According to the Rev Awdry's notes, and subsequently books release by his son Christopher, The Fat Controller (aka Sir Topham Hatt) ordered a 4-4-2 Atlantic, but instead got a 4-6-0/4-6-2 (see below) based on stolen blueprints which were rejected by the original designer.
The Welsh coal was a story line in Awdry's original books too. The story originally made it to TV in the first season of Britt Alcroft's TV Series in 1984, at the time all episodes were based on the original books, it wasn't until the third season of production in the 1990's that Britt started taking more creative license and writing her own episodes to intertwine with the original stories. That being said the tv series was not always consistent in their portrayal of engine modifications due to the way it was produced. They would basically break all the stories down by location of each scene and film them all at one time, for example all the scenes filmed at "the big station" (aka Tidmouth) for an entire season were filmed at one time, then the set was deconstructed and the next one constructed, all those scenes filmed, and so on. As such there were occasions where extra footage was needed as filler and you'd occasionally see recycled footage, or things were missed from time to time - when watching the original series from the 80s and early 90s, and even into the early 2000's before the CGI came into play you can see all sorts of inconsistencies like this (in particular the number of cars being pulled often changes between camera views and locations)
The reason behind Henry's rebuild was a point of contention between Awdry and his original illustrator. If you go back and look at the original Railway Series books, Henry changed shape and color quite often, despite Awdry providing the illustrator with a model to follow. He would randomly change between blue and green, and sometimes was a 4-6-2 or 4-6-0 (even within the same story - referenced in an interview one time as the world's only retractable truck on a steam engine)
The Welsh Coal/Flying Kipper stories were an attempt by Awdry around the time his original illustrator quit (over a dispute about Percy looking nothing like his model either, the "Wooly Caterpillar" story was actually based on something Awdry had said to the original illustrator), to explain with some sense why Henry changed shape one final time when his new illustrator would finally start drawing him consistently.
For more info on Henry (Especially the "wait, what?" moments): see
http://www.pegnsean.net/~railwayseries/henry.htm
I couldn't tell you what's happened on the Island of Sodor since the late '90s as I haven't watched Thomas since HiT took over and went CGI. If you really want to know what happened on the Island of Sodor you really need to buy the original Railway Series books - there's a really nice all-in-one copy that was still a good read when I was in my 20's.