Canton Repository

May 12, 2002

Steel makers trying to shed benefit costs 

By Paul M. Krawzak
Copley Washington correspondent

WASHINGTON — Two ailing steel makers might have found new ways around the vexing issue of legacy costs — the pension and health-care obligations to retirees that have acted like a ball and chain on some steel producers.

The plans could result in the loss of health benefits for thousands of retirees in Ohio, Indiana, Maryland, Pennsylvania
and other states where Republic Technologies International and Bethlehem Steel own plants. 

Republic and Bethlehem are hoping to avoid these obligations through innovative plans involving the creation of new
companies that would be free of the burdensome costs.

Under proposals still being negotiated, an investment firm would buy the bulk of Republic and continue operating it as a
new company, but without the responsibility to pay benefits currently owed to Republic retirees.

Bethlehem, meanwhile, is looking for partners to form joint ventures to operate Bethlehem plants. The joint ventures
would not have the obligation to pay for existing retiree benefits. Those obligations would remain with Bethlehem, which
hopes to generate at least some funding for benefits with revenues from the ventures.

If these experiments succeed, they could become a model — some say a dubious model — for other steel makers in crisis.

Other corporations have escaped their obligations through bankruptcy in the past, said Gary C. Hufbauer, a leading
economist on trade and steel issues. But the latest efforts from Republic and Bethlehem “are more deliberately crafted
to specifically shed these liabilities. So I think it raises it to a new height in terms of corporate planning.”

If the strategy succeeds, he added, it may be adopted not only by other steel companies but other firms outside the steel industry.

The Republic and Bethlehem approaches represent “a pattern that maybe is developing,” added Gary Hubbard, spokesman for the United Steelworkers. The union is supporting both companies’ efforts not because they are ideal, but because “we’re trying to prevent a total shutdown,” he said.

Republic, a privately held company, and Bethlehem, a publicly held corporation, have been struggling to survive since last year. They filed for Chapter 11 protection from bankruptcy, which gives them a respite from creditors as they attempt to reorganize into viable manufacturers.

The American steel industry welcomed the tariffs on foreign steel imposed by President Bush in March. At the same time,
steel-using companies complained the duties will increase their costs. The tariffs are designed to raise steel prices, which last year fell to their lowest levels in three decades. The tariffs also will reduce steel imports.

Despite the action taken by Bush, the obligation to pay benefits to retirees has remained a serious obstacle to financial health for many steel companies.

Over the years, these companies and unions negotiated generous pension and health-care benefits for retirees whose numbers grew into the thousands. In many cases, the companies failed to put away money to cover the future benefits. As a result, they have to pay them now with current income.

Partly as a result of its large unfunded legacy costs, Cleveland-based LTV Steel went belly up last year. No other steel
company was willing to buy it because of the heavy obligations to retirees that would come with the purchase.

When LTV liquidated, it left more than 80,000 retirees and their dependents in the lurch. The retirees will continue to
receive pensions from the Pension Benefit Guaranty Corp., a federal agency that insures pensions. But their health benefits are history.

Selma S. Bianchi, 82, is worried. “I’m disgusted with them,” she said of LTV, where her late husband worked. Mrs. Bianchi receives Medicare, the federal health insurance program for older Americans. The Canton woman has depended on health insurance from LTV to pay for her prescriptions. She estimates her medications will cost her hundreds of dollars a month without coverage.

“When they’re gone, I don’t know how I’ll get them,” she said.

LTV was one of the nation’s largest steel makers before its fall.

After it went out of business, thereby shedding its obligations to retirees, it became attractive to purchasers. Investor
Wilbur Ross bought the company for $80 million in April and reopened it earlier this month as International Steel Group.

Republic and Bethlehem, along with National Steel, Wheeling-Pittsburgh Steel Corp. and other struggling steel
companies, could go down just as LTV did.

Since the imposition of steel tariffs two months ago, steel interests have turned to their next priority: persuading Congress to take over the health care obligations of failing steel makers. Opponents warn that the government will set a dangerous precedent if it begins bailing out private insurance plans.

Government relief for legacy costs has less support than the tariffs did. Its prospects for winning passage in Congress are uncertain.

That leaves Republic and Bethlehem to come up with their own innovative approaches in the meantime.

In its proposal, Republic is asking a federal bankruptcy court to approve its sale to KPS Special Situations Fund, a New York investment firm. KPS, which declined to return phone calls for this story, proposes to acquire several of Republic’s plants and retain 2,500 of its 4,000 employees. KPS would operate the steel producer as a new company.

Bankrupt Republic would be left with the plants that KPS does not want, the obligations to retirees and debts owed to creditors. Although Republic’s future is unclear, it is likely to liquidate its assets to pay its debts.

Bethlehem is looking for partners with whom it would establish joint ventures at its plants. Negotiations are furthest along with CSN, a Brazilian steel maker that would become a partner at Bethlehem’s Sparrows Point steel mill near Baltimore.

Bethlehem would supply the plant and workers, while CSN would bring “capital, new technology and enhanced market access,” Bethlehem spokesman Robert Bilheimer said. CSN would gain a coveted foothold in the U.S. steel market through the deal.

Under the plan, obligations to existing retirees would remain with Bethlehem, which would become a holding company.

The key question for retirees is how they would fare under these plans, which are still being negotiated. Currently, Republic pays benefits to about 2,500 retired workers and their dependents, including 2,200 under a union retirement plan.

At the end of 2001, the company had a $257 million unfunded liability for retiree health care and a $199 million unfunded
liability for pension benefits, according to financial statements. The “unfunded” liability refers to obligations for which money has not been set aside.

Under a proposed agreement with Republic, the new company formed by KPS would establish a trust fund to be used to
help pay retiree health benefits. But the legal obligation to pay health benefits to existing retirees of Republic would remain with Republic, which would be unlikely to have the resources to pay them.

John Willoughby, vice president of human resources at Republic, said he could not divulge how much money would be put in the trust fund. He could not say to what extent it would cover retiree health benefits.

Bethlehem hopes to pay for its $5 billion in unfunded pension and health-care obligations through the revenue it would draw from the joint ventures. But the company doesn’t know how much that will be. It also is counting on government help to assist with the payments, Bilheimer said.

“I don’t have any illusion that that revenue stream is going to cover those obligations,” said Tom Conway, a Steelworkers representative who leads the union’s negotiating team at Bethlehem.

Still, the union is supporting the Bethlehem and Republic plans. “I don’t know that frankly there are a lot of alternatives in either of those cases,” Conway said.

For Hufbauer, efforts to scrap legacy costs suggest the need to consider changes in laws to require full funding of pension plans and give retirement benefits priority in bankruptcy liquidations.

“Companies will increasingly think about gaming the system and this being their exit strategy,” he said. “It’s a recipe for saying to other companies, yeah, go ahead, make these promises, don’t fund your plans, get rid of them, turn it over to the federal government.”