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Former Peabody exec accuses company of 'gross breach' of duties to shareholders

Former Peabody Energy Corp. executive Fred Palmer is objecting to the company's plan of reorganization.

Palmer, once Peabody's senior vice president of government relations, filed a shareholder objection to the plan and a related disclosure statement in a detailed filing Jan. 20. In his objection, Palmer claims a plan to give management 10% ownership of the new Peabody by canceling the stock of existing shareholders is a "gross breach of debtor's fiduciary and trust duties."

Like other shareholders who have objected to the plan, Palmer insists there is value to be recovered from Peabody, the largest private-sector coal company in the world, now that the coal market has improved.

"Due to the marketplace's staggering improvement, Mr. Palmer assumed debtor would devise a reorganization plan that would allow it to emerge from bankruptcy while paying all creditors when due and preserving existing shareholders' equity," the filing states.

Palmer's filing said the former executive's efforts to reach out to management to urge a plan that supported shareholder value were rebuffed by management. Palmer believes recent coal price trends have been abnormal and Peabody is "consciously underestimating coal prices" to show a lower enterprise value for the company.

"The company and Mr. Palmer disagree on a number of issues, and he has not been engaged as an employee or consultant for some time," Peabody said in a statement. "The company is fully aware of our obligations and continues to uphold them."

Peabody has insisted in filings as recently as Jan. 17 that there is likely little value left for shareholders. In a challenge to the appointment of an equity committee, Peabody said projections that have found room for shareholders to recover value from the reorganization fail to account for several costs and make "inappropriate conclusions about where coal prices will stabilize and that such prices will be maintained without change."

U.S. Bankruptcy Court Judge Barry Schermer denied a request to appoint an equity committee in a written order Jan. 20, noting Palmer and other concerned shareholders had appeared before the court.

"Yesterday's court decision to not appoint an equity committee is consistent with the plan of reorganization as filed, which the company believes maximizes the value of the enterprise," Peabody said in a statement. "We continue to believe that Peabody Energy equity securities will be canceled and extinguished for no value on confirmation of the proposed plan of reorganization."

The motion to appoint an equity committee was led by Mangrove Partners Fund LP. However, Palmer's filing said the effort failed because Mangrove failed to present sufficient evidence. He claims Peabody's project enterprise valuation "is based on projections made by the same analysts that did not see the recent price spike coming."

"This case should not be resolved based on analysts' reports that favor the client who retained the analysts," Palmer's filing states. "Such a result would be a complete disservice to the integrity of the bankruptcy process itself and to the many stakeholders who are being economically harmed by debtor's utilization of flawed projections that reflect a world that will not exist. Having spent many years at Peabody watching decisions be made on investments and divestiture, Mr. Palmer can categorically state that while analysts' reports were considered, final decision-making was never based on an average of analyst projections."

In a supporting declaration filed by Peabody, Seth Schwartz, president of consulting firm Energy Venture Analysis, said it would be unreasonable to project prices to stabilize at the levels Mangrove had assumed in its projections.

"Industry analysts, including Wall Street and Australian analysts, all project that coal prices will decline well below the minimum sustainable levels required by the equity motion," Schwartz said.

Palmer said he is willing to work with the court to produce a special evidentiary hearing to help the court understand "why coal prices will stay elevated not just this year, but in the years beyond." The former Peabody executive is also calling for the court to demand management explain why the company's "extremely valuable" assets in Australia were not considered for sale to prevent the bankruptcy.

"On information and belief, Peabody's management has been actively working with certain preferred creditors to create an environment where markets are portrayed as worse than they are, and shareholders are consciously relegated to ultimate extinction by virtue of the structure of the plan presented," Palmer alleged. "Management's fiduciary obligations to shareholders, as well as its role as debtor-in-possession, require a full discussion regarding the efforts (if any) made to avoid bankruptcy and require full disclosure as to why a strategy based on Australian asset sales has never been proposed as a means to emerge from bankruptcy fully intact."

In a separate filing, the judge extended the challenge period deadline of the final debtor-in-possession order to March 8. Peabody did not immediately respond to a request for a comment on Palmer's objection.