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PEABODY

Weighed down by debt used to make the purchase, squeezed by low shale gas prices and faced with declining coal use in a more climate-conscious world, St. Louis-based Peabody filed for Chapter 11 bankruptcy protection on April 13, 2016. Shown here are Peabody operations in Campbell County, Wyoming. (Credit: Peabody Energy)

Fred Palmer is an unlikely dissident.

As a senior vice president of Peabody Energy, he worked the corridors of power on behalf of the world’s largest coal company.

Now his former employer is in bankruptcy and Palmer feels betrayed — not by the legal system or any of the bureaucrats he used to lobby, but by Peabody’s own management.

Palmer retired in 2014 after running Peabody’s government relations for 13 years. The stock he accumulated during those years would be worthless under a reorganization plan that Peabody submitted last month. He also benefits from a supplemental pension plan that Peabody wants to cancel, making him an unsecured creditor.

Palmer has continued to follow the fortunes of the coal industry in general and Peabody in particular, and he is convinced that the pain being imposed on him — and other shareholders and creditors — is unnecessary.

In a letter to the U.S. bankruptcy court, Palmer argues that Peabody should resolve its Chapter 11 case by simply reinstating all of its existing debt. Coal prices have improved so much in the past nine months that, according to his analysis, Peabody can earn more than enough to pay everything it owes.

Peabody maintains otherwise. Its plan calls for canceling $6.6 billion in debts as “a necessary step for the company’s financial health.” It also would wipe out existing shares.

When Palmer reads the court documents, he keeps coming back to one question: Why does Peabody assume far lower coal prices than the ones prevailing today? “The business plan was filed in July 2016 and they have not changed it,” he told me. “The business plan is a fundamentally flawed document intended to mislead and confuse.”

He’s not the only one making that allegation. “The plan was based on information that’s completely outdated,” says Mark Gottlieb, a New Jersey investor who owns Peabody convertible bonds. “Coal assets have come back big time, and other coal stocks have gone through the roof.”

Albert Kello, a shareholder in Adelaide, Australia, charges that Peabody executives allied themselves with a group of hedge funds, including Elliott Management and Aurelius Capital Management, that own large amounts of Peabody bonds.

Under the reorganization plan, the hedge funds would end up with significant stakes in a recapitalized Peabody, including the right to buy more shares at a discount. Ten percent of the new shares would be reserved for a management incentive plan, with 2.5 percent able to be issued as soon as Peabody emerges from bankruptcy.

Peabody estimates that the new shares will be worth $3.1 billion, or less than half as much as the $6.6 billion in debt it wants to cancel. Kello thinks they’re worth far more.

“It’s phenomenal what 10 percent of Peabody could be worth, and that’s what motivates the senior management team,” Kello said. “They are undervaluing the company deliberately and with malice.”

Palmer, the old Peabody powerbroker, is also angry. He now lives in Washington, D.C., but he’s returning to St. Louis on Thursday for a bankruptcy hearing. Judge Barry Schermer will consider a request to appoint an official equity committee, a step that many shareholders believe could save them from being wiped out.

Palmer hopes to make his case that the company is now valuable enough to make everyone whole. To do that, he’ll have to attack his former colleagues and the plan they prepared.

“I think it’s offensive, I think it’s illegal and I’m going to get my day in court,” Palmer said.

David Nicklaus is a business columnist for the St. Louis Post-Dispatch.