VINEYARD, Utah County -- As anticipated, Geneva Steel filed Chapter 11 bankruptcy Monday to reorganize the beleaguered company.
Heavy debt, falling prices and reduced shipments of its hot-rolled an plate steel have combined to throw Geneva into a financial coma. The cash-poor company skipped a $9 million interest payment due Jan. 15 on some of its bonds to pay vendors and keep the plant operating."This isn't a surprise considering the fact they missed the coupon payment," said an East Coast steel industry analyst who asked not be identified. "The environment is just so terrible that Geneva had little choice given their debt load."
Geneva executives feverishly huddled with attorneys and financial advisers the past month to come up with a plan to satisfy its major creditors. Filing for Chapter 11 protection in U.S. Bankruptcy Court was one of several options the company considered to keep making steel.
Joe Cannon, Geneva chairman and chief executive officer, said in a press release Monday afternoon that the decision to seek reorganization was made after a "painstaking" examination of the potential impact on all of Geneva's stakeholders. Cannon believes the move is in the best interest of the enterprise as a whole.
"Filing for Chapter 11 protection eliminates months of uncertainty for all involved and allows us to continue to produce and ship steel without interruption to our customers," Cannon said. "Although Chapter 11 is indeed strong medicine, we believe the result will be much stronger and healthier Geneva Steel."
Chapter 11 bankruptcy differs from Chapter 7 which involves a trustee appointed to collect and sell all of a company's property to repay creditors. Under Chapter 11, a company is protected from creditors and can set up a plan to repay its debts while keeping property.
Geneva's bondholders would own the vast majority of the equity in the company and would have the complicated task of restructuring it, the analyst said. That could mean Cannon and President Robert J. Grow, the men who helped rescue the plant from permanent closure a dozen years ago, could be on the outside looking in.
"I would say that's likely," the analyst said.
Cannon and Grow have disagreed recently about the direction in which to take the struggling company. Grow spends little if any time at the company's Utah County headquarters, apparently preferring to work from home.
Geneva is arranging for a debtor-in-possession credit line for $125 million secured by accounts receivable, inventory, property and plant equipment. It's asking the bankruptcy court for approval to replace its current line of credit.
Geneva's financial distress stems from two primary factors: debt associated with modernizing and renovating the 54-year-old mill and the Asian economic crisis.
The company has spent $637 million to upgrade its facilities since 1989, making it one of the most state-of-the-art mills in the country. Nevertheless, some of the new equipment has had mechanical problems; some isn't used at all. The company currently is about $325 million in debt.
Low-priced foreign imports are stacked for miles in major U.S. ports, forcing steel prices to plummet and order books to go soft. As of Nov. 30, 1998, Geneva had orders on hand for 74,000 tons compared to 309,000 tons one year earlier. Overall, the plant is running at about half capacity.
Geneva joined 11 other steel companies, including the industry's heavyweights, to file "anti-dumping" cases against Japan, Russia and Brazil. A favorable decision could spur an upswing in prices as early as this spring.
Because Geneva sells on the spot market, it's susceptible to fluctuating steel prices. "They tend to get whipped around in terms of their exposure to pricing," the analyst said. In addition to higher prices, Geneva will need to ship higher volumes to get back on track, he said.
While it remains a major employer in Utah County, the workforce has dropped from about 2,600 to 1,600 the past four years. The majority of those workers were laid off in the past year.
United Steelworkers of America Local No. 2701 had little to say about the bankruptcy filing Monday morning.
"We don't have any details at this time," said Kelly Hansen, union financial secretary. "We're kind of just sitting tight. They haven't given out any information."
The Utah Legislature is considering three bills that could help Geneva. The measures would give the company sales-tax exemptions on pollution control devices, replacement equipment and bricks for its blast furnaces.
"Even with the legislative action, if market conditions stay the same, Geneva is in severe jeopardy of being closed," said Sen. John Valentine, R-Utah, adding he fully expected the Chapter 11 filing as a "normal course of business" after defaulting on a loan.
Geneva made nearly $180 million in the first four years under Cannon and Grow during one of the strongest periods ever in the steel industry. However, Cannon said it could not have stayed competitive had it not borrowed money to modernize the plant.
Geneva's recent 10-K filing with the U.S. Securities and Exchange Commission recognizes its precarious situation and puts shareholders on notice that things won't be the same at the only integrated steel mill west of the Mississippi River.
"These matters raise substantial doubt about the company's ability to continue as a going concern," the annual report says. "The company's existence is dependent upon several factors including the company's ability to return to normal production levels."
Geneva isn't the only U.S. mill in trouble. Acme Steel filed Chapter 11 bankruptcy and Laclede Steel and Gulf States Steel are also suffering. All three mills are about the same size as Geneva.