By Tracy Rucinski and Jim Christie

(Reuters) - Bankrupt coal company Peabody Energy won U.S. court approval on Wednesday for agreements with three states to partially cover $1.14 billion in potential environmental liabilities and for a bonus plan for its six top executives.

Under the agreements, Wyoming can receive $127 million in cash if Peabody walks away from its mine cleanup obligations in the state while in bankruptcy, while New Mexico would receive $32 million and Indiana would get $17 million.

Until now those liabilities were covered by a federal program known as self-bonding. It allows the largest miners to extract coal without setting aside cash or collateral. The program is currently under review.

Peabody's agreements with Wyoming, New Mexico and Indiana are similar to deals reached by bankrupt coal miners Arch Coal and Alpha Natural Resources on self-bonds in Wyoming and West Virginia.

Peabody also overcame objections by funds affiliated with the United Mine Workers of America to its executive bonus plan.

The plan and another incentive plan for non-insider employees proposed setting aside up to $16.2 million in bonuses.

Peabody's executive leadership team would be eligible for the bonuses if they hit performance targets through the end of next year.

The funds had argued the bonuses for the executives were unfair and retentive in nature.

Bonus plans in bankruptcies routinely come under scrutiny, especially by the U.S. trustee, over concerns they are mainly intended to keep insiders from quitting.

Bonus plans emerged as an alternative way to reward company leaders after changes to the U.S. bankruptcy code in 2005 essentially abolished retention payments for top executives while companies were slashing payrolls.

To win court approval, debtors must prove the plans pay for performance rather than simply substitute for retention payments.

Hurt by weak prices for coal and unable to service $10.1 billion in debt, much of it incurred to finance expansion into Australia, Peabody filed for bankruptcy in April.

The case is In re Peabody Energy Corp, in U.S. Bankruptcy Court, Eastern District of Missouri, No. 16-42529-399.

(Reporting by Jim Christie; Editing by Tom Brown)