Basic Steel Operations

Bethlehem's Basic Steel Operations produces a wide variety of steel mill products, including hot rolled, cold rolled and coated sheets and strip, plates, structural shapes, piling, tin mill products, specialty blooms, carbon and alloy bars, rail and large-diameter pipe. Basic Steel Operations includes the following Business Units: the Burns Harbor Division, the Sparrows Point Division, Bethlehem Structural Products Corporation ("BSPC") and Pennsylvania Steel Technologies, Inc. ("PST"). Also included in Basic Steel Operations are iron ore and coal operations (which provide raw materials to Bethlehem's steelmaking facilities or sell such materials to trade customers), railroad and trucking operations (which primarily transport raw materials and semifinished steel products within various Bethlehem operations) and lake shipping operations (which primarily transport raw materials to the Burns Harbor Division). See "ITEM 2. PROPERTIES" of this Report for a description of the facilities of these business units and operations.

As reported by the American Iron and Steel Institute ("AISI"), the steel industry's raw steel production capability for 1995 was 112 million tons, and the preliminary average rate of industry utilization of that capability was 92 percent, compared to 108 million tons and 93 percent for 1994 and 110 million tons and 89 percent for 1993. Bethlehem's raw steel production capability was 11.5 million tons for 1995, 1994 and 1993. Its average rate of utilization of that capability was 91 percent for 1995, 85 percent for 1994 and 90 percent for 1993. Bethlehem's raw steel production capability was reduced to 10.5 million tons for 1996 because of the termination of steelmaking at BSPC and BethForge, Inc.

The following table shows, for each of the years indicated, the raw steel production of Bethlehem and of the entire domestic steel industry:

* The figures are as reported by the AISI.

** Based on preliminary AISI figures.

Of Bethlehem's 1995 raw steel production, 93 percent was produced by basic oxygen furnaces and 7 percent by electric furnaces. Bethlehem's three continuous slab casters for light flat rolled products and plates produced approximately 84 percent of the slabs needed for these products in 1995 compared to 78 percent in 1994 and 86 percent in 1993.

Bethlehem's raw steel production and slab production for 1994 decreased from 1993 primarily due to the reline of one of the two blast furnaces at the Burns Harbor Division.

The following table shows, for each of the years indicated, the percentage of the total net tons of steel mill products shipped by Bethlehem's Basic Steel Operations to each of its principal markets, including shipments to its own Steel Related Operations:

Steel products are distributed by Bethlehem principally through its own sales organization, which has sales offices at various locations in the United States and Mexico, and through foreign sales agents. In addition to selling to customers who consume steel products directly, Bethlehem sells steel products to steel service centers, distributors, processors and converters. Export sales for this segment were 5 percent of total sales in 1995 and 2 percent in 1994 and 1993.

Trade orders on hand for Basic Steel Operations at December 31, 1995, and December 31, 1994, were approximately $1,281 million and $1,166 million, respectively. Substantially all of the orders on hand at December 31, 1995, are expected to be filled in 1996.

Competition within the domestic steel industry is intense. Principal competitors are domestic mini-mills, foreign and domestic integrated steel companies and reconstituted mills. Bethlehem experiences strong competition in all principal markets served by Basic Steel Operations with respect to, among other things, price, service and quality.

Domestic integrated producers, such as Bethlehem, have lost market share in recent years to domestic mini-mills. Mini-mills provide significant competition in certain product lines, including structural shapes and hot rolled sheets. Mini-mills are relatively efficient, low-cost producers that produce steel from scrap in electric furnaces, have low employment and environmental costs and target regional markets. Thin slab casting technologies have allowed mini-mills to enter certain sheet markets which have traditionally been supplied by integrated producers. Certain companies are constructing, or have indicated that they are currently considering, additional mini-mill plants for sheet products in the United States.

Domestic steel producers also face significant competition from foreign producers and have been adversely affected by unfairly traded imports. Imports of finished steel products accounted for approximately 18 percent of the domestic market in 1995, approximately 20 percent in 1994 and approximately 15 percent in 1993. The major restructuring of the domestic steel industry, which began in the late 1970s and early 1980s, has removed the steelmaking capacity that once existed to meet market demand during peak periods. 1995 was the strongest domestic shipment year since 1979. A portion of the demand that exceeded steelmaking capacity was met by domestic producers who imported semifinished slabs for rolling into finished products in their own mills. The remaining demand, which could not be met by domestic rolling mills, was met by increased imports of finished products, primarily hot and cold rolled sheets and plates.

Many foreign steel producers are owned, controlled or subsidized by their governments. Decisions by these foreign producers with respect to production and sales may be influenced to a greater degree by political and economic policy considerations than by prevailing market conditions. The following table, which is based on data reported by the AISI, shows the percentage of the domestic apparent consumption of steel mill products captured by imports for various classes of products.

* Preliminary

** Excludes steel imported in the form of manufactured goods, such as automobiles, but includes semifinished steel.

Excluding semifinished steel, imports of steel mill products were approximately 19.3 million tons in 1995, 22.1 million tons in 1994 and 14.5 million tons in 1993.

Antidumping and countervailing duty orders covering imports of corrosion-resistant sheet from 6 countries, cold rolled sheet from 3 countries and plates from 11 countries, which resulted from unfair trade cases filed by Bethlehem and 11 other companies in 1992, remain in place. In late 1995, a petition to terminate the orders covering cold rolled sheet from Germany and the Netherlands because of "changed circumstances" was filed with the ITC. The petition will be opposed by the U.S. producers.

Imports of flat rolled products from countries not covered by antidumping and countervailing duty orders, particularly imports of plate, continue to diminish the impact of the successful cases.

The intensely competitive conditions within the domestic steel industry have been exacerbated by the continued operation, modernization and upgrading of marginal steel production facilities through bankruptcy reorganization procedures, thereby perpetuating overcapacity in certain industry product lines. Overcapacity is also perpetuated by the continued operation of marginal steel production facilities that have been sold by integrated steel producers to new owners, which operate such facilities with a lower cost structure.

In the case of many steel products, there is substantial competition from manufacturers of products other than steel, including plastics, aluminum, ceramics, glass, wood and concrete.

Steel Related Operations

Bethlehem's Steel Related Operations includes BethForge, Inc. and CENTEC Roll Corporation. BethForge manufactures and fabricates forged products, including forged rolls for the metalworking industry. CENTEC produces centrifugally cast rolls for the metalworking industry. The operations of BethForge and CENTEC are located in Bethlehem, Pennsylvania.

Steel Related Operations also includes BethShip, Inc., which repairs and services ships and fabricates industrial products. The facilities of BethShip consist of a ship repair yard at Sparrows Point, Maryland. A dry dock facility for the repair and inspection of offshore drill rigs and other vessels at Port Arthur, Texas, was sold during 1995.

Bethlehem sells this segment's fabricated steel products to the steel, machinery, transportation, energy, defense and utility industries. These products are distributed principally through Bethlehem's own sales organization. The markets for these products overlap to a certain extent with the principal markets for products included in Basic Steel Operations. Bethlehem obtains the major portion of the materials and products used in the manufacture and fabrication of the products of this segment from its own steel mills.

Competition is strong in all principal markets for the products of this segment, particularly with respect to price, quality and service. Principal competitors are foreign and domestic independent steel and marine fabricating companies. As is the case with Basic Steel Operations, there is substantial competition with respect to some fabricated steel products from manufacturers of products other than steel and from imports. The operations of this segment are generally subject to the cyclical fluctuations characteristic of the construction and capital goods industries.

Trade orders on hand for Bethlehem's Steel Related Operations at December 31, 1995, and December 31, 1994, were approximately $43 million and $46 million, respectively. Substantially all the orders on hand at December 31, 1995, are expected to be filled in 1996.

General

Capital Expenditures

Capital expenditures were $267 million in 1995 compared to $445 million in 1994 and $327 million in 1993. Capital expenditures for 1996 are currently estimated to be approximately $300 million.

Major projects during 1995 included the upgrade of the 44-inch rolling mill at BSPC and the modernization of the 160-inch plate mill at the Burns Harbor Division.

Approximately $360 million of additional capital expenditures were authorized in 1995. At December 31, 1995, the estimated cost of completing authorized capital expenditures was approximately $400 million compared to $325 million at December 31, 1994. Such authorized capital expenditures are expected to be completed during the 1996-1998 period.

Environmental Control and Cleanup Expenditures

Bethlehem is subject to various federal, state and local environmental laws and regulations concerning, among other things, air emissions, waste water discharges and solid and hazardous waste disposal. During the five years ended December 31, 1995, Bethlehem spent approximately $235 million for environmental control equipment. Expenditures for new environmental control equipment totaled approximately $36 million in 1995, $44 million in 1994 and $35 million in 1993. The costs incurred in 1995 to operate and maintain existing environmental control equipment were approximately $122 million (excluding interest costs but including depreciation charges of $21 million) compared to $115 million in 1994 and $125 million in 1993. In addition, Bethlehem has been required to pay various fines and penalties relating to violations or alleged violations of laws and regulations in the environmental control area. Bethlehem paid approximately $5.9 million in 1995, $3.9 million in 1994 and $3.7 million in 1993 for such fines and penalties.

Under the Clean Air Act, as amended, coke-making facilities will have to meet progressively more stringent standards over the next 30 years. Bethlehem currently operates coke-making facilities at Bethlehem, Pennsylvania; Burns Harbor, Indiana; and Lackawanna, New York. While Bethlehem continues to evaluate the impact applicable emission control regulations will have on these operations, it believes that these operations will be able to comply.

Negotiations between Bethlehem and federal and state regulatory agencies are being conducted to resolve differences in interpretation of certain environmental control requirements. In some instances, those negotiations are being held in connection with the resolution of pending environmental proceedings. Bethlehem believes that there will not be any significant curtailment or interruptions of any of its important operations as a result of these proceedings and negotiations. Existing environmental laws could be amended, new laws could be enacted by Congress and state legislatures, and new environmental regulations may be issued by regulatory agencies. For these reasons, Bethlehem cannot predict the specific environmental control requirements that it will face in the future. Based on existing and anticipated regulations promulgated under presently enacted legislation, Bethlehem currently estimates that capital expenditures for the installation of new environmental control equipment will average about $30 million per year over the next two years. However, estimates of future capital expenditures and operating costs required for environmental compliance are subject to numerous uncertainties, including the evolving nature of regulations, possible imposition of more stringent requirements, availability of new technologies and the timing of expenditures.

Under the Resource Conservation and Recovery Act, as amended ("RCRA"), the owners of certain facilities that managed hazardous waste after 1980 are required to investigate and, if appropriate, remediate certain historic environmental contamination found at the facility. All of Bethlehem's major facilities may be subject to this "Corrective Action Program", and Bethlehem has implemented or is currently implementing the program at its facilities located in Steelton, Pennsylvania; Lackawanna, New York; Burns Harbor, Indiana; and Sparrows Point, Maryland. At Steelton, Bethlehem has completed a RCRA Facility Investigation ("RFI"), a Corrective Measures Study ("CMS") and a remediation program, which program received formal approval of the United States Environmental Protection Agency (the "EPA") and was completed in 1994 at a cost of $316,000. At Lackawanna, Bethlehem is conducting an RFI which, due to the complexity of the site, regulatory delays and agency-initiated modifications to the original scope of work, will not be completed until mid 1996 at the earliest. Bethlehem has requested and received formal approval from the EPA for extension of the investigation to incorporate work requested by the agency. At Burns Harbor, Bethlehem has submitted to the EPA its proposed scope of work for an RFI which, following EPA approval, will require several years to complete. At Sparrows Point, Bethlehem, the EPA and the Maryland Department of the Environment have initiated negotiations to conduct a Phased RFI as part of a comprehensive multimedia pollution prevention agreement. The goal is to finalize an agreement during the fourth quarter 1996, or as soon thereafter as possible. The potential costs for possible remediation activities at Lackawanna, Burns Harbor and Sparrows Point and the timeframe for implementation of these activities cannot be reasonably estimated until the RFIs, and possibly the CMSs, have been completed and approved and the final corrective action rule has been promulgated by the EPA. The EPA is not expected to propose a final rule until later this year at the earliest.

Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA", also known as "Superfund"), the EPA has authority to impose liability for site remediation on waste generators, past and present site owners, and operators and transporters regardless of fault or the legality of the original disposal activity. Bethlehem is actively involved at a total of 22 sites where it has been advised that it may be considered a potentially responsible party under CERCLA or the corresponding State Superfund legislation. Based on its experience regarding site remediation and its knowledge of and extent of

involvement in such sites, Bethlehem expects that its share of the costs for remediation of these sites will not be material.

Although it is possible that Bethlehem's future results of operations, in particular quarterly or annual periods, could be materially affected by the future costs of environmental compliance, Bethlehem does not believe the future costs of environmental compliance will have a material adverse effect on its consolidated financial position or on its competitive position with respect to other integrated domestic steelmakers that are subject to the same environmental requirements.

Raw Materials

Bethlehem obtains the major portion of the iron ore and a portion of the coal essential to its steelmaking business from properties that are owned by it or in which it has substantial interests. The balance of the iron ore and coal, and all of the limestone and other raw materials essential to its steelmaking business will be purchased from commercial sources. See "ITEM 2. PROPERTIES--Properties Relating to the Basic Steel Operations Segment--Raw Material Properties and Interests" of this Report.

Research and Development

Bethlehem engages in its own research activities for the improvement of existing products and the development of new products and more efficient operating processes. During 1995, 1994 and 1993, Bethlehem incurred costs of approximately $25 million, $24 million and $24 million, respectively, in its research and development activities. Bethlehem owns a number of United States and corresponding foreign patents that relate to a wide variety of products and processes, has pending various patent applications and is licensed under a number of patents. Bethlehem also licenses its patents to others, producing royalties. During 1995, four United States patents covering a variety of new developments were awarded to Bethlehem. However, Bethlehem believes that no single patent or license, which expires from time to time, or any group of patents or licenses relating to a particular product or process is of material importance in its overall business. Bethlehem also owns registered trademarks for certain of its products and service marks for certain of its services which, unlike patents and licenses, are renewable so long as they are continued in use and properly protected.

In 1994, Bethlehem and U. S. Steel Group, a unit of USX Corporation, entered into a Cooperative Research and Development Agreement. During 1995, Bethlehem and U. S. Steel Group continued to conduct joint research and development activities under the Agreement in the field of basic ironmaking and steelmaking technologies and processes, such as primary iron and steel process development, finishing process development and process instrumentation development. Notices in connection with the Cooperative Research and Development Agreement have been filed in accordance with the National Cooperative Research and Development Act of 1993.

Employees and Employment Costs

At year end 1995, Bethlehem had about 18,300 employees at work compared to about 19,900 employees at the end of 1994 and 20,600 employees at the end of 1993. About three-quarters of Bethlehem's employees are covered by its labor agreements with the United Steelworkers of America ("USWA").

Under the terms of Bethlehem's 1993 labor agreements with the USWA, most employees at steel operations received a lump-sum bonus of either $500 or 25 shares of Bethlehem Common Stock, at the election of the employee, and a $.50 per hour wage increase in 1995. In early 1996, most employees at steel operations will receive a bonus of $.50 per hour worked (maximum payment of $1,000) or the equivalent value of Bethlehem Common Stock, at the option of Bethlehem, based on Bethlehem having achieved the required level of 1995 adjusted consolidated pre-tax income. Also, profit sharing of 8 percent of consolidated adjusted annual income before taxes, unusual items and expenses applicable to the plan, plus 2 percent of adjusted profits of certain operations, is paid to USWA represented employees in the following year. The 1993 labor agreements provide for Reopener Negotiations in March 1996 for certain wage and benefit items, but exclude pension and health care benefits. Issues that Bethlehem is unable to reach agreement upon with the USWA will be submitted for final offer interest arbitration and any changes will be effective August 1, 1996.

Under other provisions of the labor agreements, Bethlehem is required to pay "shortfall amounts" each year up to 10 percent of the first $100 million and 20 percent in excess of $100 million of consolidated income before taxes, unusual items and expenses applicable to the shortfall plan. Shortfall amounts arise when employees terminate employment and ESOP Preference Stock, held in trust for employees in reimbursement for wage and benefit reductions in prior years, is converted into Common Stock and sold for amounts less than the stated value of the Preference Stock ($32 for Series A and $40 for Series B). Profit sharing is also paid to non-represented employees based on specific Corporate and Business Unit plans. Bethlehem paid about $37 million in 1995 and expects to pay about $74 million for income-related bonuses, profit sharing and shortfall amounts in early 1996.

Under the terms of the profit sharing plan provided for in the 1989 labor agreements with the USWA, no material profit sharing payments were required for the 1993 plan year. Under other provisions of those labor agreements, Bethlehem issued approximately 40,800 shares of Series B Preference Stock in 1995 and approximately 134,800 shares in 1994 to a trustee for the benefit of employees for 1994 and 1993, respectively, and expects to issue about 62,000 shares in early 1996 for the 1995 plan year.

For further information with regard to Bethlehem's employment costs, see "Employment Cost Summary -- All Employees" under "Financial Review and Operating Analysis" in Bethlehem's 1995 Annual Report to Stockholders. As set forth on page 23 of this Report, such discussion is incorporated herein by reference.

Employee Postretirement Obligations

Bethlehem has substantial financial obligations related to its employee postretirement plans for pensions and health care. Moreover, due to the excess of projected benefit obligations over pension fund assets, Bethlehem's annual pension expense is substantially higher on a per ton basis than that of most other domestic steel producers. This pension expense, combined with postretirement health care expense, puts Bethlehem at a competitive disadvantage with respect to such costs compared to most other domestic steel producers. As of December 31, 1995, Bethlehem's consolidated balance sheet reflects liabilities of $1,115 million and $1,565 million for the actuarial present value of unfunded accumulated benefit obligations for pensions and postretirement benefits other than pensions, respectively. The calculation of the actuarial present value of the accumulated benefit obligations for active employees assumes continued employment with projections for retirements, deaths, resignations and discharges. If the actual retirement of active employees is significantly earlier than projected (for plant closings or other reasons), the accumulated benefit obligations would increase substantially. The charges for employees terminated as a result of plant shutdowns or restructurings vary depending upon the demographics of the work force, but could be approximately $100,000 per employee. The recording of these charges could result in a material adverse impact on Bethlehem's financial condition because of the increase in recorded liabilities, decrease in stockholders' equity and increases in required contributions to the pension fund and retiree health care payments.

During 1995, long-term interest rates declined substantially. As a result, Bethlehem decreased the discount rate used to calculate the actuarial present value of its accumulated benefit obligation for pensions from the 9.0 percent used at December 31, 1994, to 7.25 percent at December 31, 1995. This decrease in the discount rate increased Bethlehem's accumulated benefit obligation for pensions by about $640 million and required a reduction of $67 million to additional paid�in capital as required by generally accepted accounting principles. For each 25 basis point change in such future discount rate, Bethlehem's accumulated benefit obligation for pensions changes by about $90 million. A decrease in interest rates at December 31, 1996, from December 31, 1995, would require Bethlehem to increase the actuarial present value of its accumulated benefit obligation for pensions and might again require Bethlehem to reduce additional paid�in capital depending on the then market value of Bethlehem's pension trust fund assets (which was $4.0 billion at December 31, 1995). For postretirement benefits other than pensions, principally health care and life insurance, the same increase in the discount rate as of December 31, 1995, and potential future changes also apply to the actuarial present value of Bethlehem's accumulated benefit obligation. However, because different accounting principles apply, there is no immediate change in the recorded liability or potential charge to equity.

Bethlehem has contributed amounts to its pension fund substantially in excess of amounts required under current law and regulations. As a result, Bethlehem currently has a funding standard credit balance which would allow it under current law and regulations to defer all pension funding for about two years, although it presently has no plans to do so. In December 1994 Congress passed new pension legislation. The new legislation is not expected to significantly increase Bethlehem's annual required minimum contribution to its pension plans for the next several years, but it will increase over time the annual premium due to the Pension Benefit Guaranty Corporation.

Restructuring Activities

As part of Bethlehem's efforts to make its business and operations more competitive, Bethlehem has implemented, and will continue to consider, a wide range of restructuring alternatives.

Asset Sales. Since early 1986, Bethlehem has implemented an extensive program of asset sales. Approximately 35 businesses have been sold since the program began. Bethlehem cannot continue indefinitely to raise substantial cash from asset sales.

Joint Ventures, Partnerships, Facility Sharing Arrangements and Mergers. Bethlehem has considered, and discussed with others, various opportunities for joint ventures, partnerships, facility sharing arrangements and mergers of all or part of Bethlehem. Bethlehem will continue to explore such opportunities. See "ITEM 2. PROPERTIES." of this Report for a description of joint ventures in which Bethlehem participates.

Facility Shutdowns and Restructurings. During the last five years, Bethlehem has shut down or restructured facilities and operations and has reduced its annual steelmaking capability from 16.0 million tons to 10.5 million tons for 1996. Bethlehem has recorded charges of approximately $1.0 billion in connection with these actions, including a $350 million restructuring charge ($290 million after�tax) reflected in its results for 1993. See Note C to the Consolidated Financial Statements. Although Bethlehem has no current plans to do so, if it becomes necessary for Bethlehem to shut down or restructure additional businesses and operations in the future, it could incur substantial additional charges in the process. The recording of these charges could have a material adverse impact on Bethlehem's financial condition because of the increase in recorded liabilities and decrease in stockholders' equity.

Introduction Properties Other Items

Main Menu Investor Relations Business Units Commercial Information Environment History Vision Statement Public Affairs Research