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By Tracy Rucinski and Tom Hals
CHICAGO/WILMINGTON, Del. Feb 28 A year ago,
Peabody Energy Corp's chief executive was presiding
over $2 billion of losses as the world's largest private sector
coal miner spiralled into bankruptcy.
Now, CEO Glenn Kellow and other top executives stand to reap
tens of millions of dollars in stock bonuses under Peabody's
bankruptcy exit plan, which sets aside 10 percent of newly
minted shares for employees.
The executives would collect a big portion of that stock
when the company exits bankruptcy, expected in April. The shares
would be worth about $15 million for Kellow and between $3
million and $5 million for each of five other executives,
according to a company estimate.
But some shareholders and creditors who are challenging
Peabody in bankruptcy court say the executives could reap a much
bigger windfall. That's because Peabody's estimate severely
undervalues the stock, they argue.
The company's valuation, they contend, fails to properly
reflect the impact of President Donald Trump's unexpected
election victory and regulatory changes in Beijing that have
stoked demand for coal in China.
The critics include hold-out creditors who complain they are
getting shorted by a deal hammered out by Peabody executives and
hedge funds that hold the bulk of the company's debt, which
totals about $8 billion. The funds - led by Elliott Management,
Discovery Capital Management and Aurelius Capital Management -
would benefit from a lower valuation because it would give them
more shares of the newly created Peabody stock, which will be
used to pay off their bonds.
"You'd think this was one of the hottest IPOs in the world,"
said Fredrick Palmer, who retired from Peabody in 2014 as a
senior vice president and will be left with Peabody's old and
essentially worthless stock.
Some shareholders and creditors are expected to oppose
Peabody's Chapter 11 exit plan when the company seeks approval
from the U.S. Bankruptcy Court in St. Louis in March.
By any estimate, the stock in Peabody's management incentive
plan is unusually valuable for a bankrupt company.
Peabody predicts it will be worth $310 million based on a
$3.1 billion market capitalization, a figure the company said is
appropriate given the volatile nature of global commodity
Critics contend the stock could be worth up to three times
that amount. Palmer estimates the initial stock award to Kellow
could be worth as much as $43.5 million. That would top all
restricted stock grants in 2015 by U.S. public companies with at
least $1 billion in revenue, according to a survey by the
Equilar consulting firm.
Peabody spokesman Vic Svec disputed Palmer's estimate and
said that one-time bankruptcy exit awards should not be compared
with other companies' annual stock grants. Peabody followed
widely accepted pay practices for companies in Chapter 11, Svec
said, and offers stock grants to all 7,000 of its employees.
Companies emerging from bankruptcy generally give stock to
executives to align the interests of management with new
shareholders, who are usually former creditors. The percentage
of stock being granted to Peabody executives is standard for a
company exiting Chapter 11, according to John Dempsey, a partner
at the Mercer consulting firm.
AN UNLIKELY RALLY IN COAL
The potentially high stock value stems from an unexpectedly
positive near-term outlook for the coal industry, based in part
on Trump's promises of deregulation.
"Many coal companies were convinced that Hillary Clinton
would seek to destroy the industry," said Nathan Yates, director
of research at Forward View Consulting.
For a bankrupt company, Peabody has drawn unusually high
interest among investors. The company's bonds rallied in recent
months, and the miner was able to easily raise money in
financial markets. Creditors including the Appaloosa Management
hedge fund sued so they could get access to Peabody's new stock.
Prices for seaborne coal, which Peabody produces from
Australian mines, rose sharply in the second half of last year,
driven by higher demand from China after the government there
closed money-losing coal mines. That sparked a rally in the
shares of miners such as Cloud Peak Energy Inc and
Australia's Whitehaven Coal Ltd.
Long-term prospects for the coal industry, however, remain
uncertain. The Chinese government has for years worked toward
cleaner energy to ease choking smog in cities and is now
considering cuts to coal-consuming heavy industries.
It also remains unclear how Trump policy changes would make
coal cheaper than abundant U.S. natural gas.
At Peabody's estimated value, the company would start
trading with a market capitalization just below the industry
leader, CONSOL Energy Inc, which is shifting from coal
to natural gas production.
Kellow and his management team will have to wait one year
before they can sell a portion of their incentive-plan stock and
three years before they can sell all of it.
SURVIVING CHAPTER 11
Surviving the bankruptcy at all is a victory for Peabody
executives. Top managers are often shown the door when a company
declares Chapter 11.
Many energy producers, however, retained executives during
the recent wave of industry bankruptcies, which many boards of
directors blamed on a once-in-a-generation price collapse rather
Kellow joined Peabody from BHP Billiton Ltd in 2013
and took the helm in May 2015, after the industry had slumped on
weak China demand and a shift by U.S. power plants away from
coal to cheap natural gas.
In his first three years, as the company stumbled, the board
awarded Kellow restricted stock worth a combined $6.58 million,
as part of his overall pay of $14.37 million.
Those shares were rendered essentially worthless by the
bankruptcy, but the company replaced much of the lost
compensation with a plan that could allow up to $11.9 million in
cash bonuses for executives, including up to about $4 million
The cash bonuses would be paid in addition to the stock
awards that executives stand to collect. Peabody said the cash
bonus plan, which is based on 2016 and 2017 performance
benchmarks, was in line with other bankrupt companies.
For both the stock and cash incentives, creditors had the
chance to object when the plans were negotiated, said Jonathan
Lipson, a professor at Temple Law School.
"The creditors apparently accepted it," he said, "and it's
(Reporting by Tracy Rucisnki and Tom Hals; Editing by Noeleen
Walder and Brian Thevenot)