COURT FILE NO.: CV-14-10695-00CL DATE: 20160912 SUPERIOR COURT OF JUSTICE - ONTARIO
IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT , R.S.C. 1985, c. C-36, as amended AND IN THE MATTER OF A PROPOSED PLAN OF COMPROMISE OR ARRANGEMENT WITH RESPECT TO U.S. STEEL CANADA INC.
BEFORE: Mr. Justice H. Wilton-Siegel
COUNSEL: Paul Steep, Elizabeth Brown and Heather Meredith, for the Applicant U.S. Steel Canada Inc. Robert Staley and Kevin J. Zych, for the Monitor Ernst & Young Inc. Ken Rosenberg and Karen Jones, for the United Steel Workers International Union and the United Steel Workers International Union, Local 8782 Sharon White, for the United Steel Workers International Union, Local 1005 Andrew Hatnay and Barbara Walancik, Representative Counsel for the non-unionized active employees and retirees Jeff Galway and Kiran Patel, for United States Steel Corporation Patrick Riesterer, for Brookfield Capital Partners Ltd. Lou Brzezinski, for Bob and Sharon Milbourne Gale Rubenstein, for the Province of Ontario
HEARD: August 17, 2016
Endorsement
[1] At a hearing on August 17, 2016, the Court heard two motions. In the first motion, the applicant in these proceedings under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (the “CCAA”), U.S. Steel Canada Inc. (“USSC”), sought approval of a proposed second key employee retention plan (the “KERP 2”) (the “KERP Motion”). In the second motion, the United Steel Workers International Union (the “USW”), USW Local 1005, USW Local 8782 and Representative Counsel for the non-unionized employees and retirees (“Representative Counsel”) (collectively, the “Moving Parties”) jointly sought an order requiring USSC to terminate its suspension of the funding of other post-employment benefits (“OPEBs”) (the “OPEB Motion”).
[2] On August 19, 2016, the Court advised the parties that, for written reasons to follow, it would grant the KERP Motion and deny the OPEB Motion at this time provided USSC made a one-time contribution of $2.7 million to a transition fund established by the Province of Ontario for the benefit of the retired employees of USSC (the “Transition Fund”) or to another fund to be administered on the same terms as the Transition Fund. This Endorsement sets out the Court’s reasons for these determinations.
Preliminary Matter
[3] At the outset of the hearing, Representative Counsel sought an adjournment of the OPEB Motion to permit cross-examination on the affidavit of William Aziz (“Aziz”), the chief restructuring officer of USSC (the “CRO”), sworn August 11, 2016 (the “Aziz Reply Affidavit”), and to permit further negotiations to proceed regarding a possible settlement of both motions.
[4] The Aziz Reply Affidavit responds to an affidavit of Paul Bishop (“Bishop”), the financial advisor to the USW, sworn July 20, 2016 (the “Bishop Affidavit”), which was included in the motion materials of the Moving Parties on the OPEB Motion. The Aziz Reply Affidavit was served on the Moving Parties on August 11, 2016.
[5] The USW, USW Local 1005 and USW Local 8782 opposed the adjournment unless the KERP Motion was also adjourned. USSC opposed any adjournment of either the KERP Motion or the OPEB Motion.
[6] The KERP Motion was originally scheduled to be heard on July 27, 2016. The Moving Parties short-served the materials for the OPEB Motion for a hearing on July 27 as well. The motions were adjourned at the encouragement of the Court with a view to determining whether the parties could agree on a disposition of both motions. While such an agreement was not reached, the discussions resulted in the USSC offer to make a one-time payment to the Transition Fund referred to below.
[7] There was no basis for adjourning the KERP Motion further. USSC was entitled to have the KERP Motion heard as it has already been adjourned once. Representative Counsel did not actively seek an adjournment of the KERP Motion, its principal request being an adjournment of the OPEB Motion. In addition, there is nothing in the Aziz Reply Affidavit that was relevant to the KERP Motion. There was no also legal connection between the KERP Motion and the OPEB Motion. While each of the motions involved the application of a portion of the limited cash resources of USSC, this was addressed, as a practical matter, in the negotiations between the parties.
[8] The adjournment of the OPEB Motion was denied for the following reasons.
[9] First, there is no demonstrable need for a cross-examination of Aziz on the Aziz Reply Affidavit. Representative Counsel has not provided any specifics of the matters on which it would seek to cross-examine Aziz. It says merely that it seeks time to assess whether it wishes to cross-examine him. Moreover, there is no evidence that a cross-examination is necessary to elucidate further the position of USSC. The matters addressed in that affidavit are largely of a financial nature based on the financial performance of USSC. This is neither new nor disputed information. The Monitor has been reporting on a monthly basis regarding the financial performance of USSC since October 2015. As a result, the Moving Parties are in a position to understand and assess the testimony of Aziz in that affidavit. Consistent with this view, the USW, USW Local 1005 and USW 8782 were prepared to argue the motion without the benefit of any cross-examination. Moreover, as the Moving Parties acknowledge, the differences between the parties do not relate to the underlying financial information but rather to the “spin” that they put on such facts, as set out in their respective arguments.
[10] Second, Representative Counsel acknowledged at the hearing that the principal purpose for the adjournment request was to permit further negotiations among the parties. Representative Counsel sought a more nuanced result than either of the two polar options presented to the Court by the parties. This is a laudable purpose that I would ordinarily support. However, in this case, however willing Representative Counsel would be to find an intermediate position, it is clear that the other parties have reached the end of their negotiations and that such an agreement is not possible. The Monitor is also of the view that a further narrowing of the positions between the parties is unlikely.
[11] Third, as discussed in the OPEB Motion analysis below, there is a connection between the outcome of that motion and the current negotiations among the principal stakeholders of USSC and the prospective purchasers of the business of USSC on a going-concern basis. The other parties to the OPEB Motion are of the view that it would be desirable to have this motion heard at this time for this reason.
[12] Accordingly, the motion of Representative Counsel for an adjournment of the OPEB Motion was denied.
The KERP Motion
[13] On October 8, 2014, as amended by order dated January 21, 2015, the Court approved a key employee retention plan in respect of 29 employees in management and operational roles who it considered critical to the success of USSC’s restructuring efforts and continued operations as a going concern (the “KERP 1”). KERP 1 provided for an overall maximum of $2,570,378 to be payable to certain key employees upon the earlier of: implementation of a plan of arrangement, completion of a sale, termination of employment without cause, or June 30, 2016. Accordingly, as of June 30, 2016, all amounts owing under KERP 1 became due and were paid to these key employees.
[14] USSC has now identified 34 employees in management and operational roles who it considers critical to the success of its current restructuring efforts and continued operations as a going concern. It says that it requires the services of these employees, among other things, to enable it to continue to operate as a going concern. This is essential to the completion of any going-concern transaction that may result from the sale and investor solicitation process currently being conducted by USSC (the “SISP”), and to provide transition services to any going-concern purchaser.
[15] USSC has developed KERP 2 to retain such employees. KERP 2 provides for a cash retention payment equal to a percentage of each such employee’s annual salary in two tiers, either 50% or 25% of annual salary. KERP 2 provides for an overall maximum amount payable under the plan of $1,572,051. The cash payment will become payable upon the earlier of the following events: termination of employment without cause, implementation of a plan of arrangement or completion of a sale of all or substantially all of the assets of USSC, in either case as approved by the Court and resulting in a continuation of going-concern operations, the substantial completion of liquidation in the event a going concern sale cannot be completed, the date an employee’s services are no longer needed for such a liquidation as determined by the Monitor, and June 30, 2017.
[16] KERP 2 provides for a payment of 75% of the retention payments on the closing of a sale of all or substantially all of the assets of USSC, or on implementation of a plan of arrangement, if in either case the transaction results in a continuation of going-concern operations. The remaining 25% is payable three months after closing of any such transaction, or earlier in the event of termination without cause of an employee. If an employee covered by KERP 2 is not offered employment by a going-concern purchaser, the entire retention payment will be made upon closing of the transaction. In the event of a liquidation, the cash retention payments will be equal to 75% of the maximum amounts established in respect of the employees covered by KERP 2. As was the case with KERP 1, USSC proposes to pay the KERP 2 amount to the Monitor to be held in trust pending the occurrence of any payment condition.
[17] The Court’s jurisdiction to authorize KERP 2 is found in its general power under s. 11 of the CCAA to make such order as it sees fit. The following factors identified in case law support approval of KERP 2 as fair and reasonable in the present circumstances.
[18] First, the evidence supports the conclusion that the continued employment of the employees to whom KERP 2 applies is important for the stability of the business and to assist in the SISP. The evidence is that these employees perform important roles in the business and cannot easily be replaced. In addition, certain of the employees have performed a central role in the proceedings under the CCAA and the restructuring process to date.
[19] USSC advises that the employees identified for KERP 2 have lengthy histories of employment with it and specialized knowledge that cannot be replaced. Of the 34 employees covered by KERP 2, twenty-four were key employees in KERP 1. USSC advises that the number of employees considered to be key employees has increased since KERP 1 as a result of USSC’s increasing independence from United States Steel Corporation (“USS”). The evidence strongly suggests that, if the employees were to depart USSC, it would be necessary to replace them on an immediate basis but that it would be very difficult, if not impossible, to identify adequate replacements in view of USSC’s current circumstances.
[20] Second, there is little doubt that, in the present circumstances and, in particular, given the uncertainty surrounding a significant portion of the USSC’s operations, the employees to be covered by KERP 2 would likely consider other employment options if KERP 2 were not approved. USSC says that certain of the key employees could depart imminently and others are likely to depart in the longer term if they are not provided with an incentive to remain in the form of KERP 2. More generally, it would be expected that, given that the CCAA proceedings have continued for almost two years, key employees will look for more stable long-term employment. USSC advises that approximately 48 salaried staff employees have departed in the past six months, including one employee who was covered by KERP 1.
[21] Third, the evidence supports the conclusion that the continued employment of the employees to whom KERP 2 applies is important for the stability of the business and to assist in the successful conclusion of a going-concern sale or plan of arrangement, if feasible. In particular, seven of the key employees perform sales functions. Their departure would cause direct harm to USSC’s ability to generate revenue, given that USS no longer performs any sales function on behalf of USSC. The sales function is also important to the business of USSC’s major customers. In addition, the retention of key employees will be critical to any transition plan regarding a continuation of going-concern operations. USSC advises that at least one prospective purchaser in the SISP has indicated that a second key employee retention plan is important to it for this purpose.
[22] Fourth, the KERP 2 was developed through a consultative process involving USSC’s management, USSC’s outside labour and employment counsel, and USSC’s board of directors. USSC's board of directors, including the independent director, supports KERP 2. The business judgment of the board of directors is an important consideration in approving a proposed key employee retention plan: see Timminco Ltd. (Re), 2012 ONSC 506, at para. 73.
[23] Fifth, both the Monitor and the CRO support KERP 2. In particular, the Monitor’s judgment in this matter is an important consideration. The Monitor advised in its Twenty-Ninth Report dated August 15, 2016 (the “Twenty-Ninth Report”) that it is satisfied that each of the employees covered by KERP 2 occupies an important management or operational role, is a seasoned employee of USSC with deep knowledge of its business which cannot be readily replaced, and is critical to USSC’s strategic direction and day-to-day operations and management as well as to completion of a successful restructuring. The Monitor also advises that it has reviewed the role and responsibility for each individual employee and the proposed quantum under KERP 2 for each employee and is satisfied that the amount and terms of the proposed KERP 2 are reasonable and appropriate in the circumstances and in the Monitor’s experience in other CCAA proceedings. The CRO advised that he believes it is in the best interests of USSC to make KERP 2 available to the employees covered by the plan and that the aggregate amount payable under KERP 2 is reasonable.
[24] Sixth, the terms of KERP 2, as described above, are effectively payable upon completion of the restructuring process.
[25] Based on the foregoing considerations, the KERP Motion is granted.
The OPEB Motion
[26] By order dated October 9, 2016, the Court authorized the suspension of payments by USSC in respect of all OPEBs except for life insurance, along with the suspension of certain other payments (the “Cash Conservation Order”). On the basis of this order, USSC has suspended payments of the OPEBS, among other obligations, since that date.
[27] As mentioned, this motion was originally scheduled to be heard on July 27, 2016. It was adjourned at the encouragement of the Court to permit discussions between the parties regarding a possible settlement of both the KERP Motion and the OPEB Motion. The parties did not reach an agreement. However, in connection with these discussions, each of USSC and the Moving Parties served “with prejudice” offers.
[28] The USSC offer proposed a one-time payment of $2.7 million to the Transition Fund, or to another fund to be administered on the same terms. The Moving Parties’ offer provided for reinstatement of OPEBs until December 31, 2016, to be followed by a case conference to discuss whether the OPEBs should continue to be suspended after that date.
[29] At the hearing of the OPEB Motion, the parties proceeded on the basis that the positions of the parties were narrowed to those reflected in their respective offers.
[30] Accordingly, the Moving Parties sought an order requiring USSC to reinstate payment of OPEBs on a going-forward basis to the end of 2016, with payment thereafter to be addressed in a case conference at that time. USSC opposed this motion on the basis that its offer of a one-time payment to the Transition Fund appropriately balances the payment of the OPEBs with ensuring USSC’s operational capabilities during the SISP process and furthering the prospects of the SISP.
The Evidence of the Parties
[31] The parties have provided affidavit evidence of their respective advisors. The following summarizes the evidence in these affidavits, which counsel for the USW and USW Local 8782 accurately notes is at least as much argument as factual evidence. In addition, I have set out the principal recommendations of the Monitor in its Twenty-Ninth Report.
The USW
[32] The USW relies on the Bishop Affidavit. Bishop states that, in his opinion, reinstatement of OPEB funding would not materially diminish USSC’s forecast cash balance during 2016 and should not change USSC’s and the Monitor’s expectation that there will be no need to draw on the “debtor-in-possession” loan currently in place (the “DIP Loan”) at any time in 2016.
[33] Bishop bases this conclusion largely on his view that USSC has underestimated its cash flow forecasts, or perhaps more precisely outperformed its cash flow forecasts, since the commencement of these proceedings and continues to do so. In particular, Bishop has provided charts that demonstrate in his view that, contrary to expectations at the time that payment of the OPEBs was suspended, USSC could have continued to pay OPEBs after October 9, 2015 and would still have had sufficient liquidity to continue operations through 2016 without drawing on the DIP Loan.
Representative Counsel
[34] Representative Counsel relies on an affidavit of William Missen (“Missen”), a former senior officer of USSC who retired in 2004. Missen observes, as did Bishop, that the actual cash on hand at December 31, 2015 far exceeded the forecast amount at the time that payment of the OPEBs was suspended and that USSC has not drawn on the DIP Loan despite its forecast at the time.
[35] Missen states that, in his opinion, USSC has sufficient cash on hand and forecasted earnings before interest, taxes, depreciation and amortization (“EBITDA”) to allow reinstatement of the OPEBs without requiring a draw on the DIP Loan to fund such payments.
USSC
[36] USSC relies on the Aziz Reply Affidavit. Aziz states that he believes that it is necessary, and in the best interests of achieving a successful restructuring, not to order reinstatement by USSC of the OPEBs. Aziz essentially makes six points in support of this position.
[37] First, he says that actual EBITDA of USSC tracked exactly the forecast to May 31, 2016 made at the time of the Cash Conservation Order, and that it was only in June and July 2016 that actual EBITDA exceeded the forecast amount. He says these results are reflected in the fact that income from operations was positive only in June 2016. Accordingly, during the period October 1, 2015 to June 30, 2016, USSC had a cumulative negative income of $139.7 million and a cumulative negative EBITDA of $61 million. Further, Aziz says that the factors that resulted in increased gross margins since May 2016 – principally lower costs for key raw materials, higher steel prices, and a lower dollar – are subject to volatility, particularly steel prices which are forecast by many industry observers to decline during the rest of 2016. On the basis of the foregoing, Aziz says that, in his opinion, the historical record over this period, including the recent performance of USSC, does not indicate a reliable upward trend of financial performance over that which was forecast in September 2015, including in particular any reliable trend in the level of anticipated cash contributed from operations as reflected in EBITDA.
[38] Second, while USSC acknowledges that its cash position has improved since October 2015, Aziz says this is largely due to the conversion of working capital, principally raw material inventory, into cash and the deferral of approximately $14 million of capital expenditures that were included in the forecast at the time of the Cash Conservation Order. Over the period October 2015 to the end of June 2016, USSC’s net cash position exceeded the forecast by $92 million while its working capital and capital expenditures was $54 million less than forecast. Of the difference of $38 million, $23 million is accounted for by the EBITDA difference in June 2016 compared to the forecast at the time of the Cash Conservation Order, and $8 million is accounted for by the absence of interest payments on the DIP Loan, which was not drawn on during the period. Aziz says that, essentially, the existing cash is “spoken for” in the form of a necessary raw material inventory buildup in anticipation of winter, necessary capital expenditures, and payment of post-filing payables to suppliers who have extended credit to USSC.
[39] Third, Aziz says there are a number of benefits to the USSC restructuring process from its current cash position that must also be taken into account. These include: (1) allowing USSC to operate reliably and without interruption; (2) avoiding a draw on the DIP Loan with its attendant interest costs and pressure from priority creditors who perceive an erosion of their security; (3) providing the liquidity to make seasonal raw materials inventory purchases and necessary capital expenditures; (4) affording USSC flexibility in its negotiations with prospective purchasers in its SISP process without an artificial deadline driven by cash-flow constraints; (5) permitting better payment terms from suppliers; and (6) assuring certainty of supply to USSC’s customers. He suggests that conservation of cash is necessary for these reasons, which collectively enhance the prospects of a successful going-concern restructuring process that would address the concerns of all stakeholders to the maximum extent feasible.
[40] Fourth, Aziz suggests that any consideration of the resumption of payment of unsecured obligations should be taken in light of the prior ranking of secured and other priority claims. In particular, Aziz refers to the USS secured claim of U.S. $118.7 million, post-filing payables to suppliers, which were $95.5 million at June 30, 2016, and potential statutory liens on the USSC properties, including municipal taxes.
[41] Fifth, Aziz says that reinstatement of the OPEBs may trigger an event of default under the DIP Loan. This suggestion is speculative. I have not taken it into consideration in reaching the Court’s determination on this issue.
[42] Lastly, Aziz says that it is difficult to predict the actual cost of OPEB coverage if OPEBs were reinstated by USSC and that the actual cost could be higher than the historical average of $3.6 million per month due to pent up demand and a time-limited incentive if reinstatement were ordered for a limited time prior to completion of any transaction.
The USW Reply to the Aziz Reply Affidavit
[43] In a reply affidavit sworn August 15, 2016 (the “Bishop Reply Affidavit”), Bishop makes the following statements.
[44] First, Bishop says the USSC financial results reflect the cost of certain raw materials under long-term contracts which ended in February 2016. He calculates the negative impact on cash flow associated with these contracts during the period October 1, 2015 to February 28, 2016 to have been $44 million.
[45] Second, he suggests the positive EBITDA in June 2016 and the anticipated positive EBTIDA for July 2016 represents a “significant change” in USSC’s financial performance.
[46] Third, he says that, in the absence of a working capital “roll forward” or forecast to the end of 2016, Aziz has failed to show mathematically that USSC would not have sufficient liquidity to meet its operational needs if it funded the OPEBs.
[47] Ultimately, Bishop relies on his earlier statement that USSC could have continued to pay for the OPEBs after October 9, 2016 and still have more liquidity than it forecast during the period October 1, 2015 to May 31, 2016 at the time of the Cash Conservation Order.
The Monitor
[48] In its Twenty-Ninth Report, the Monitor addressed the financial performance of USSC and the status of the SISP in the context of the Moving Parties’ motion to require reinstatement of the OPEBs. The Monitor is of the opinion that the proposed one-time contribution by USSC to the Transition Fund, pending the outcome of the negotiations currently taking place under the SISP, “represents an appropriate balancing of the interests of USSC’s operating and restructuring priorities with the interests of the OPEB [b]eneficiaries.” It says such a contribution “is appropriate in light of USSC’s financial position, priority claims and the on-going SISP.” The Monitor recommends against reinstatement of the OPEBs, apart from the proposed payment of $2.7 million by USSC to the Transition Fund, for the following reasons.
[49] First, in the Monitor’s estimation, USSC’s financial position remains uncertain, notwithstanding an improvement in steel prices in the last several months. It states that the increase in USSC’s cash position over the forecast at the time of the Cash Conservation Order is principally due to a reduction of working capital and the increase of post-filing trade credit.
[50] Second, the Monitor says that any decision to reinstate the OPEBs should take into consideration the legal priorities of other claimants. These include post-filing payables that need to be paid to continue operations and the claims of its secured creditors, including statutory liens and construction liens that remain to be adjudicated.
[51] Third, in the Monitor’s view, reinstatement of the OPEBs could be detrimental to a successful SISP outcome involving a going-concern sale. It says the long-term treatment of the OPEBs is best negotiated between a going concern bidder and the affected stakeholders.
The Positions of the Parties
[52] The Moving Parties say essentially that, however the current cash position of USSC arose, there is sufficient cash to reinstate the OPEBs on a monthly basis without negatively affecting the operational and restructuring activities of USSC. They say that, to the extent that USSC has failed to demonstrate quantitatively that it cannot afford to reinstate the OPEBs, it has failed to satisfy the onus on it. They also suggest that the Court should draw an adverse inference from the absence of such evidence and, in particular, from the absence of a forecast of month-end working capital for the period to December 31, 2016.
[53] USSC says that its current financial position is largely unchanged from its financial position at the date of the Cash Conservation Order. It says that, while it has accumulated substantial cash, its current cash position reflects factors other than a cash contribution from operations. It says that these factors do not reflect an improvement in its financial position. USSC submits that the Court should give priority to the payment of OPEBs only if the operational and restructuring activities of USSC are not materially adversely affected. USSC also submits that the Moving Parties bear the onus of proof on this motion and suggests that they have failed to satisfy that onus.
Analysis and Conclusions
[54] The issue of the possible resumption of the OPEBs is a matter on which the Court has considerable sympathy for the affected stakeholders. The possibility of a resumption of payments if economic circumstances permitted was contemplated in the Court’s Endorsement dated October 14, 2015. The Court stated the following at para. 137:
…It is possible that the operating experience in the new environment will reveal some possible alternatives. I would encourage USSC to be alert to such possibilities as it moves forward. The restoration of the OPEBs should be a priority together with its operating and restructuring priorities.
[55] However, as the passage indicates, any consideration of the resumption of payments must take into account USSC’s operating and restructuring priorities. Such considerations are of particular significance at the present time given the status of the SISP. I will analyse the applicable considerations on this motion after first addressing the test implied by this passage.
The Legal Test
[56] The Moving Parties submit different standards for application by the Court, in each case based on the statements of the court in Bloom Lake, g.p.l (Arrangement relatif a), 2015 QCCS 3064, at para. 104, leave to appeal dismissed, 2015 QCCA 1351 and the Court’s Endorsement dated October 14, 2015.
The Tests Proposed by the Moving Parties
[57] Representative Counsel submits that the Court should order reinstatement of OPEB payments unless the evidence demonstrates that such payments will result in the bankruptcy of USSC. While those were the circumstances in Bloom Lake, I do not think that the trial court judge considered that the authority of the court was so limited, or that he purported to set out a test that was limited to such circumstances. Nor do I think that such an inflexible test is consistent with the role and authority of a court in CCAA proceedings, which are not directed toward avoiding the bankruptcy of a debtor company, but rather toward furthering a restructuring of the company as a going concern if possible. The test proposed by Representative Counsel is also not reflective of the decision of the Court in its Endorsement as is discussed further below. The USW describes the approach of this Court as making it a priority that OPEBs be reinstated unless it is demonstrated that such action will adversely affect USSC’s operating priorities or will adversely affect its restructuring process. It also suggests that this is the test that was articulated in Bloom Lake. I also do not agree with this formulation of the applicable legal standard on this motion as is discussed below.
Analysis of the Court
[58] In its Endorsement, the Court contemplated a consideration of the extent to which it was feasible to reinstate some or all of the OPEBs relative to the impact of any such decision on the operating priorities of USSC at such time and the current status of its SISP. In broad terms, the Court envisaged a need to balance the competing objectives of payment of some or all of the OPEBs, maintenance of USSC’s operations as a going concern consistent with its business plan, and furtherance of the SISP.
[59] With respect to the reinstatement of the OPEBs, any such reconsideration could canvas a range of alternatives. In this case, the Moving Parties seek reinstatement of all of the OPEBs, whereas USSC proposes a one-time payment. With respect to the maintenance of USSC’s operations, the Court’s Endorsement specifically contemplated, as a practical matter, that any such decision would require a change in USSC’s operating experience, by which was meant an improvement in USSC’s profitability, as a condition of such an order. In other words, the existence of cash not accompanied by an improvement in the anticipated operating performance relative to the cash flow forecast at the time of the Cash Conservation Order would not be sufficient to support such relief. Such an approach implies that the onus of demonstrating such a change rests with the Moving Parties. With respect to considerations pertaining to the SISP, the Court must take into account the potential for any impact, adverse or otherwise, on the prospects for a successful outcome of the restructuring process.
[60] I consider this approach to be consistent with the decision in Bloom Lake upon which the Moving Parties rely. Insofar as the trial judge in Bloom Lake applied a test, it is set out in para. 104 thereof, where he stated that “[t]he Courts have consistently recognized a jurisdiction to suspend the obligation to make special payments and OPEB payments when ‘necessary to enhance the liquidity to promote the survival of a company in financial distress.’” What is “necessary to enhance the liquidity to promote the survival of a company in financial distress” in any given situation will depend on the circumstances of each case. In Bloom Lake, the debtor company had ceased operations. All that was necessary was funding to permit the conduct of a sales and investment process. In the present circumstances, it is necessary to fund the continuing operations of USSC to maximize the prospects of a successful SISP that will provide the greatest possible benefit to all of the stakeholders, including in particular the Moving Parties.
[61] Accordingly, I am of the view that the determination of the OPEB Motion requires a balancing of the three competing objectives set out above subject to the condition of demonstration of a material improvement in the anticipated profitability of USSC over the period of payment of the OPEBs sought by the Moving Parties.
Analysis of the Relevant Considerations
[62] It is important to recall the circumstances in which, and the purpose for which, the Cash Conservation Order was made in October 2015. At that time, USSC was facing the prospect of a termination of its operating business unless it could adopt its business preservation plan. The purpose of USSC’s business preservation plan was to conserve cash with a view to continuing to operate the USSC business for a further year or more while conducting a new sales and investor solicitation process.
[63] At that time, the OPEB beneficiaries were faced with the immediate termination of their OPEB benefits if USSC ceased operations and no prospect of any reinstatement under a liquidation scenario. The only alternative was a suspension of payment of a number of obligations, including OPEB benefits, pursuant to USSC’s business preservation plan in the hope that a new sale and investment process would result in a going-concern transaction which would include a resumption of OPEB payments.
[64] Accordingly, the starting point for the analysis of the present motion must be whether there has been any fundamental change in the profitability of USSC from that anticipated at the date of the Cash Conservation Order which would warrant a direction of the Court to USSC to resume OPEB payments. This is consistent with the legal standard described above. Accordingly, I have proceeded on the basis that the evidence must demonstrate such a fundamental change on a balance of probabilities in order to warrant an order which would, in effect, vary the Cash Conservation Order.
Has A Fundamental Change Occurred in USSC’s Financial Performance and Prospects?
[65] While the Moving Parties argue forcefully that the financial forecasts on which the USSC business plan was based in October 2015 were significantly different from the circumstances that actually arose, I am not persuaded that this is the case. The actual performance of USSC was bound to depart from the forecast. I am not persuaded, however, that the actual performance of USSC since October 2015 has departed materially from that which was forecast at the time of the Cash Conservation Order.
[66] The strongest evidence for this conclusion is the historical experience of cash contribution to earnings as evidenced by the EBITDA performance. As mentioned, for the period October 1, 2015 to May 31, 2016, actual EBITDA was essentially the amount forecast as of the time of the Cash Conservation Order. On an aggregate basis, EBITDA only exceeded the forecast amount in June and in July (for which the financial results were not available at the date of the hearing).
[67] I am not persuaded on the evidence before the Court that the financial performance of USSC in May, June and July, insofar as it was known at the date of the hearing, evidences a material improvement in the profitability of USSC. The Monitor says in the Twenty-Ninth Report that caution is required in assessing the likelihood that this recent financial performance represents a fundamental improvement in USSC’s operating performance because of the volatility of its business and the inherent challenges of the steel industry, including significant excess production. It indicates that USSC’s recent order experience in June and July may reflect a trend of decreasing orders. In addition, the Aziz Reply Affidavit states that forward prices reflect an anticipated decline in steel prices by the end of 2016. Bishop did not contradict that evidence.
[68] Bishop’s evidence to the contrary was that EBITDA results reflected higher than market prices for raw materials inventory through to the end of February 2016. However, it is overly simplistic to base a conclusion regarding USSC’s current level of profitability on an adjustment of one figure to a portion of USSC’s historical results, rather than considering the totality of the evidence regarding the profitability of its operations. As Bishop notes in the Bishop Affidavit, at the time of the Cash Conservation Order, USSC estimated that, after implementation of its business preservation plan, its cash resources would be depleted by $6 to $8 million per month. While Bishop says that this has clearly not been the case, the actual average monthly reduction in cash from operations, as reflected in the EBITDA performance to June 30, 2016 of a cumulative negative $61 million, was approximately $7 million.
[69] Given the legal standard set out above, and the Court’s determination that the evidence does not support a finding that there has been a fundamental improvement in the profitability of USSC’s business, there is no basis for the relief sought by the Moving Parties on the OPEB motion. The remainder of the Endorsement sets out the Court’s views on three other considerations that also support the Court’s determination in the event it were held that a finding of a fundamental improvement in the profitability of USSC should not be a condition of any order requiring a reinstatement of the OPEBs.
Does USSC Hold Excess Cash?
[70] The alternative, and principal, argument of the Moving Parties is that, even if the Court finds that there has been no material improvement in USSC’s profitability over that forecast at the time of the Cash Conservation Order, the cash position of USSC has departed from that forecast to such an extent that USSC could resume the payment of the OPEBs without materially adversely affecting its operational or restructuring priorities over the foreseeable payment horizon for the OPEBs. They say that the Court should therefore order a resumption of the OPEBs based on the level of cash that USSC currently holds.
[71] I have the following observations and findings on this submission.
[72] First, the principal argument in the Bishop Affidavit is, as mentioned, that USSC has underestimated its cash flow forecasts, or perhaps more precisely outperformed its cash flow forecasts, since the commencement of these proceedings and continues to do so. In particular, the Moving Parties have chosen to place great emphasis on the difference between the amount of cash on hand at December 31, 2015 and the amount forecast at the time of the Cash Conservation Order.
[73] The decision to pick one date in time, particularly a date that is now more than seven months from the date of the hearing of this motion, is not only misleading but indicative of the argumentative nature of the alleged evidence in the Bishop Affidavit and therefore reason to approach such evidence with caution. Further, the fact that USSC has underestimated its cash position since the date of the Cash Conservation Order is no predictor of its cash position, or financial performance, in the future. Moreover, the current cash position is not by itself a basis for a resumption of payment of the OPEBs if USSC requires such cash for its operations. This is addressed below.
[74] Second, for its part, USSC points to significant benefits to USSC from its current cash position that it says must be considered in connection with any resumption of payments of unsecured liabilities, including the OPEBs.
[75] From an operational perspective, the existence of an adequate cash position is necessary to provide assurance to USSC’s customers of continued supply of product. In addition, the current cash position has contributed to favourable credit terms from suppliers and removed the need for a draw, and consequential interest payments, on the DIP Loan. These factors contribute to an increased likelihood that USSC will be able to continue to operate on an independent basis until an agreement may be reached with a purchaser for a going-concern transaction.
[76] Most importantly from USSC`s perspective, the existing cash position allows USSC to conduct the SISP in an orderly manner in two respects. First, it allows negotiations with prospective purchasers to proceed without artificially imposed deadlines pertaining to USSC’s financial performance. Such circumstances maximize the prospects for a successful going-concern restructuring which, as a practical matter, is the best if not the only course of action that would envisage a resumption of OPEB payments on a longer-term basis. In addition, by removing the possibility of erosion of the security position of its priority creditors, USSC is able to pursue the orderly conduct of the SISP without the distraction of creditor-initiated proceedings.
[77] However, the issue before the Court is not the benefit of liquidity in the abstract, which is not disputed. Bishop agrees that “holding sufficient liquidity is essential.”
[78] Third, the issue on this motion is more narrowly focused on the extent to which USSC requires liquidity in the present circumstances and whether its current position would permit a resumption of payment of the OPEBs without detrimentally affecting its operational and restructuring priorities.
[79] The Moving Parties say, in effect, that USSC has built the need for excess cash into its forecasts or, alternatively, it has, and will continue to, regularly exceed the very conservative cash flow forecasts that it has prepared with the result that there is a cash “cushion” in its financial condition, present and future. The Moving Parties say that USSC has the onus of demonstrating that this is not the case and that all of the cash that it currently has on hand will be required in its operations. They say that USSC has failed to satisfy this onus and, accordingly, the Court should order reinstatement of the OPEBs as a priority matter.
[80] For its part, USSC says that it has based its position on its going-forward analysis of its working capital requirements. Essentially, it says all of the current cash will be applied in its operations through to the year-end, other than cash requirements to provide a reasonable cushion for unanticipated events in a volatile market. USSC argues that the extent of the liquidity that it requires is a matter of business judgment. Accordingly, it says that the Court should respect the considered judgment of USSC management and its board of directors absent evidence of negligence or other improper behaviour.
[81] These positions raise four issues that I will address in turn.
[82] First, it is incorrect and misleading to limit the focus of the inquiry to the present cash position and the existence of any cash “cushion.” The issue for the Court must be the anticipated future operating performance of USSC over the rest of 2016 viewed as a totality. This requires an understanding of the anticipated use of all of USSC’s current assets, including but not limited to its cash, raw materials, and inventory, and the adequacy of such assets over this period. Such an understanding is informed in part, but not entirely, by the historical experience, including the source of the current cash position and the explanation for the difference between USSC’s forecast and actual cash position.
[83] In this regard, as the Aziz Reply Affidavit sets out, and the Monitor confirms, it is significant that the increase in USSC’s cash position is not the result of an improved financial performance except in respect of the most recent operating experience. In para. 41 of the Twenty-Ninth Report, the Monitor analysed the actual cash flow of USSC for the period from October 1, 2015 to June 30, 2016 against the forecast cash flow at the time of the Cash Conservation Order. Of the $92 million difference, only $23 million was due to an improvement in cash contributed from operations, being the favourable experience in June 2016. The balance represented primarily the reduction of working capital assets, the negotiation of credit terms from suppliers post-filing, the deferral of capital expenditures, and the absence of interest on the DIP Loan.
[84] These factors are, in large measure, both short-term and interrelated. The absence of interest payments on the DIP Loan is primarily the result of the conversion of working capital into cash and the deferral of capital expenditures rather than a consequence of an improvement in the operating experience of USSC, as discussed above. During the remainder of 2016, the reduction of working capital assets will reverse as raw materials inventory will build up again. The favourable credit terms from suppliers are only possible with a favourable cash position. The deferral of capital expenditures cannot last indefinitely and, in the event an agreement is reached in the SISP on a going-concern transaction, may be required as a condition of closing.
[85] Second, while the Court has been provided with a cash flow projection to the end of 2016, it has not been provided with a working capital forecast over the same period. It is understood, however, that such forecasts are available to the Moving Parties on a monthly basis. I am therefore not prepared to draw an adverse interest from the absence of such financial forecasts in the record before the Court. However, the information before the Court does require a close scrutiny of the anticipated cash requirements of USSC over this period.
[86] Third, while I acknowledge that the considered assessment of USSC management and its board of directors is an important consideration for the Court, I do not accept that the business judgment rule governs the present circumstances in an unqualified manner. Under the CCAA, a court has an obligation and a mandate to scrutinize the decisions of a debtor company through the prism of the rights of the affected stakeholders.
[87] On the other hand, the issues on this motion involve an understanding and assessment of USSC’s business plan for the remainder of 2016. The specific question of the capacity of USSC to resume payment of the OPEBs, given its expectations for this period as incorporated into its business plan and cash flow forecasts, is necessarily a matter of judgment rather than simple mathematics, as Bishop suggests. In these circumstances, in assessing the appropriateness of USSC’s business decisions, the Court must necessarily rely heavily on the assessment and recommendations of the Monitor regarding financial matters, including the necessary level of liquidity to be incorporated into USSC’s business plan. The Court cannot be its own financial advisor. In this regard, it must also rely heavily on the Monitor’s assessment of the extent to which that business plan has the capacity to absorb additional obligations, such as a resumption of payment of the OPEBs.
[88] The Monitor advises in the Twenty-Ninth Report, and confirms the evidence of USSC, that USSC sustained EBITDA losses through May 31, 2016 in line with the forecast at the time of the Cash Conservation Order and that, despite positive cash flow performance in June and July relative to the forecasted cash flow, the financial position of USSC remains uncertain. In addition, the Monitor confirmed, and set out in detail in its Report, that although USSC’s cash position at the end of June 2016 was greater than projected at the time of the Cash Conservation Order, this is principally due to the factors described above and is not indicative of a material beneficial change in the financial condition and prospects of USSC at the present time.
[89] The Monitor also states that the post-filing payables as of June 30, 2016 were $95.5 million, principally representing trade credit owed to suppliers and accrued employee obligations. These payables will ultimately need to be paid out of the cash on hand, which was $131.4 million as of June 30, 2016. This amount is before any reduction in cash that will occur in connection with additional raw materials inventory purchases ahead of the winter season. The Monitor also notes that payment of the post-filing payables and secured claims of USSC, including certain construction lien claims that have not yet been adjudicated, would result in a significant cash deficiency. Payment of the OPEBs to the end of the year would conservatively add approximately $20 million to such obligations.
[90] Having reviewed both the historical performance of USSC and its forecast working capital requirements, the Monitor recommends against reinstatement of the OPEBs, among other reasons, based on USSC’s working capital requirements for the remainder of 2016. This is an important consideration for the Court. In effect, the Monitor concludes that there is a significant possibility that resumption of payment of the OPEBs would materially adversely affect USSC’s operational performance given its current level of profitability.
[91] Based on the foregoing analysis, I see no basis for rejecting this conclusion which the Court therefore adopts.
Additional Considerations Relative the SISP
[92] It is also important to recognize two other considerations that relate to the context in which this motion is brought forward.
[93] First, the timing of this motion relative to the SISP, and the circumstances that would exist depending upon the outcome of that process, are important factors to be taken into account. In general terms, USSC and the principal stakeholders, including the USW and to a lesser extent Representative Counsel, are holding discussions with prospective purchasers. It is currently expected that the outcome of these negotiations will be known within 4-6 weeks.
[94] If the SISP process results in a going-concern transaction, it is anticipated that the agreement with the successful bidder will, among other things, address the future of the OPEBs. The most appropriate outcome of the present motion would, under such circumstances, be an order that is consistent with the agreement reached between the stakeholders, including the Moving Parties and the proposed purchaser, regarding OPEBs. Moreover, as the Monitor has indicated in its recommendations, the present motion should not constrain the current discussions between the stakeholders and the prospective bidders. In this regard, it is also important to note the Monitor’s assessment that, in this context, an order reinstating the OPEBs “could be detrimental to a successful SISP outcome.”
[95] Conversely, if the SISP process does not result in a going-concern transaction, USSC will have to address alternative transactions, which would include an orderly liquidation of its assets. In this context, it would be necessary to address the status of the claims of the OPEB beneficiaries relative to the priority claims of other creditors before any decision on payment of those claims could be made. I recognize that it is of little consolation to the OPEB beneficiaries that, in such circumstances, they would be in the same position that they would have been in if the Cash Conservation Order had not been issued and USSC had ceased operations after October 2015. However, Representative Counsel has advised on a number of occasions of a priority claim that it intends to assert in respect of the same parties as pension beneficiaries. In addition, the Moving Parties have advised that they have conduct-related claims against USS which they may pursue in such event.
[96] For its part, in such scenario, the Court would be required to address the priorities of the claims of the stakeholders as they have been determined as of that time. For this reason, as well, the Court must be mindful of the impact of any decision on the status of all stakeholder claims if this alternative scenario were to occur. Given that any such scenario would arise in the very near term, the Court cannot approve any action that would potentially adversely affect the security of priority creditors until the outcome of the SISP is known. The latitude that often exists at the outset of a restructuring process does not exist in the present circumstances given the status of the SISP. The Court cannot look to the anticipated benefits of a restructuring over the longer-term to offset the potential for adverse impacts in the short-term.
[97] The second consideration is more administrative in nature but could nevertheless be material. The Moving Parties suggest that the monthly amount involved if OPEB payments were resumed would be approximately $3.6 million. This is based on the historical experience before USSC suspended payment of the OPEBs. However, in the current environment there can be no certainty regarding the likely level of claims for several reasons. These include the fact of past claims that have been denied by the Transition Fund, as well as the natural influence of a future date for termination of OPEB claims on the timing and level of claims as that date approaches. In short, the Moving Parties ask the Court to direct USSC to assume an unquantifiable obligation. On the other hand, the USSC proposal involves a fixed amount. Further, based on its experience since it was established, the existing Transition Fund is in a better position to anticipate the level of eligible claims that would be made if eligible coverage were extended to other categories of claims. In this connection, it is useful to consider the one-time contribution proposed by USSC of $2.7 million. On the one hand, such a payment does not satisfy the Moving Parties’ request in terms of either amount or duration. On the other hand, it recognizes that USSC has recently experienced favourable economic results in June and July 2016 of which the Monitor attributes $12.2 million to higher than anticipated gross margins in respect of the period to June 30, 2016. It is appropriate that the OPEB beneficiaries share in some of this favourable performance as have the existing employees. Such a payment will, together with the recent payment of the Province, permit a possible expansion of the coverage under the Transition Fund to address some of the coverage gaps in the Fund. Further, the amount contemplated is a material contribution toward the amount that the Moving Parties suggest is the likely cost of OPEBs during the period in which negotiations regarding the restructuring of USSC are expected to conclude. It would then be possible to assess the future status of the OPEBs based on the outcome of these negotiations.
[98] The two considerations addressed in this section indicate that any payments made on account of the OPEBs that are authorized at this time should be fixed in amount and be of fixed duration. Put another way, there is a real sense in which this motion is premature and should be heard after the outcome of the SISP is known. The Moving Parties suggest that payments should be ordered to at least the end of 2016. This would obligate USSC to pay the OPEBs well beyond the date on which it is anticipated that the outcome of the SISP will be determined. The USSC offer involves a one-time payment pending the outcome of the SISP. I conclude that the two considerations addressed in this section argue against a resumption of payment of the OPEBs at the present time and in favour of the contribution to the Transition Fund proposed by USSC, given that the Court effectively has to choose between the two offers of the parties.
Conclusion
[99] As mentioned, the determination of this motion requires that the Court choose between the two positions of the Moving Parties and USSC on the basis of its estimation of the best balance of competing considerations. These considerations are the furtherance of USSC’s operational and restructuring priorities, and payment of the OPEBs. This is not an easy decision given the impact on the OPEB beneficiaries, who are certainly entitled to the sympathy not only of the Court but of all the stakeholders. Based on the test implied by the Court’s Endorsement dated October 14, 2015, however, there is no basis for ordering a resumption of payment of the OPEBs. The evidence does not support a finding that there has been a fundamental improvement in the profitability of USSC’s business since the date of the Cash Conservation Order.
[100] Even if such a determination were not a condition of such relief, the combination of factors discussed above weighs against such relief. In particular, the Monitor is of the view that the USSC contribution of $2.7 million to the Transition Fund is appropriate in light of USSC’s financial position, among other considerations, and recommends against reinstatement of the OPEBs. Given the considerations discussed above, I agree with that recommendation in concluding that the position of USSC best balances the competing priorities at play on this motion. Accordingly, the OPEB Motion should be denied at this time provided that USSC makes a one-time contribution of $2.7 million to the Transition Fund or to another fund to be administered on the same terms as the Transition Fund.
Wilton-Siegel, J.