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July 23, 2019
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U.S. Steel Investors Sue Company, Allege Systemic Maintenance, Operational Failures; Did Investors Uncover Intentional Acts That Threaten Local Air Quality?

By Amanda Gillooly, for the Group Against Smog and Pollution

U.S. Steel investors in April filed a class-action complaint against the multi-billion-dollar company, alleging violations of federal securities laws. Documents filed in the U.S. District Court for the Western District of Pennsylvania accuse company leaders of misleading investors about U.S. Steel’s financial wellbeing, including a “sham” implementation of what U.S. Steel called a “transformational process to make the company profitable again.”

Top executives at U.S. Steel touted the program — “The Carnegie Way” — as a three-pronged initiative that would focus on employee engagement, “operational excellence,” and “reliability-centered maintenance,” which together promised “proactive improvements” to its manufacturing facilities.

The complaint alleges that, in reality, The Carnegie Way prioritized just one thing: extreme cost-cutting measures that deferred facility maintenance, forcing employees to “jury rig” machines to keep them operational. Confidential witness statements described this a “don’t buy, get by” approach to facility maintenance.

U.S. Steel faces a class-action lawsuit for violating Federal Securities laws

Aside from the impact these measures could have had on investors, they might lift the veil on the company’s upward trend in air quality violations over the past several years. It seems plausible, if not likely, “don’t buy, get by” had a direct impact on increased emissions from U.S. Steel facilities and thus an adverse impact on human health here in Allegheny County.

As this is written, U.S. Steel faces $2.7 million in fines for decreased compliance with emissions standards and permit limits as well as two lawsuits filed in federal court stemming from a fire at its Clairton Coke Works facility in December 2018.  That fire, along with a smaller fire this past April, temporarily wiped out essential air pollution-control systems for months in total.

U.S. Steel and the Allegheny County Health Department have reached a draft settlement to resolve the violations involving the $2.7 million fine. But almost to prove the hypothesis, the agreement would require significant investments to U.S. Steel’s Mon Valley Works facilities—improvements U.S. Steel said are designed in part to reduce energy consumption and enhance emissions controls.  In other words, U.S. Steel is now agreeing to undertake projects that a properly implemented Carnegie Way should have never ignored in the first place.

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U.S. Steel Unveils The Carnegie Way Program, Faces $2 Billion Loss in Market Value

Confidential sources cited in the complaint said it became clear that The Carnegie Way was hyper-focused on cost-cutting measures shortly after the program was rolled out in 2015 and that as the initiative proceeded, those measures included “massive layoffs” and the deferment of “desperately needed maintenance and repairs.”

Lawyers representing the plaintiffs noted that the program was implemented at a time when steel industry conditions worsened, a trend that had a “nearly disastrous effect on U.S. Steel”  “record year-over-year losses and a stunning 2015 year-end loss of $1.5 billion”

In the wake of those losses, the company shut down some operations and “abandoned” the employee engagement and proactive maintenance aspects of The Carnegie Way Program, focusing instead on “ruthlessly cutting costs in order to improve the company’s bottom line,” the suit alleges.

According to the legal filing:

“These measures left U.S. Steel with a skeleton crew of inexperienced plant employees who did not know how to maintain or repair the equipment, and who were required to work long hours of up to 90 hours a week. …[U.S. Steel] also decreased overall capital spending and spending for the flat-rolled segment [which includes the Mon Valley Works] in 2016 by approximately 39 percent and 60 percent respectively.”

It continued:

“[U.S. Steel executives] were admittedly aware back in August 2016 that [the company] would need to undertake a ‘large,’ multi-year ‘asset-revitalization’ in order to fix the company’s problems – a known fact that was not disclosed to investors until (April 25, 2017).”

Meanwhile, as market conditions improved in 2017, company leaders told investors the worst was over and that the company was “positioned for success in a market recovery.” Then, on April 27, 2017, after the market had closed, U.S. Steel announced its first-quarter results: A “surprise” net loss of $108 million, according to the complaint.

Lawyers for the plaintiffs wrote, “(then U.S. Steel Chief Executive Officer) Longhi and (Chief Operating Officer) Burritt sold more than half their personal holdings of U.S. Steel common stock at a time when they could take advantage of improving market conditions, but, as a result of their decision to slash maintenance and capital spending, U.S. Steel could not.”

That news, lawyers noted, prompted a stock price decline that equated to $2 billion in market value – what they said was the steepest decline since 1991.

Less than a month later, U.S. Steel would announce that Longhi would retire and that Burritt would replace him as CEO. The suit notes that “despite failures” Longhi still received a more than $4 million bonus – his largest ever.

Confidential Witnesses: Cost-Cutting Led to Injury, Death, Machine Failures & Unplanned Outages at Mon Valley Works and Beyond

The complaint includes information from depositions of several confidential witnesses, one of whom was a former mechanical repairman and team leader who worked at the Clairton Coke facility at U.S. Steel’s Mon Valley Works facility for nearly 40 years. The complaint further notes that this employee retired from the company in January 2017.

The employee, who is referred to as Confidential Witness #6 in the court filing, was responsible for running “the shop” there, overseeing all repairs to coke oven doors and also procuring parts for them. The complaint notes that one of his job responsibilities was working with the company’s vendors to obtain parts.

Lawyers for the plaintiffs explain that the former Clairton Coke Works employee “recounted that the company abandoned job training and filled positions with inexperienced employees that did not know how to operate the equipment and machinery.”

The complaint goes on to say:

“(Confidential Witness #6) stated that during 2015 and 2016, U.S. Steel allowed the steel making machinery and equipment to run until it broke, rather than providing preventative maintenance and timely repairs. Moreover, according to CW#6, U.S. Steel abandoned any training in order to save money. Thus, the employees operating the coke ovens were ‘busting parts left and right’ during 2015 and 2016 due to lack of proper training, causing more frequently needed repairs. CW#6 believed that many of the unplanned outages in 2015 and 2016 were the direct result of the company’s failure to properly maintain and repair its equipment because U.S. Steel let ‘things go a little too far.’”

Other confidential witnesses quoted in the legal document were employed in various U.S. Steel facilities across the country and their statements described how maintenance efforts “fell by the wayside.”

According to the document:

“According to confidential witnesses, U.S. Steel repeatedly canceled purchase orders for parts needed to keep facilities running and used cheaper, less durable materials to operate machinery. Rather than invest in its equipment, U.S. Steel plant managers would deny maintenance requests and tell employees to ‘jury rig’ the machines and operate by the motto, ‘Don’t Buy, Get By.’ U.S. Steel also repeatedly deferred maintenance projects and once the company’s machines inevitably broke, the company suffered millions in losses as a result.”

One witness quoted in the legal document said the company began deferring projects, “some of which included structural integrity issues that absolutely needed to be done or it would cost a lot of money.”

The complaint goes on to say:

“(One confidential witness) understood that machines had to be replaced sooner than they otherwise would have had the proper repair and maintenance occurred. Rather than perform maintenance, however, (the witness) reported that the company, instead, ‘put a patch’ on the issue. (The witness) stated one example related to the Mon Valley plant, which had two electrical generators that were over 70 years old. During 2015, the first machine kept breaking and after employing ‘every Band-Aid’ and ‘bubble gum-aide’ possible, was decided that the generator had to be replaced.”

According to the complaint, “this turned out to be extremely costly, as it took nine months to obtain a new generator and it cost the company $1 million per month to obtain electricity from another source.”

The lawsuit also noted how the cost-cutting measures allegedly impacted operations at U.S. Steel’s Edgar Thomson facility.

Lawyers for the plaintiffs wrote:

“(One confidential witness) stated that ‘everybody knows that’ the company was underinvesting. It was ‘common knowledge’ within U.S. Steel. According to (the witness), one example of defendants’ cut of the capital budget involved the Edgar Thomas plant. (The witness) explained that the Edgar plant was allocated money for capital improvement projects each year. However, invariably when the capital improvement projects were presented for approval, the same response was always received – the capital improvement money was being cut and allocated elsewhere, usually because something had broken that needed immediate attention. (The witness) informed the manager at Edgar Thomson of all the issues concerning under-investing but U.S. Steel kept running its equipment ‘into the ground.’”

The complaint continued:

“According to (one witness), the Edgar Thomson ‘melt shop’ contained cooling towers that had not been maintained in ‘years.’ At some point during 2015, a new tower was put in. However, according to (the witness), the new tower was not maintained correctly and, in late 2016, all of the ‘cooling media’ ended up melting. ‘(The witness) estimated that this error resulted in significant costs of as much as $500,000-$750,000. The cooling tower was eventually repaired in the first quarter of 2017 by (the witness’s) current employer.”

Lawyers for the plaintiffs noted that “mass layoffs” took a human toll: After U.S. Steel furloughed nearly 25 percent of its Gary, Indiana, workforce, an employee there was electrocuted in 2015. According to the complaint, a second death occurred in 2016. 

Understanding U.S. Steel’s Mon Valley Works Compliance Issues During The Carnegie Way Program

Critical to understanding the relationship between facility maintenance and pollution emissions are the physical demands of coke-making. U.S Steel produced 5.2 million tons of coke in 2018, which required thousands of ovens to bake coal in an oxygen-free environment for up to 20 hours at approximately 1700° Fahrenheit.

All the while, the toxic gasses produced by this process required extensive treatment to extract byproducts or reduce the overall emissions when ultimately burned as fuel.  Suffice it to say, the operating conditions for this equipment are extreme and regular maintenance is an absolute necessity.

Clairton Coke Works

The first hint maintenance had deteriorated came in 2016 when U.S. Steel entered into a consent decree with the Allegheny County Health Department to address emissions standards for the coke oven battery combustion smokestacks at the company’s Clairton Coke Works plant.  This, of course, coincides with the time period during which the alleged under-investments in maintenance took place.

U.S. Steel later became the subject of an ACHD enforcement action in 2018 that cited emissions problems with other parts of the plant, such as the coke ovens and their doors, and that stemmed from a “comprehensive review of U.S. Steel’s compliance” with air pollution regulations, the 2016 Consent Decree, and the facility’s operating permit. That 2018 enforcement order, which was the result of more than 300 violations, detailed decreased compliance with emissions standards. According to the document:

  • Battery B had a compliance rate of 100 percent in 2013. That rate dropped to 61 percent in 2017, during which there were 16 violations.
  • Battery 13 had a compliance rate of 100 percent in 2013 to 70 percent in 2017. As of April 2018, its compliance was just 50 percent.
  • Battery 3’s emissions performance declined from 100 percent compliance in 2015 to 81 percent in 2016.
  • From 2015-2017, Battery C failed to achieve an observed compliance percentage greater than 83 percent.
  • While emissions issues increased across the board, the number of high opacity door violations increased dramatically – from just 33 in 2014 to 295 in 2017.
  • Since 2014, quenching and soaking emissions compliance had “deteriorated.”

The ACHD enforcement order also referenced pollution-control equipment – air curtains – at Clairton Coke Works that had allegedly gone missing and were never replaced. In a Feb. 15, 2019 ACHD brief in support of that enforcement order, attorneys for the department wrote:

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“(ACHD) had info that the shed had air curtains that reduced the occurrence of visible emissions leaving the sides of the shed but that the curtains subsequently disappeared and were never replaced.”

It should also be noted that during U.S. Steel’s enforcement order appeal hearing, ACHD Deputy Director of Environmental Health shared concerns over the company’s plan maintenance efforts.

“You know it is our understanding that U.S. Steel wasn’t taking care of their batteries,” he stated Dec. 4, 2018, on the first day of the four-day hearing. “I think we’re in this situation because our inspectors have observed a lack of maintenance in maintaining your batteries.”

Another member of ACHD’s staff, 20-year health department veteran Angela Crowley, also mentioned a lack of maintenance at the facility during her day-three testimony—specifically noting a lack of timely fixes to known coke-oven door issues.

More Legal Woes for U.S. Steel

The class-action lawsuit filed against U.S. Steel by its investors isn’t the only legal battle being waged against the company.

In April, two environmental groups filed a lawsuit against the company in the U.S. District Court of the Western District of Pennsylvania for alleged violations of the Clean Air Act resulting from the December 2018 fire at the Clairton Coke facility. In June, ACHD successfully moved to intervene in the case.

On April 9, lawyers filed a class-action lawsuit against U.S. Steel, claiming the company was grossly negligent/reckless in the way it handled a Dec. 24 fire at its Clairton plant and its aftermath.

That suit made myriad allegations against U.S. Steel. Lawyers representing the plaintiffs alleged that the company failed to develop and implement an adequate mechanical integrity program necessary to prevent such fires.

So, What’s the Impact?

If these allegations of intentionally avoiding maintenance are true and only investors were harmed, we could simply hope that the courts find an equitable sum of money that repairs the damage. 

“But if these allegations are true, far greater harm will have been inflicted in Allegheny County and – most likely – communities around the globe where U.S. Steel does business,” GASP Executive Director Rachel Filippini noted. “Actual, living, breathing people will have been harmed by poor air quality, poor health, and the knowledge that their powerful local employer put the profits of a few ahead of the wellbeing of a community. No court can find an equitable sum to repair those damages.”

GASP is a nonprofit citizens’ group in Southwestern Pennsylvania working for a healthy, sustainable environment. Founded in 1969, GASP has been a diligent watchdog, educator, litigator, and policy-maker on myriad environmental issues, with a focus on air quality in the Pittsburgh region.

Amanda Gillooly is the communications manager for the Group Against Smog and Pollution (GASP). She is an award-winning investigative journalist who worked as a news reporter, writer, public relations specialist and social media manager for various organizations prior to her tenure at GASP.