U.S. Steel Forced Stelco To Overpay $123M For Supplies While Stripping Retirees’ Benefits: Union
17 August 2016
U.S. Steel Canada was forced to pay its American parent $123 million over market prices for steelmaking supplies at the same time it took health benefits away from retirees.
In new documents filed ahead of a court hearing Wednesday asking for the immediate reinstatement of those benefits, a union financial expert says if not for those inflated prices the former Stelco would have been profitable and able to pay the benefits retirees were promised.
Corporate finance and restructuring expert Paul Bishop, senior managing director of FTI Consulting Canada Inc., said in an affidavit that analysis by the company's court-appointed monitor shows "USSC paid USS approximately $123 million more than market prices for iron ore and coal during that period, thereby significantly reducing USSC's profitability."
The payments, the monitor reported, were made under contracts to purchase at a fixed price — signed even before the former Stelco went into creditor protection. A new set of contracts was signed in April and May of 2015.
In October USSC won a court decision allowing it to stop paying health benefits to retirees as well as pension top-up payments and municipal property taxes. The company said it needed that relief in order to separate its operations from those of the American parent.
Bishop added that if USSC had paid competitive prices for its coal and iron ore, the $47-million loss it reported to the end of 2015 would have been a profit of $37 million — a difference of $84 million. (Those figures are earnings before interest taxes, depreciation and amortization, or EBITA — a measure of a company's operating performance before the impact of financing decisions.)
Bishop's allegation is not the first time Pittsburgh-based U.S. Steel has been accused of managing Stelco in ways that weakened the company.
In earlier legal filings former Stelco president Bob Milbourne argued that U.S. Steel provoked labour confrontations in Canada in order to justify shifting production to its American plants. He also argued that it stripped Canadian mills of production of the highest value products, again to support plants in the United States.
During legal arguments over the American company's claim its Canadian unit owed it more than $2.2 billion, Milbourne argued the debts were based on security agreements Stelco executives were forced to sign without independent financial and legal advice.
The debt claims have been accepted by the Superior Court judge overseeing USSC's restructuring. That decision is under appeal.
Bishop also argues that even without the inflated supply contracts, USSC could still pay the retiree benefits because the company has consistently posted better financial results than anticipated in its forecasts.
In his latest report, court-appointed monitor Alex Morrison says the company lost $60.8 million between October 2015 and June 30 of this year. That's $23 million less than predicted in its forecast. USSC also finished the period with $131.4 million cash on hand — money workers say could be used to finance their benefits.
Morrison argued the positive performance for the period was entirely in June, when steel market conditions improved. Since July, however, sales have slowed.
"USSC is hopeful this trend of decreasing new orders will reverse over the upcoming weeks, but if not, it will begin to impact USSC's financial results in the fall months," he wrote. "Although the month of June's financial results were much better, and July should be strong as well, caution is required due to the volatility in USSC's business and the inherent challenges, including significant excess production capacity of the steel sector globally and in North America."
Morrison added that if the retiree benefits had been paid, USSC would have been forced to borrow up to $60 million from its emergency line of credit — a fund it hasn't touched yet.
In a final argument that has enraged worker groups, Morrison supported a second round of bonus payments for 34 employees designated as being essential to the company's operation. If the suggested Key Employee Retention Plan is approved, they will split a pool of almost $1.6 million when USSC's restructuring is completed.
Morrison's arguments reflect those of USSC's chief restructuring officer, who said in an earlier filing that forcing the company to start paying retiree benefits again could cripple efforts to sell the business as a going concern.
The retiree payments — called other post employment benefits or OPEBs — would cost USSC about $3.5 million a month. They cover prescription drugs, dental work, vision care and other needs.
The Ontario government has eased some of the pain of their loss by offering emergency funds of $5.6 million. The company offered to add $2.7 million to that pool, but only if workers dropped their motion for full reinstatement.
Source : thespec.com