Steel Mill Needs Break On Property Taxes, Says Court-Appointed Monitor

16 June 2016

The sun may be shining brighter these days on Essar Steel Algoma.

Bright enough, the company says, that it just might be able to avoid selling its Sault steel operations.

Bright enough that it might even be able to cobble together its own restructuring deal without outside help.

But before you start clicking on Facebook advertisements for $24.99 Oakley sunglasses, know that Essar Algoma's prospects are not so bright that it can afford to pay the millions and millions of dollars in property taxes it owes to the City of Sault Ste. Marie.

No way.

Lawyers for the Sault steelmaker will appear in a Toronto courtroom today, pleading that Essar is far too poor to afford paying property taxes just now.

The city will have high-priced lawyers there, saying that the company has no choice — it promised to pay all taxes going forward when it filed for insolvency protection last November.

Denega's arguing that Essar Steel Algoma needs relief from its City of Sault Ste. Marie property tax bill.

"The monitor is of the view that any material suspension or reduction of property taxes will assist [Essar Algoma] in maintaining their minimum required liquidity and support [Essar Algoma] through these Companies' Creditors Arrangement Act proceedings," Denega says in a report filed late last month.

This monitor has a knack for getting what he asks for in Essar's insolvency hearings.

SooToday readers will remember that it was Denega who successfully asked that 23 Essar Steel Algoma senior brass receive a total of $3.5 million in controversial retention bonuses.

He also controversially helped persuade Judge Newbould to relieve Essar from its obligation to pay $3.38 million in special payments each month to its pension plans.

Essar stopped paying city taxes two years ago

Essar Algoma hasn't paid city property taxes since April 16, 2014.

By the time the company filed for protection from its creditors last November, its unpaid city taxes had reached $14 million.

Now that its affairs are under the Companies' Creditors Arrangement Act (CCAA), the steelmaker couldn't pay that bill if it wanted to.

The law prohibits all creditors, lenders and suppliers from taking action against Essar Algoma as it restructures.

City officials are optimistic they'll eventually recover Essar's $14 million in back taxes when the court authorizes payments.

Property taxes payable since Essar sought court protection are another kettle of fish.

Millions more owing from this year

By the end of August, $5.4 million will have been added to Essar's tax bill.

By the end of September, that number will rise to approximately $7.2 million.

Faced with possibly having to cut millions of dollars from the city budget, or having to load millions of dollars of debt onto the backs of local ratepayers, nervous city officials have been huddling behind closed doors after each City Council meeting.

Today, the steelmaker will ask Judge Newbould for an order suspending all obligations to make payments on municipal property taxes until the CCAA proceedings have concluded.

Essar Algoma says it's been losing an average of $5 million a month since the CCAA proceedings started and the steel mill is "completely dependent" on its US$200 million debtor-in-possession financing to meet ongoing obligations to suppliers, employees and other stakeholders.

"Due to the volatility of the applicants' business, including variances in commodity prices and the risk of negative cash flow variances, it would be imprudent to make payments on account of property taxes during the CCAA proceedings," the company says in a recent court filing.

The $20 million cushion

"Maintaining sufficient cash levels to implement a restructuring transaction remains subject to considerable risk and making payments in respect of property taxes during the CCAA proceedings would materially increase that risk," Essar argues.

The company maintains it needs a cushion of US$20 million in available cash to ensure its obligations.

The lion's share of Essar Algoma's property taxes are paid on its Wallace Terrace production facility.

The company has appealed the assessed value of that site to the Municipal Property Assessment Corporation (MPAC).

The grounds for the appeal are:

•    Economic obsolescence: due to changes in the steel market, integrated steel producers such as Algoma have suffered from declining profitability in recent years.
•    Improper classification of buildings: a number of buildings on the Wallace Terrace site should be classified as commercial buildings instead of industrial buildings due to changes in use which would result in a lower tax rate being applied to those buildings.
•    Functional obsolescence: the buildings at the Wallace Terrace site have certain structural issues which were not properly taken into account in determining the assessed value.

If its appeal is successful, Essar Algoma says its property tax could be cut in half.

City Solicitor Nuala Kenny says it doesn't work that way.

The MPAC appeal is unlikely to be decided this year and there's no guarantee that the appeal will be successful, she says.

In the meantime, Essar Algoma is supposed to be paying its property taxes.

Says Kenny: "Even if we were to forget all the above and assume that the assessment appeal would lead to a 50 percent reduction in the amount owing to the city (which assumption I am not prepared to make), I still do not understand how a 50 percent reduction could mathematically lead to a 100 percent suspension — both retroactively and on a go-forward basis."

Highest industrial tax rate in Ontario

Rajat Marwah, Essar Algoma's chief financial officer, says the Sault is one of just 18 municipalities in Ontario with a large industrial tax rate.

And the Sault has the highest industrial rate in Ontario among municipalities with populations over 5,000, Marwah says.

Back at City Hall, Nuala Kenny points out that Essar Algoma waited until March 4 — one business day before its initial payment of $1.8 million in taxes was due, to write to the city requesting a reduction in its tax rate.

Lawyers for Essar are expected to cite a 2014 case in which U.S. Steel was allowed to suspend its annual property tax payments of $5.8 million to the City of Hamilton and $3.6 million to the County of Haldimand.

City of Sault Ste. Marie will point out that U.S. Steel paid its property tax bills as they came due and asked the court for permission before suspending payment.


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