AK Steel said it will create a Voluntary Employees’ Beneficiary Association as part of a settlement with a group of retirees who protested the company’s 2006 initiatives to reduce its retiree health-care costs.
Under the agreement, AK Steel will transfer all of its health-care obligations for the covered retirees to a VEBA trust, which will be managed solely by the retirees’ designees, and will be utilized to fund the retirees’ covered benefits. AK Steel will fund the trust with $663 million, including an initial contribution of $468 million and three subsequent annual contributions of $65 million each.
AK Steel’s stock jumped more than 11 percent on news of the deal, which covers about 4,600 current Middletown Works retirees. Under the deal, the company will have no further liability related to the Middletown Works retirees covered by the agreement.
The steel company said it expects to fund the $468 million trust through sources that may include its existing cash balances and credit facilities and the capital markets. It anticipates the initial trust contribution to occur in the first quarter of 2008.
As of June 30, 2007, AK Steel’s total health care liability was about $2.1 billion, of which about half was related to the Middletown Works retirees covered by the settlement.
VEBAs are currently the hot solution for spiraling retiree health-care costs. Last month, a VEBA was a cornerstone of the new labor agreement between General Motors and its union. It enabled the auto giant to remove from its balance sheet the value of its future retiree health benefits — historically a big source of concern for GM and other automakers — as well as other traditional manufacturing companies that are desperately trying to compete in the increasingly global marketplace.
GM estimates its future health-care costs for retirees to be $50 billion. The proposed deal reportedly calls for GM to shift the liability to a VEBA. GM would contribute as much as $35 billion to the trust, or about 70 percent of its estimated future retiree costs.