AK Steel and Middletown retirees settle suit over health costs, create $663M health care trust

Shares in AK Steel Holding Corp. soared to an all-time high Monday after the company and a group of retirees agreed to settle a lawsuit over health care premiums by creating a $663 million trust fund to be managed by retirees.

The announcement that AK was shedding about half of its $2.1 billion legacy health care costs at a discount sent shares up $4.48, or more than 10 percent, to $47.47. Shares had traded between $12.63 and $44.98 in the past 52 weeks.

Getting control of legacy costs had been the top priority for AK management since it succeeded in restructuring and reducing the labor force at its largest mill, the Middletown Works, by about 1,000 workers after a nearly 13-month lockout that ended in April.

The agreement with retirees from that mill calls for AK Steel to transfer health care obligations for about 4,600 retirees to a Voluntary Employees Beneficiary Association trust, or VEBA.

"They have to pay for that, it's not free, but it's less than the liability and it removes a cloud over the stock," said steel analyst Charles Bradford of Bradford Research/Soleil Securities in New York.

The settlement must be approved by the U.S. District Court in Cincinnati, where retirees filed suit in July 2006 to prevent the company from charging them for part of their health care premiums. Workers had not previously contributed to the cost; the VEBA means they still won't have to pay.

"We said from the beginning, our job was to protect retirees' health care benefits," said Michael Bailey, the lead plaintiff and president of the retirees' group, Concerned Armco Retired Employees. "This settlement does that. It makes sure AK Steel can never mess with our benefits again."

AK Steel is to fund the trust with an initial contribution of $468 million in the first quarter of 2008, and with three subsequent annual contributions of $65 million, the company said.

"They take an immediate hit, but then they are out," said Rafael Gely, a labor relations expert and professor at the University of Cincinnati College of Law. "With people living longer, and the rising cost of health insurance, they figure they are better off taking the hit now."

Company spokesman Alan McCoy declined to say how negotiators arrived at the $663 million total.

"The agreement is a result of discussions with the plaintiffs," McCoy said. "It's the only group that had not shared in any of the cost saving that was initiated in 2003. What we have attempted to do all along is to be competitive. One of the major areas we have not been competitive in is our legacy costs."

The company said last year that it would start charging Middletown Works retirees a monthly premium in October 2006 for a portion of their health care premiums. Retirees won a temporary injunction blocking the charge, and the case was expected to go to trial in January.

Retirees benefit from the deal by getting control of the fund, which offers them some security, Gely said.

"They (AK Steel) get a discount, but the VEBA belongs to us," Bailey said. "The main benefit here is there is more assurance that the health care benefits are intact."

The use of VEBAs has been an increasingly popular way for companies to get liabilities off their books.

A tentative agreement between General Motors and the United Auto Workers, modeled after one last year between Goodyear Tire & Rubber Co. and the Steelworkers, calls for GM to put up to $30 billion of its $51 billion in unfunded retiree health care obligations into a UAW-managed VEBA.

AK Steel makes flat-rolled carbon steel and stainless and electrical steel used in cars and appliances. Besides the Middletown plant, the company has smaller plants in Zanesville, Mansfield and Coshocton; Ashland, Ky.; Rockport, Ind.; and Butler, Pa.

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AK Steel: http://www.aksteel.com