In re Alpha Natural Res., Inc.

• Court: U.S. Bankruptcy Court — Eastern District of Virginia
• Writing for the Court: Kevin R. Huennekens, UNITED STATES BANKRUPTCY JUDGE
• Citation: In re Alpha Natural Res., Inc., 546 B.R. 348 (Bankr. E.D. Va. 2016)
• Decision Date: 24 February 2016
• Docket Number: Case No. 15–33896–KRH
• Parties: In re: Alpha Natural Resources, Inc., et al., Debtors.

546 B.R. 348

In re: Alpha Natural Resources, Inc., et al., Debtors.

Case No. 15–33896–KRH

United States Bankruptcy Court, E.D. Virginia, Richmond Division.

Signed February 24, 2016

Carl E. Black, David G. Heiman, Thomas A. Wilson Jones Day, Cleveland, OH, Tyler P. Brown, Shannon Eileen Daily, Henry Pollard Long, III, Justin F. Paget, Hunton & Williams, LLP, Richmond, VA, Jeffrey B. Ellman, Jones Day, Atlanta, GA, Robert W. Hamilton, Jones Day, Columbus, OH, for Debtors.

MEMORANDUM OPINION

Kevin R. Huennekens, UNITED STATES BANKRUPTCY JUDGE

On August 3, 2015 (the "Petition Date"), Alpha Natural Resources, Inc., and 149¹ of its direct and indirect subsidiaries (the "Debtors") commenced these bankruptcy cases by each filing a separate voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Virginia.² The Debtors continue to manage their properties and operate their businesses as debtors in possession pursuant to §§ 1107 and 1108 of the Bankruptcy Code. No trustee or examiner has been appointed in these Chapter 11 cases. On August 5, 2015, the Court entered an order authorizing the joint administration of these Chapter 11 cases.³

This matter comes before the Court on the motion (the "Motion") of the Debtors for entry of an order (i) authorizing payments to executive insiders under the Debtors' 2015 Annual Incentive Bonus Plan (the "AIB") and (ii) approving the Debtors' Key Employee Incentive Plan (the "KEIP").⁴ The 2015 AIB component of the Debtors' Motion asked the Court for authorization in the ordinary course of its business to pay eight of the Debtors' executive insiders incentives that had been earned pre-petition under the Debtors' longstanding AIB program. The Court approved the AIB component of the Debtors' Motion on an uncontested basis. The KEIP component of the Debtors' Motion sought to incentivize the Debtors' senior management team to meet and exceed certain performance goals. Senior management members would receive monetary rewards based on the performance of the Debtors and the completion of other restructuring milestones.

The Office of the United States Trustee (the "U.S. Trustee"), the United Mine Workers of America (the "UMWA"), and six UMWA associated health and retirement funds (the "UMWA Funds") filed objections to the KEIP (together, the "Objectors" or the "Objections"). The Official Committee of Unsecured Creditors (the "Creditors' Committee"), the Official Committee of Retired Employees (the "Retiree Committee"),⁵ the Debtors' post-petition lenders,⁶ the Debtors' first-lien lenders, and the Debtors' second-lien lenders (all of which have played an active role in these jointly administered cases) did not object to the KEIP. On January 22, 2016, the Court conducted an evidentiary hearing to consider granting the KEIP Motion (the "Hearing"). At the conclusion of the Hearing, the Court overruled the Objections and approved the KEIP. Accordingly, the Court entered an order approving the 2015 AIB payments and the KEIP on January 27, 2016 (the "KEIP Order"). This Memorandum Opinion sets forth the Court's findings of fact and conclusions of law supporting the KEIP Order in accordance with Rule 7052 of the Federal Rules of Bankruptcy Procedure.⁷

Jurisdiction and Venue

The Court has subject matter jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 157 and 1334 and the General Order of Reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A). Venue is appropriate in this Court pursuant to 28 U.S.C. § 1408.

Factual Background

The Debtors are the largest domestic producers of coal by volume in the United States and are headquartered in Bristol, Virginia. As of the Petition Date, the Debtors employed almost 8,000 full time employees across many different states; the UMWA represents approximately 1,000 of these employees. On a consolidated basis, the Debtors had total assets of $10.1 billion and liabilities of $7.1 billion as of the Petition Date. The Debtors had consolidated 2014 revenues of 4.3 billion.⁸

Prior to the Petition Date, the Debtors had offered two annual employee incentive programs for certain eligible employees. The AIB had been used for approximately eleven years and rewarded many support and operational staff with a bonus based on the Debtors' performance relative to a number of financial and operational metrics. The different metrics were assigned a certain weight that determined the amount of the bonus. The metrics included: (i) safety (7.5%); (ii) environmental compliance (7.5%); (iii) adjusted EBITDA ⁹ (40%); (iv) liquidity (10%); (v) gross debt reductions (10%); and (vi) expense reductions (25%). An independent compensation committee of the Alpha Board of Directors (the "Compensation Committee") designed and approved the AIB. The Debtors' recently transitioned many of their employees to the Operational Safety and Environmental Bonus ("OSEB") program. This program distributes a quarterly bonus to all of the Debtors' non-union hourly employees based on environmental and safety metrics in accordance with the performance of the employee's individual work site. On the Petition Date, the Debtors filed a motion (the "Wage and Benefit Motion") to continue payments under the AIB and OSEB. The Court granted the Wage and Benefit Motion on a final basis by order entered September 3, 2015.¹⁰

The Debtors have also compensated a number of important employees through a Key Employee Retention Program (the "KERP"). Prior to the Petition Date, and as the coal industry continued to decline, the Debtors had increasingly relied on retention agreements to combat the departures of key employees. Following the Petition Date, the Debtors sought the authority to continue the practice of entering into retention agreements in the ordinary course of business. However, as the Bankruptcy Code clearly prohibits purely retentive agreements for "insiders," the Debtors excluded eight members of the Debtors' senior management team from the KERP (the "Executive Insiders"). See 11 U.S.C. §§ 101(31), 503(c)(1). The U.S. Trustee filed an objection to the KERP on the principal basis that additional employees should be excluded from the KERP because they too should be deemed "insiders" under the Bankruptcy Code and thus ineligible to participate in the KERP.¹¹ See 11 U.S.C. §§ 101(31), 503(c)(1). The Debtors resolved the U.S. Trustee's objection by excluding seven additional individuals from the KERP (the "Non–Executive Insiders"). The eight Executive Insiders, and the seven additional Non–Executive Insiders that were all excluded from the KERP constitute the fifteen KEIP participants (the "KEIP Participants").

The KEIP Participants have historically received three principal forms of compensation: (i) base salary; (ii) cash bonuses through the AIB and/or the KERP; and (iii) equity awards. The equity awards constituted the bulk of the compensation for the KEIP Participants. On average the equity awards composed 46% of the Executive Insiders' total compensation, and 35% of the Non–Executive Insiders' total compensation. After the Debtors' bankruptcy, these equity rewards have little or no value. Following the Petition Date, the KEIP Participants will no longer receive cash bonuses under the AIB or the KERP. Going forward, compensation of the KEIP Participants will consist only in the form of base salary unless the Court approves the KEIP.

The Debtors' KEIP was designed and approved by the Debtors' Compensation Committee. The Debtors' Compensation Committee consists of three independent board members. The Compensation Committee complies with the independence requirements of the New York Stock Exchange (NYSE).¹² Since 2012, the Compensation Committee had retained Meridian Compensation Partners ("Meridian") to provide independent compensation advice to the Compensation Committee.¹³ To maintain their full independence, Meridian does not provide any other advice or services to the Debtors' management and only consults with the Compensation Committee.

To begin developing the outline of the Debtors' KEIP, Meridian looked for companies with a similar profile to the Debtors. Meridian targeted companies that had operated in a similar industry and that had a comparable amount of assets. Meridian initially identified forty-three companies that were potentially comparable to the Debtors. Meridian further narrowed this list to twenty comparable companies. Meridian then conducted significant research on the twenty remaining companies to develop a foundational design for what the Debtors' KEIP should look like. One of Meridian's goals was to identify other KEIPs that had been approved by bankruptcy courts in order to best fashion a KEIP that could ultimately obtain approval in this Court. For example, Meridian informed the Debtors' Compensation Committee that this Court had previously approved a KEIP in the James River Coal Company case. Meridian noted that the James River Coal Company KEIP had nine total participants, three different payout levels, and was contingent on the consummation of a Chapter 11 plan of reorganization or a sale of substantially all of the assets. Based on the data sets of the twenty different companies it had researched, Meridian developed preliminary metrics for the Debtors' KEIP. Four different categories of performance goals were suggested: (i) cost savings; (ii) EBITDA/liquidity; (iii) safety; and (iv) environmental compliance. The Debtors' financial turnaround advisor, McKinsey Recovery & Transformation Services U.S., LLC, ("McKinsey") then operationalized the savings and EBITDA/liquidity benchmarks in the Meridian model to ultimately determine targets the company would need to achieve in order for the KEIP Participants to earn an incentive award.

KEIP Specifications

The KEIP incorporates the four metrics that Meridian...