Employee Benefit Plans

12 Months Ended

Dec. 31, 2013

Employee Benefit Plans

Employee Benefit Plans

NOTE 15—Employee Benefit Plans

        The Company has various defined benefit pension plans covering certain U.S. salaried employees and eligible hourly employees. In addition to its own pension plans, the Company contributes to a multi-employer defined benefit pension plan covering eligible employees who are represented by the United Mine Workers of America ("UMWA"). The Company funds its retirement and employee benefit plans in accordance with the requirements of the plans and, where applicable, in amounts sufficient to satisfy the "Minimum Funding Standards" of the Employee Retirement Income Security Act of 1974 ("ERISA"). The plans provide benefits based on years of service and compensation or at stated amounts for each year of service.

• Defined Benefits Pension and Other Postretirement Benefit Plans

        The Company also provides certain postretirement benefits other than pensions, primarily healthcare, to eligible retirees. The Company's postretirement benefit plans are not funded. New salaried employees have been ineligible to participate in postretirement healthcare benefits since May 2000. Effective January 1, 2003 the Company placed a monthly cap on Company contributions for postretirement healthcare coverage.

        The Company is required to measure plan assets and liabilities as of the fiscal year-end reporting date. As of December 31, 2013 all of our pension plans, with the exception of the Salaried Pension Plan, have obligations that exceed plan assets and as of December 31, 2012 all of our pension plans were underfunded. The amounts recognized for all of the Company's pension and postretirement benefit plans are as follows (in thousands):

	Pension Benefits						Other Postretirement Benefits
	December 31, 2013			December 31, 2012			December 31, 2013			December 31, 2012
Accumulated benefit obligation	$	247,874		$	278,357		$	600,748		$	662,464
Change in projected benefit obligation:
Benefit obligation at beginning of year	$	295,944		$	258,780		$	662,464		$	577,918
Service cost		7,062			5,991			9,943			8,072
Interest cost		12,280			12,517			28,791			29,010
Actuarial (gain) loss		(37,873	)		29,933			(74,146	)		71,451
Benefits paid		(11,763	)		(11,501	)		(26,304	)		(23,987	)
Plan amendments		—			224			—			—
Benefit obligation at end of year	$	265,650		$	295,944		$	600,748		$	662,464
Change in plan assets:
Fair value of plan assets at beginning of year	$	232,960		$	202,537		$	—		$	—
Actual return on plan assets		35,788			28,499			—			—
Employer contributions		780			13,425			26,304			23,987
Benefits paid		(11,763	)		(11,501	)		(26,304	)		(23,987	)
Fair value of plan assets at end of year	$	257,765		$	232,960		$	—		$	—
Unfunded status of the plan	$	(7,885	)	$	(62,984	)	$	(600,748	)	$	(662,464	)
Amounts recognized in the balance sheet, pre-tax:
Other long-term assets	$	1,260		$	—		$	—		$	—
Other current liabilities		(7,089	)		(5,744	)		—			—
Accumulated postretirement benefits obligation
Current		—			—			(30,036	)		(29,200	)
Long-term		—			—			(570,712	)		(633,264	)
Other long-term liabilities		(2,056	)		(57,240	)					—
Net amount recognized	$	(7,885	)	$	(62,984	)	$	(600,748	)	$	(662,464	)
Amounts recognized in accumulated other comprehensive income, pre-tax
Prior service cost	$	994		$	1,257		$	7,641		$	8,871
Net actuarial loss		48,331			114,787			238,693			331,775
Net amount recognized	$	49,325		$	116,044		$	246,334		$	340,646

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

	Pension Benefits									Other Postretirement Benefits
	For the years ended December 31,									For the years ended December 31,
	2013			2012			2011			2013		2012		2011
Components of net periodic benefit cost:
Service cost	$	7,062		$	5,991		$	5,163		$	9,943	$	8,072	$	6,160
Interest cost		12,280			12,517			12,576			28,791		29,010		25,140
Expected return on plan assets		(16,941	)		(16,125	)		(15,717	)		—		—		—
Amortization of prior service cost (credit)		263			256			272			1,230		1,045		(961	)
Amortization of net actuarial loss		9,609			9,377			8,252			18,936		14,725		10,046
Settlement loss		—			—			1,807			—		—		—
Net periodic benefit cost for continuing operations	$	12,273		$	12,016		$	12,353		$	58,900	$	52,852	$	40,385

        The estimated portions of net prior service cost and net actuarial loss remaining in accumulated other comprehensive income that is expected to be recognized as components of net periodic benefit costs in 2014 are as follows (in thousands):

	Pension Benefits		Other Postretirement Benefits
Prior service cost	$	246	$	1,227
Net actuarial loss		2,566		15,570
Net amount to be recognized	$	2,812	$	16,797

        Changes in plan assets and benefit obligations recognized in other comprehensive income (loss) in 2013 are as follows (in thousands):

	Pension Benefits			Other Postretirement Benefits			Total
Current year net actuarial gain	$	56,721		$	74,146		$	130,867
Current year prior service cost		—			—			—
Amortization of actuarial loss		9,609			18,936			28,545
Amortization of prior service cost		263			1,230			1,493
Total		66,593			94,312			160,905
Deferred income taxes		(24,986	)		(35,027	)		(60,013	)
Total recognized in other comprehensive income (loss), net of taxes	$	41,607		$	59,285		$	100,892

        A summary of key assumptions used is as follows:

	Pension Benefits									Other Postretirement Benefits
	December 31,									December 31,
	2013			2012			2011			2013			2012			2011
Weighted average assumptions used to determine benefit obligations:
Discount rate		5.24	%		4.29	%		5.02	%		5.28	%		4.44	%		5.14	%
Rate of compensation increase		3.70	%		3.70	%		3.70	%		—			—			—
Weighted average assumptions used to determine net periodic cost:
Discount rate		4.29	%		5.02	%		5.30	%		4.44	%		5.14	%		5.35	%
Expected return on plan assets		7.50	%		7.75	%		7.75	%		—			—			—
Rate of compensation increase		3.70	%		3.70	%		3.70	%		—			—			—

	December 31,
	2013						2012						2011
	Pre-65			Post-65			Pre-65			Post-65			Pre-65			Post-65
Assumed health care cost trend rates at December 31:
Health care cost trend rate assumed for next year		7.00	%		7.00	%		7.50	%		7.50	%		8.00	%		8.00	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)		4.50	%		4.50	%		5.00	%		5.00	%		5.00	%		5.00	%
Year that the rate reaches the ultimate trend rate		2027			2027			2019			2019			2018			2018

        The discount rate is based on a yield-curve approach which matches the expected cash flows to high quality corporate bonds available at the measurement date. The model constructs a hypothetical bond portfolio whose cash flows match the year-by-year, projected benefit cash flow from the benefit plan. The yield on this hypothetical portfolio is the maximum discount rate used. The yield curve is based on a universe of bonds available from the Bloomberg Finance bond database at the measurement date, with a quality rating of AA or better by Moody's or S&P.

        The plan assets of the pension plans are held and invested by the Walter Energy, Inc. Subsidiaries Master Pension Trust ("Pension Trust"). The Pension Trust employs a total return investment approach whereby a mix of equity and fixed income investments are used to meet the long-term funding and near-term cash flow requirements of the pension plan. The asset mix strives to generate rates of return sufficient to fund plan liabilities and exceed the long-term rate of inflation, while maintaining an appropriate level of portfolio risk. Risk tolerance is established through consideration of plan liabilities, plan funded status and corporate financial condition. The investment portfolio is diversified across domestic and foreign equity holdings, and by investment styles and market capitalizations. Domestic equity holdings primarily consist of investments in funds invested in large-cap and mid-cap companies located in the United States managed to replicate the investment performance of industry standard investment indexes. Foreign equity holdings primarily consist of investments in domestically managed mutual funds located in the United States. Fixed income holdings are diversified by issuer, security type and principal and interest payment characteristics. Derivatives may be used to gain market exposure in an efficient and timely manner; however, derivatives may not be used to leverage the portfolio beyond the market value of the underlying investments. Fixed income and derivatives holdings primarily consist of investments in domestically managed mutual funds located in the United States. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual benefits liability measurements, and periodic asset/liability studies. Management believes the only significant concentration of investment risk lies in exposure to the U.S. domestic markets as compared with total global investment opportunities.

        The Pension Trust's strategic asset allocation targets for 2013 and the asset allocations as of December 31, 2013 and 2012 were as follows:

							Actual Allocation
	Strategic Allocation			Tactical Range
							2013			2012
Equity investments:
U.S. large-cap funds		38.5	%		30-47	%		39.0	%		37.3	%
International fund		13.0	%		10-16	%		14.3	%		13.3	%
U.S. mid-cap fund		8.5	%		6-11	%		9.7	%		9.6	%
Total equity investments		60.0	%		50-70	%		63.0	%		60.2	%
Fixed income investments		40.0	%		30-50	%		36.5	%		39.2	%
Cash		0.0	%		0-5	%		0.5	%		0.6	%
Total		100.0	%					100.0	%		100.0	%

        These ranges are targets and deviations may occur from time-to-time due to market fluctuations. Portfolio assets are typically rebalanced to the allocation targets at least annually.

        The fair values of the Pension Trust's assets, all of which are valued based on quoted market prices in active markets for identified assets (Level 1), were as follows (in thousands):

	December 31,
Asset Class:	2013		2012
Cash and cash equivalents	$	1,224	$	1,397
Equity investments(a):
U.S. large cap funds		100,384		86,892
International fund		36,812		31,038
U.S. mid-cap fund		25,143		22,368
Fixed income investments:
Intermediate-term bond(b)		34,091		85,814
Long-term bond(c)		60,111		5,451
Total	$	257,765	$	232,960

(a)

Equity investments include investments in domestic and international mutual funds investing in large- and mid-capitalization companies. Investments in mutual funds are valued at the net asset value per share multiplied by the number of shares held as of the measurement date and are traded on listed exchanges.

(b)

This fund seeks maximum total return through a diversified portfolio of fixed income instruments of varying maturities, which may be represented by forward or derivatives such as options, futures, contracts, or swap agreements. Fixed income instruments include bonds, debt securities and other similar instruments issued by various U.S. and non-U.S. public or private-sector entities. This fund also invests in high yield securities, mortgage-related securities and securities denominated in foreign currencies. This fund is valued at the net asset value per share multiplied by the number of shares held as of the measurement date and is traded on a listed exchange.

(c)

This fund invests in diversified portfolio consisting primarily of high-quality bonds and other fixed income securities, including U.S. government obligations, mortgage-and asset-backed securities, corporate and municipal bonds, and collateralized mortgage obligations of varying maturities. This fund is valued at the net asset value per share multiplied by the number of shares held as of the measurement date and is traded on a listed exchange.

        The expected long-term return on assets of the Pension Trust is established at the beginning of each year by the Company's Benefits Committee in consultation with the plans' actuaries and outside investment advisor. A building block approach is used in determining the long-term rate of return for plan assets. Historical market returns are studied and long-term risk/return relationships between equity and fixed income asset classes are analyzed. This analysis supports the widely accepted fundamental investment principle that assets with greater risk generate higher returns over long periods of time. The historical impact of returns in one asset class on returns of another asset class is reviewed to evaluate portfolio diversification benefits. Current market factors including inflation rates and interest rate levels are considered before assumptions are developed. The long-term portfolio return is established via the building block approach by adding interest rate risk and equity risk premiums to the anticipated long-term rate of inflation. Proper consideration is given to the importance of portfolio diversification and periodic rebalancing. Peer data and historical return assumptions are reviewed to check for reasonableness. For the determination of net periodic benefit cost in 2014, the Company will utilize an expected long-term return on plan assets of 7.25%.

        Assumed healthcare cost trend rates, discount rates, expected return on plan assets and salary increases have a significant effect on the amounts reported for the pension and healthcare plans. A one-percentage-point change in the rate for each of these assumptions would have had the following effects as of and for the year ended December 31, 2013 (in thousands):

	Increase (Decrease)
	1-Percentage Point Increase			1-Percentage Point Decrease
Healthcare cost trend:
Effect on total of service and interest cost components	$	7,468		$	(5,790	)
Effect on postretirement benefit obligation	$	78,720		$	(65,091	)
Discount rate:
Effect on postretirement service and interest cost components	$	(297	)	$	293
Effect on postretirement benefit obligation	$	(67,637	)	$	83,447
Effect on current year postretirement expense	$	(6,140	)	$	7,638
Effect on pension service and interest cost components	$	159		$	(272	)
Effect on pension benefit obligation	$	(27,881	)	$	33,879
Effect on current year pension expense	$	(2,978	)	$	3,547
Expected return on plan assets:
Effect on current year pension expense	$	(2,259	)	$	2,259
Rate of compensation increase:
Effect on pension service and interest cost components	$	631		$	(557	)
Effect on pension benefit obligation	$	4,929		$	(4,463	)
Effect on current year pension expense	$	1,058		$	(948	)

        The Company's minimum pension plan funding requirement for 2014 is approximately $1.1 million, which the Company expects to fully fund. The Company also expects to pay $30.0 million in 2014 for benefits related to its other postretirement benefit plans. The following estimated benefit payments from the plans, which reflect expected future service as appropriate, are expected to be paid as follows (in thousands):

	Pension Benefits		Other Postretirement Benefits Before Medicare Subsidy		Medicare Part D Subsidy
2014	$	20,326	$	32,158	$	2,121
2015	$	14,820	$	34,127	$	2,391
2016	$	14,772	$	36,056	$	2,650
2017	$	15,814	$	37,921	$	2,921
2018	$	16,516	$	39,824	$	3,222
Years 2019-2023	$	92,643	$	217,871	$	20,982

UMWA Pension and Benefit Trusts

        The Company is required under its agreement with the UMWA to contribute to multi-employer plans providing pension, healthcare and other postretirement benefits. The risks of participating in these multi-employer plans are different from single-employer plans in the following aspects:

• •

  Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers.

  •

  If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.

  •

  The Employee Retirement Income Security Act of 1974 ("ERISA"), as amended in 1980, imposes certain liabilities on contributors to multi-employer pension plans in the event of a contributor's withdrawal from the plan.

        At December 31, 2013, approximately 41% of Walter Energy's workforce was represented by the UMWA and covered under our collective bargaining agreement which began July 11, 2012 and expires December 31, 2016.

UMWA 1974 Pension Plan

        The Company is required under the agreement with the UMWA to pay amounts to the 1974 UMWA Pension Plan ("the 1974 Pension Plan") based principally on hours worked by UMWA represented employees. The required contribution called for by our current collective bargaining agreement is $5.50 per hour worked. This cost is recognized as an expense in the year the payments are assessed. The benefits provided by the 1974 Pension Plan to the participating employees are determined based on age and years of service at retirement. The Company was listed in the 1974 Pension Plan's Form 5500, filed April 15, 2013, as providing more than 5 percent of the total contributions for the 2012 plan year.

        As of June 30, 2013, the most recent date for which information is available, the 1974 Pension Plan was underfunded. This determination was made in accordance with ERISA calculations. In October 2013, the Company received notice from the trustees of the 1974 Pension Plan stating that the plan is considered to be "seriously endangered" for the plan year beginning July 1, 2013. The Pension Protection Act ("Pensions Act") requires a funded percentage of 80% be maintained for this multi-employer pension plan. If the plan is determined to have a funded percentage of less than 80% it will be deemed to be "endangered." The plan will be considered "seriously endangered", if the number of years to reach a projected funding deficiency equals 7 or less in addition to having a funded percentage of less than 80%, and if less than 65%, it will be deemed to be in "critical" status. The funded percentage certified by the actuary for the 1974 Pension Plan was determined to be 71.2% under the Pension Act.

        The Company faces risks and uncertainties by participating in the 1974 Pension Plan. All assets contributed to the plan are pooled and available to provide benefits for all participants and beneficiaries. As a result, contributions made by the Company benefit the employees of other employers. If the 1974 Pension Plan fails to meet ERISA's minimum funding requirements or fails to develop and adopt a rehabilitation plan, a nondeductible excise tax of five percent of the accumulated funding deficiency may be imposed on an employer's contribution to this multi-employer pension plan. As a result of the 1974 Pension Plan's "seriously endangered" status, steps must be taken to improve the funded status of the plan. In an effort to improve the plan's funding situation, the plan adopted a Funding Improvement Plan as of May 25, 2012. The Funding Improvement Plan states that the plan must avoid a funding deficiency for any plan year during the funding improvement period and improve the plan's funded status by at least 20% over a 15-year period. The Funding Improvement Period begins July 1, 2014 and ends June 30, 2029. The Funding Improvement Plan calls for increased contributions beginning January 1, 2017 and lasting throughout the improvement period so that the plan can meet the applicable benchmarks and emerge from seriously endangered status by the end of the Funding Improvement Period. The Funding Improvement Plan and the corresponding contribution schedules were updated on April 26, 2013, to reflect the experience of the plan.

        Under current law governing multi-employer defined benefit plans, if the Company voluntarily withdrew from the 1974 Pension Plan, the Company would be required to make payments to the plan which would approximate the proportionate share of the multiemployer plan's unfunded vested benefit liabilities at the time of the withdrawal. The 1974 Pension Plan uses a modified "rolling five" year allocation method for calculating an employer's withdrawal liability share of the unfunded vested benefits. An employer would be obligated to pay its pro-rata share of the unfunded vested benefits based on the ratio of hours worked by the employer's employees during the previous five plan years for which contributions were due compared to the number of hours worked by all the employees of the employers from which contributions were due. The 1974 Pension Plan's unfunded vested benefits at June 30, 2013 was $5.4 billion. The Company's percentage of hours worked during the previous five plan years to the total hours worked by all plan participants during the same period was estimated to be approximately 14%. The Company does not have any intention to withdraw from the plan; however, if we were to withdraw from the plan before July 1, 2014, the Company's estimated withdrawal liability would be approximately $760.0 million.

        The following table provides additional information regarding the 1974 Pension Plan as of December 31, 2013 (in thousands):

			Pension Protection Act Zone Status			Contributions of Walter Energy
	EIN/Pension Plan Number				FIP/RP Status Pending/Implemented							Surcharge Imposed	Expiration Date of Collective-Bargaining Agreement
Pension Fund			2013	2012		2013		2012		2011
United Mine Workers of America 1974 Pension Plan(1)		52-1050282/002	Yellow	Yellow	Yes	$	19,670	$	20,948	$	19,520	No		12/31/2016

(1)

The enrolled actuary for the 1974 Pension Plan certified to the U.S. Department of the Treasury and the plan sponsor that the plan is in "Seriously Endangered Status" for the plan year beginning July 1, 2013 and ending June 30, 2014. The plan adopted a funding improvement plan on May 25, 2012.

UMWA Benefit Trusts

        The Coal Industry Retiree Health Benefit Act of 1992 ("Coal Act") created two multiemployer benefit plans: (1) the United Mine Workers of America Combined Benefit Fund ("Combined Fund") into which the former UMWA Benefit Trusts were merged, and (2) the 1992 Benefit Fund. The Combined Fund provides medical and death benefits for all beneficiaries of the former UMWA Benefit Trusts who were actually receiving benefits as of July 20, 1992. The 1992 Benefit Fund provides medical and death benefits to orphan UMWA-represented members eligible for retirement on February 1, 1993, and who actually retired between July 20, 1992 and September 30, 1994. The Coal Act provides for the assignment of beneficiaries to former employers and the allocation of unassigned beneficiaries (referred to as orphans) to companies using a formula set forth in the Coal Act. The Coal Act requires that responsibility for funding the benefits to be paid to beneficiaries, be assigned to their former signatory employers or related companies. This cost is recognized as an expense in the year the payments are assessed. The Company's contributions to these funds for the years ended December 31, 2013, 2012 and 2011 were insignificant.

        The UMWA 1993 Benefit Plan is a defined contribution plan that was created as the result of negotiations for the National Bituminous Coal Wage Agreement (NBCWA) of 1993. This plan provides healthcare benefits to orphan UMWA retirees who are not eligible to participate in the Combined Fund, the 1992 Benefit Fund or whose last employer signed the 1993, or a later, NBCWA and subsequently goes out of business. Contributions to the trust under the 2011 labor agreement were $1.10 per hour worked by UMWA represented employees for the years ended December 31, 2013, 2012 and 2011. Total contributions to the UMWA 1993 Benefit Plan in 2013, 2012 and 2011 were $3.9 million, $4.2 million and $1.8 million, respectively.