INCESTUOUS DEALINGS AT SAGO
© by Mark Reutter
Posted 11/17/06
The $2 million-a-year advisory services agreement between Wilbur Ross’ buyout firm and ICG – first disclosed by this website – has become a focal point of lawsuits filed by relatives of the miners killed in the Sago Mine disaster.
Fifteen months before the Sago explosion and cave-in, ICG hired Ross and his private equity firm, W.L. Ross & Co. (WLR), to provide advisory management services to the coal company.
Based on the contract terms, ICG had already funneled $3 million to Ross directly and to other “key personnel” of WLR when an abandoned section of the Sago mine exploded on January 2, 2006, blowing out a seal and trapping 12 miners in a passageway surrounded by toxic fumes and smoke. Eleven of the miners were found dead of carbon monoxide poisoning when rescuers reached them 41 hours after the blast. Only Randal McCloy Jr. survived.
After the explosion, Ross repeatedly stated that Sago Mine was “fundamentally safe.” For example, he told ABC News that he and his aides were “comfortable” with sending men two miles underground into an old coal seam “based on the assurances from our management that they felt that it was a safe situation.”
But whose management is “our management”?
Ross was not some absentee landlord passively investing in a few coal mines. Having established ICG in 2004 out of the bankrupt holdings of Horizon Natural Resources, Ross was aggressively seeking to consolidate the coal fields into a powerful entity to rival producers Consol and Massey Energy. Thanks to the 2004 management agreement, Ross and his “key personnel” were paid a substantial sum to do this.
The agreement provides Ross and WLR with a $14-million income stream over the contract’s seven-year life. The terms are very specific: ICG, for example, is contractually obliged to pay WLR $500,000 per quarter in advance of the quarter. This would indicate that Ross’ firm had received payment for the first quarter of 2006 just two days before Sago exploded.
The contract defined WLR’s advisory services as follows: “consulting and advisory services in connection with strategic and financial planning, investment management and administration and other matters relating to the business and operations of ICG of a type customarily provided by sponsors of U.S. private equity firms to companies in which they have substantial investments, including, without limitation, any such consulting or advisory services which the Board of Directors of ICG reasonably requests that WLR provide to ICG.”
The language is significant. It underscores that Ross and WLR will take a firm hand in the management of ICG “without limitation.”
Because Ross wore two hats – as chairman of WLR and as chairman of ICG – he would appear to have substantial, if not dominant, sway over the coal company’s policies.
WLR’s tentacles reached deeper into ICG. For example, the person who signed the advisory services contract on behalf of ICG was David L. Wax, who was both vice president of ICG and managing director of WLR.
WLR Senior Vice President Wendy L. Teramoto served as a director of ICG and chairman of Anker Coal Group, which on March 31, 2005, entered into a business combination agreement with ICG. Wilbur Ross had invested in Anker Coal Group starting in 1997 and controlled the company’s assets by 2002. Among Anker’s properties was the Sago Mine.
At the time of the Sago accident, the largest ICG stockholder was an investment entity controlled by Ross. WLR Recovery Fund II owned 19.1 million shares of ICG stock. Wendy Teramoto was the fund’s agent.
Bennett K. Hatfield served as the public face of International Coal Group during the drawn-out and ultimately unsuccessful attempt to rescue the Sago miners. A career coal executive, Hatfield had joined ICG as president and CEO on March 14, 2005, or 10 months before the explosion.
At the time of his hire, ICG was embarking on a major productivity and expansion drive to capture fuller profit margins from the rising price of Appalachian coal. Ross outlined ICG’s ambitious program for expansion, telling Fortune magazine in January 2006: “Sago produced 350,000 tons of coal last year, and we had planned on 900,000 tons this year.”
The man called upon to achieve this sharp increase in production was Ben Hatfield. And Hatfield’s employment agreement provided quite lavish compensation “upon the achievement of certain results measured by meeting certain EBITDA [earnings before interest, taxes, depreciation, and amortization] targets.”
On top of his yearly base salary of $500,000 – “subject to annual review by the board of directors” – Hatfield was guaranteed “no less than $500,000 per year” in bonuses in 2005 and 2006, according to SEC disclosure statements.
In addition, Hatfield was granted $3 million worth of term life insurance; $3.5 million of stock options, which vested in equal installments in 2005, 2006, 2007, and 2008; 206,250 restricted shares of common stock, vested in equal installments in 2006, 2007, and 2008; and 68,750 shares of common stock. Finally, ICG would pay the income tax gross-up “to make Mr. Hatfield whole for the income tax impact of the restricted and unrestricted shares of common stock received.”
According to Ken Ward Jr. of the Charleston Gazette, Sago Mine experienced many safety failures after the mine came under the umbrella of Hatfield’s leadership. There were three roof falls at Sago, for example, after ICG finalized its purchase of Anker in November 2005.
In inspections between October and December 2005, the U.S. Mine Safety and Health Administration issued 46 citations at Sago for a variety of safety violations. Inspectors listed 18 of these citations as “significant and substantial” violations of the law. In addition, the inspectors noted accumulations of explosive coal dust in the tunnels of the mine and faulted its emergency escapeways.
Early on the morning of January 2, 2006 – perhaps sparked by a lightning strike – a subterranean passageway in Sago Mine exploded, resulting in the greatest number of deaths in a West Virginia mine in 38 years.