‘Affordable’ USG Asbestos Plan

USG Corp. announced a unique asbestos-liability settlement Monday that could let the Chicago-based wallboard manufacturer emerge from bankruptcy by fall, repay its debtors in full, and resolve all current and future personal-injury asbestos claims against it.

The plan includes $1.8 billion in backing for the plan from value-fund guru Warren Buffett and his company, Berkshire Hathaway, which owns 15 percent of USG’s stock.

“This is a very important day in our 103-year history,” said USG CEO William C. Foote, calling the proposal a “watershed,” “a win for all constituencies” and “fair, fast, final and affordable.”

USG and its three major operating subsidiaries filed for bankruptcy protection June 25, 2001, to put an end to growing costs of fighting lawsuits filed by people who claimed to have been sickened by exposure to asbestos in USG’s plasters and joint compounds.

In the settlement plan, USG would set up its own trust fund to pay people sickened by asbestos exposure and those making future claims.

The fund would cost USG as little as $900 million or as much as $3.95 billion, depending on whether Congress creates a national trust fund to handle all such asbestos-exposure cases.

What propelled USG to settle now? Foote told the Sun-Times that three factors played a part:

*Most importantly, the company’s financial health — it posted record 2005 sales Monday — will enable USG to emerge from bankruptcy in sound financial shape, and with no more debt than it had when it filed for bankruptcy.

*A judge approved on Jan. 17 a similar asbestos settlement for Babcock & Wilcox, which once used asbestos to insulate boilers, establishing a model for USG’s plan.

*Finally, Bankruptcy Court Judge Joy Flowers Conti ruled last summer that USG lawyers could randomly survey the people who had claimed they had suffered asbestos exposure, seeking details on when, how and under what circumstances they’d been exposed to USG’s products. The possibility that fraudulent claims could be exposed made claimants’ lawyers more willing to accept USG’s offer rather than pursue litigation.

“We reached a cataclysmic moment,” Foote said.

The USG settlement plan, which requires approval of federal and bankruptcy court judges, is crafted so shareholders keep their ownership of USG, and gives USG the advantages of tax breaks, support from Berkshire Hathaway and new, but possibly investment-grade, long-term debt.

Key provisions include:

*USG would create its own trust fund to pay people who claim to have become sick from asbestos exposure to USG’s products. The set-up would let USG substitute its own trust-fund payment for 27 years of payments into a national asbestos trust fund. The USG trust fund would cover people who claim to have been exposed to asbestos at USG, its subsidiaries and at A.P. Green Refractories Co., a former subsidiary of U.S. Gypsum Co. that made and sold cement and blocks.

USG has maintained that it would pay the claims of people who truly suffer from asbestos exposure, but said it never mined or made asbestos, and stopped selling it nearly 30 years ago. USG had 150,000 asbestos-related claims pending when it filed for bankruptcy.

*USG would pay no more than $900 million into its asbestos-victims’ trust fund if Congress passes a bill in the current session to create the $140 billion national fund to compensate asbestos-exposure victims. The president must sign the bill before it becomes law. USG would fold its trust fund into the national fund.

Foote will be in Washington, D.C., this week to lobby for the bill’s passage. The Senate is scheduled to start debating the issue on Feb. 6.

*If Congress fails to create the national trust fund, USG would cough up $3.95 billion, including $1.6 billion in existing cash-on-hand; $1.8 billion from a new offering of equity to shareholders; up to $1.1 billion in tax refunds from paying into its own trust fund, and $1 billion in debt proceeds.

*To raise $1.8 billion to start the USG trust fund and to help pay creditors, USG will offer its shareholders an unusual deal, mostly seen in Europe. The deal offers shareholders one new share of USG stock for each share they already own for $40 a share — well under USG’s closing price on Friday of $79.85.

Berkshire Hathaway has agreed to put into escrow $1.8 billion to guarantee that all shares will be redeemed, even if that means Berkshire Hathaway ends up owning a bigger share of USG than it does now. If shareholders exercise their rights, their stakes in USG will remain undiluted.

The agreement has won the support of committees that represent people who have been sickened by asbestos exposure, future asbestos claimants, unsecured creditors and equity security holders.

The only holdout is the committee that represents people who claim property damage from asbestos exposure, and USG is in talks with them.

Jeff Cooper, an attorney in Downstate East Alton, who represents up to 500 people in the USG case who claim they suffer from a deadly lung cancer called mesothelioma because of asbestos exposure, said he believes the settlement plan is fair.

“I commend USG for coming to the right resolution,” said Cooper, managing partner at Simmons Hanly Conroy.

Cooper and other representatives for the asbestos sufferers criticized the proposed national trust fund. Public Citizen, a watchdog group, called it “a backdoor attempt to erase billions of dollars in corporate liability for asbestos exposure.”

USG took a pre-tax charge of $3.1 billion, and an after-tax charge of $1.9 billion, or $43.39 per share, in the fourth quarter to cover the asbestos settlement plan.

As a result, USG posed a net loss in 2005 of $1.4 billion.

Excluding the charges, USG’s fourth-quarter net earnings nearly doubled, to $165 million, or $3.70, propelled by a strong housing and commercial construction market that offset rising energy costs.

Sales in the fourth quarter grew 14 percent from a year ago, to $1.3 billion, while full-year sales hit a record $5.1 billion.

USG officials hope to start funding the USG trust fund by July and start paying asbestos victims and creditors shortly after.