLC's ("HighMount") coal bed methane business for a cash payment of $210.0 million and renamed the business Walter Black Warrior Basin, LLC ("WBWB"). The fair value of the assets acquired and liabilities assumed totaled $217.6 million and $7.6 million, respectively. The Company incurred acquisition costs related to the purchase of approximately $2.7 million, which is included in selling, general and administrative expenses in the Company's Consolidated Statement of Operations. The acquisition of the coal bed methane operations included 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 in Alabama. Current proven reserves are approximately 47 bcf (billion cubic feet), with annual coal bed methane production of approximately 5.8 bcf expected. The acquisition of this natural gas business, included in the U.S. Operations segment, helps ensure that future coal production areas will be properly degasified, thereby improving safety and operating efficiency of the Company's existing underground metallurgical coal production.

WBWB's financial results have been included in the Company's financial statements since the date of acquisition. The inclusion of this business for did not have a material effect on either the Company's revenues or operating income and the Company does not expect the results of this business to have a material effect in the foreseeable future. Assets acquired and liabilities assumed were recorded at estimated fair value as of the acquisition date. Fair values were determined using the income, cost and market price valuation methods as deemed appropriate. The following table summarizes the fair value of the assets acquired and liabilities assumed at the acquisition date (in thousands):


Fair value of assets acquired and liabilities assumed:
Receivables	$	5,439
Other current assets		340
Property, plant and equipment		210,323
Identifiable intangible asset		1,505

Total assets		217,607

Accounts payable & accrued liabilities		(4,282	)
Asset retirement obligations		(3,361	)

Total liabilities		(7,643	)

Net assets acquired	$	209,964