monitor report on the review of uss claims - final with appendices-1
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steel, stealing, hamiltonTRANSCRIPT
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Court File No. CV-14-10695-00CL
ONTARIO
SUPERIOR COURT OF JUSTICE
COMMERCIAL LIST
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.
SEVENTH REPORT OF THE MONITOR
MARCH 9, 2015
INTRODUCTION
1. On September 16, 2014, U.S. Steel Canada Inc. (“USSC” or the “Applicant”) applied for
and was granted protection from the Ontario Superior Court of Justice (Commercial List)
(the “Court”) under the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”).
Pursuant to an Order (the “Initial Order”) of this Court dated September 16, 2014 (the
“Filing Date”), Ernst & Young Inc. (“EY” or the “Monitor”) was appointed Monitor of
USSC in the CCAA proceeding. The Initial Order provided for a stay of proceedings
through October 15, 2014, which has subsequently been extended to May 15, 2015 by
Order of the Court dated January 21, 2015.
PURPOSE
2. The purpose of this report (the “Seventh Report”) is to provide a report to the Court
detailing the Monitor’s review of certain claims filed by United States Steel Corporation
(“USS”), U.S. Steel Holdings Inc. (“USS Holdings”), U.S. Steel Canada Limited
Partnership (“Canada LP”), and other affiliates of USS (other than USSC and any of
USSC’s subsidiaries) (all such claims, collectively, the “USS Claims”) pursuant to an
Order of this Court dated November 13, 2014 (the “General Claims Process Order”)
which established a Claims Process (as defined in the General Claims Process Order) for
USSC to identify, determine and resolve certain Claims (as defined in the General Claims
Process Order) of its creditors.
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TERMS OF REFERENCE AND DISCLAIMER
3. In preparing this Seventh Report and making comments herein, the Monitor has been
provided with, and has relied upon, unaudited financial information, books and records and
financial information prepared by USSC, and upon discussions with management of USSC
(“Management”) and USS (collectively, the “Information”). Except as described in this
Seventh Report:
a. the Monitor has reviewed the Information for reasonableness, internal consistency
and use in the context in which it was provided. However, the Monitor has not
audited or otherwise attempted to verify the accuracy or completeness of the
Information in a manner that would wholly or partially comply with Generally
Accepted Assurance Standards (“GAAS”) pursuant to the Chartered Professional
Accountants Canada Handbook and, accordingly, the Monitor expresses no opinion
or other form of assurance contemplated under GAAS in respect of the Information;
and
b. to the extent any of the information referred to in this Seventh Report consists of
forecasts and projections, an examination or review of the financial forecasts and
projections, as outlined in the Chartered Professional Accountants Canada
Handbook, has not been performed.
4. Future oriented financial information referred to in this Seventh Report, if any, was
prepared based on Management’s estimates and assumptions. Readers are cautioned that,
since projections are based upon assumptions about future events and conditions that are
not ascertainable, the actual results will vary from the projections, even if the assumptions
materialize, and the variations could be significant.
5. Capitalized terms not defined in this Seventh Report are as defined in previous Reports of
the Monitor or in the General Claims Process Order.
6. Unless otherwise stated all monetary amounts contained herein are expressed in Canadian
dollars.
EXECUTIVE SUMMARY AND RECOMMENDATIONS
7. Since this Seventh Report and its appendices are lengthy and provide a detailed description
of the analysis undertaken by the Monitor and its legal counsel, Bennett Jones LLP
(“Bennett Jones”), the matters addressed in this Seventh Report are summarized below.
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8. The USS Claims comprise 14 distinct Claims, which may be summarized and aggregated
into the following three categories:
a. non-contingent Secured Claims (as defined in the General Claims Process Order) -
USD$122,432,496.11 (Claim Reference # 11 addressed herein);
b. unsecured Claims - USD$127,805,815.36 (Claim Reference #s 1 to 8, 10 and 11
addressed herein) and CAD$1,847,169,934.04 (Claim Reference #9 addressed
herein); and
c. contingent Secured Claims - CAD$78,761,395.00 (Claim Reference #s 12, 13 and 14
addressed herein).
9. The Monitor’s review of the books and records of USSC indicates that, since the
acquisition by USS of Stelco Inc. (“Stelco”) and its subsidiaries in October, 2007, USS has
provided total additional financing (i.e. excluding original acquisition financing) of
approximately CAD$1,917 million and approximately USD$188 million, consisting of: (a)
equity advances of approximately CAD$1,725 million and (b) debt (net of principal
payments) of approximately CAD$192 million and approximately USD$188 million
(approximately CAD$198 million).
10. The majority of the quantum of the unsecured Claims relate to the Term Loan (as defined
later herein) (CAD$1,847,169,934.04) which primarily relate to indebtedness incurred in
connection with the acquisition by USS of Stelco and its subsidiaries (including funding
for loans to Stelco to enable it to repay its third party debt) and which, as a result of certain
amalgamations that took place in 2008, are now Claims of USS and its subsidiaries, as
appropriate, against USSC.
11. The majority of the quantum of the non-contingent Secured Claims relates to the Amended
Revolver Loan (as defined later herein), which, along with the unsecured claims from
funded debt loans asserted by USS for amounts advanced after the initial financing, was
used principally to fund cash losses at USSC since the date of acquisition.
12. In the course of its review, the Monitor noted that the USSC’s books and records regarding
the inter-company transactions were well organized and documented, including with
respect to documenting each specific advance of cash from USS to USSC in the form of
equity or debt.
13. While the security granted to secure certain amounts owing by USSC to USS purported to
secure certain advances made prior to the grant of such security, the Secured Claim
asserted by USS is limited to advances made after the security was granted.
14. In the General Claims Process Order, the Monitor was directed to prepare and serve this
Seventh Report and, as soon as reasonably practicable thereafter, to seek an appointment
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before the Court, on notice to the Service List, to schedule the hearing of a motion to
determine the USS Claims.
15. In discussions with interested parties leading to the preparation of this report, the Monitor
and Bennett Jones were advised that certain parties might seek to challenge the USS
Claims based on the potential application of equitable principles, doctrines or remedies.
16. The Monitor believes that the efficient conduct of the Applicant’s restructuring
proceedings and administration of the Applicant’s estate is best served by the early
resolution of USS’ Secured Claims and unsecured Claims, including a prompt adjudication
and any potential challenges to those Claims.
17. For this reason, and based on the review of the USS Claims conducted by the Monitor and
Bennett Jones, the Monitor recommends to this Honourable Court that:
a. USS bring a motion to approve a Secured Claim in the sum of USD$122,432,496.11
and an unsecured Claim in the sum of USD$127,805,815.36 and
CAD$1,847,169,934.04;
b. a schedule be set for an early hearing of USS’ motion, including a timetable for USS’
motion, for any objections to the USS Claims (whether based on equitable
principles, doctrines or remedies or on some other basis) and for the filing of any
other materials in connection with USS’ motion and any challenge thereto;
c. at the hearing, and subject to the Court’s determination in relation to any possible
challenges to the USS Claims:
i. USS be found to have a Proven Claim (as defined in the General Claims
Process Order) for its Secured Claim of USD$122,432,496.11; and
ii. USS be found to have a Proven Claim for its unsecured Claim in the sum of
USD$127,805,815.36 and CAD$1,847,169,934.04; and
d. the resolution of the contingent USS Claims be deferred until additional facts and
circumstances develop in these proceedings to allow the Applicant and the Monitor
to determine whether it is necessary for the purposes of these proceedings for such
Claims to be resolved.
BACKGROUND
18. USSC is an indirect, wholly-owned subsidiary of USS and operates from two principal
facilities: Lake Erie Works and Hamilton Works.
19. Lake Erie Works is located on the shores of Lake Erie (near Nanticoke, Ontario). It is an
integrated steel mill with an annual capacity of approximately 2.7 million tons of raw steel
production, although given steel market constraints; it is currently producing an annualized
total of approximately 2.0 million tons.
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20. The principal operations of Lake Erie Works include coke making (the process whereby
metallurgical coal is converted into coke by baking the coal in coke ovens), iron and steel
making (the process whereby coke is combined with iron ore and limestone in a blast
furnace and ultimately combined with scrap metal and injected with oxygen to produce
liquid steel and then processed into slabs) and finishing (the process whereby slabs are
rolled on a hot strip mill and formed into steel sheet and then rolled into coils).
21. Lake Erie Works also operates a pickling line finishing facility, a process whereby hot
rolled coils are cleaned by running them through an acid solution. Lake Erie Works’ coke
making operations had been idled from April, 2013 until being re-started in early
September, 2014, during which time Lake Erie Works had been sourcing its coke from
Hamilton Works and other USS production facilities for its blast furnace operations.
22. A significant number of the hot rolled coils produced at Lake Erie Works are shipped to
Hamilton Works for further finishing and then ultimately sold to end customers.
23. Hamilton Works is located in Hamilton, Ontario. Steelmaking operations were
permanently shut down in 2013 after being idle since 2010. Its operations now consist of
certain finishing lines, including a cold reduction mill (which forms hot rolled steel into
thinner gauges of steel for end customer use – cold rolled steel) and two galvanizing lines
(which add a zinc coating to the cold rolled steel), which are used to further process steel to
meet specific customer requirements.
24. On October 31, 2014, USSC temporarily idled production of coke at Hamilton Works since
it had produced enough coke to supply the Lake Erie Works’ steelmaking operations until
April, 2015. The coke battery will continue to be hot idled (i.e. kept fueled) until such time
as production resumes pursuant to an agreement between USSC and USS dated December
4, 2014 (the “Coke Conversion Agreement”), which USSC currently anticipates will be
sometime in March, 2015. The Coke Conversion Agreement was approved by the Court
on December 5, 2014.
THE GENERAL CLAIMS PROCESS ORDER
25. Pursuant to the General Claims Process Order, creditors of USSC were required to file a
Proof of Claim (as defined in the General Claims Process Order) in respect of affected
Claims with the Monitor by December 22, 2014 (the “Claims Bar Date”). The General
Claims Process Order excluded certain types of Claims from being filed unless
subsequently ordered by the Court, including but not limited to:
a. Employee Claims (as defined in the General Claims Process Order);
b. Pension Claims (as defined in the General Claims Process Order); and
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c. The Claims of any Governmental Authority (as defined in the General Claims
Process Order) relating to or dealing in whole or in part with the protection,
conservation, remediation or management of the natural environment.
26. Paragraphs 20 through 27 of the General Claims Process Order set out the process
pursuant to which the Monitor (in consultation with the Applicant) is to review all Proofs
of Claim filed, other than the USS Claims.
27. With respect to any Claims filed by USS, USS Holdings, Canada LP or any affiliates of
USS (other than USSC or any of USSC’s subsidiaries) (i.e. the USS Claims), paragraph
28 of the General Claims Process Order ordered that:
a. “the Monitor shall prepare a report to be served on the Service List and filed with the
Court for the Court to consider, detailing its review of all USS Claims and
recommendations it has, if any, with respect to the determination of such Claims”;
b. “as soon as reasonably practicable after service of such report, the Monitor shall seek
a scheduling appointment before the Court, on notice to the Service List, to seek a
schedule for the hearing of a motion to determine such USS Claims”; and
c. “the USS Claims shall not be accepted or determined as Proven Claims without
approval of this Court. For greater certainty, nothing in any such report filed by the
Monitor shall bind by the Court with respect to its determination of the USS Claims
as the Court sees fit, including without limitation the quantum, Status, validity and
enforceability of such USS Claims”.
28. As of March 5, 2015, a total of 664 Proofs of Claim have been filed with the Monitor,
including the USS Claims described further herein. The number and quantum of Claims
filed with the Monitor are summarized below:
Notes:
Note 1: There were three (3) contingent claims filed with a Proof of Claim value of $nil; therefore, the Proof of Claim value is subject to material change
Note 2: For illustrative purposes in this Seventh Report only Claims denominated in USD were converted to CAD using the exchange rate as at the Filing Date
(1 USD = 1.099 CAD)
29. The Applicant and the Monitor have been reconciling the Claims filed pursuant to the
General Claims Process Order as filed. The Monitor will issue a future Report to the Court
to update on the status of the reconciliation process.
Claims
# Secured ($) Unsecured ($) Total ($)
Claims received prior to the Claims Bar Date 637 226,968,530 2,248,236,778 2,475,205,308
Late Claims 27 234,683 581,998 816,681
Total 664 227,203,213 2,248,818,776 2,476,021,989
Filed Proof of Claim (1) (2)
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30. A total of 14 Proofs of Claim were filed by USS and its subsidiaries prior to the Claims
Bar Date, which are reflected in the total Claims filed described in the preceding
paragraphs.
31. The remainder of this Seventh Report will provide an overview of the USS Claims and the
review conducted by the Monitor as provided for in paragraph 28 of the General Claims
Process Order.
SUMMARY OF THE USS CLAIMS
32. To assist readers of this Seventh Report, a summarized organization chart of USS and
those subsidiaries of USS, which filed the USS Claims (or which are otherwise referred to
in this Seventh Report) is attached as Appendix “A”.
33. In the subsequent sections of this Seventh Report, a detailed description of each of the USS
Claims is provided, along with an overview of the procedures conducted by the Monitor to
review each of the USS Claims. There is also a section of this Seventh Report entitled
“Total Capital Advances by USS to USSC” starting at paragraph 182 which provides an
historical overview of the initial funding provided by USS to fund the acquisition of Stelco
and its subsidiaries in October, 2007, as well as the total capital (funded debt and equity)
provided by USS to fund the operating cash requirements of USSC until the Filing Date,
and how this aggregate funding relates to the overall quantum of the USS Claims.
34. Subsequent to the Claims Bar Date, amendments have been made to one of the USS
Claims, with the consent of the Monitor, as the result of ongoing account reconciliation of
the pre-filing trade activity between USS and USSC for the supply of goods and services
(see Note 5 in the table in the following paragraph). The Monitor has reviewed the account
reconciliation activities and agreed to permit the amendments, as they were appropriate in
the circumstances.
35. The 14 Proofs of Claim filed by USS and its subsidiaries are summarized in the following
table:
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UNSECURED CLAIMS
Claim
Reference # USD CAD
Total
(CAD) (Note 2)
Assigned Transportation Claims
Campbell Transportation Company 1 305,462$ -$ 335,703$
American Steamship Company 2 746,686 - 820,607
Canadian National Railway Company 3 1,946,402 - 2,139,095
Ficel Transport Inc. 4 31,687 - 34,824
Cole Carriers Corporation 5 55,509 - 61,005
3,085,746$ -$ 3,391,234$
Other USS Entity Claims
U. S. Steel Kosice, s.r.o 6 13,512$ -$ 14,850$
USS International Services, LLC 7 110,436 - 121,370
United States Steel and Carnegie Pension Fund 8 164,932 - 181,261
Total other USS Entity Claims 288,881$ -$ 317,480$
Term Loan 9
Principal -$ 1,419,286,855$ 1,419,286,855$
Accrued interest (to Sept. 16, 2014) - 427,883,079 427,883,079
Total Term Loan -$ 1,847,169,934$ 1,847,169,934$
Amended Revolver Loan 10
Principal 116,969,996$ -$ 128,550,026$
Accrued interest (to Sept. 16, 2014) 3,180,932 - 3,495,844
Total Amended Revolver Loan 120,150,928$ -$ 132,045,870$
Inter-company Trade Claims (Note 3)
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Inter-company trade claim 4,280,261$ -$ 4,704,007$
Total inter-company trade claims 4,280,261$ -$ 4,704,007$
Total Unsecured Claims 127,805,815$ 1,847,169,934$ 1,987,628,525$
SECURED CLAIMS
Claims pursuant to Amended Security Agreement (Note 4)
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Amended Revolver Loan
Principal 71,000,000$ -$ 78,029,000$
Accrued interest (to Sept. 16, 2014) 1,938,390 - 2,130,291
Inter-Company Trade Claims (Note 4)
Cliffs LRD transaction 14,538,463 - 15,977,771
Credit support payments 3,703,450 - 4,070,092
Inter-company trade claim (Note 5)
31,252,193 - 34,346,160
Total Amended Security Agreement claims 122,432,496$ -$ 134,553,314$
Contingent Claims
Pension Agreement 12 -$ 75,916,084$ 75,916,084$
Letters of credit 13 - 2,845,311 2,845,311
Environmental remediation costs 14 - N/A N/A
Total Contingent Claims -$ 78,761,395$ 78,761,395$
Total value of Secured Claims 122,432,496$ 78,761,395$ 213,314,709$
Total Unsecured and Secured Claims 250,238,311$ 1,925,931,329$ 2,200,943,234$
Notes
Note 1: Claim Reference #'s have been assigned by the Monitor and will be used to refer to specific claims later herein.
Note 2: For illustrative purposes in this Seventh Report only, USS Claims dominated in USD claims were converted to CAD using the
exchange rate as at the Filing Date (1 USD = 1.099 CAD).
Note 3: The unsecured component of the inter-company trade claim, which was part of the amended Claim filed on February 15, 2015 was included
as an amendment to the Proof of Claim filed pursuant to the Amended Security Agreement (as defined herein) (Claim Reference # 11 ). The value of the
amendment was approximately USD$5.3 million, of which USD$4.3 million was unsecured and USD$1 million was secured.
Note 4: Secured Claims filed pursuant to the Amended Security Agreement.
Note 5: Includes amended Claims filed by USS on February 2, 2015, February 15, 2015 and February 25, 2015 for USD$27.6 million USD$5.3 million and USD$0.827 million
respectively which, increased the Secured Claim by approximately USD$29.4 million and unsecured claim by USD$4.3 million.
Note 6: The USS Claim values in the table above have been rounded to the nearest dollar.
Summary of the USS Claims Filed (Note 1)
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OVERVIEW OF THE MONITOR’S REVIEW PROCEDURES
36. As part of the Monitor’s review of the USS Claims, the Monitor (and Bennett Jones, where
appropriate) has, among other things:
a. reviewed the relevant loan, security and other documents filed by USS and its
subsidiaries in connection with the USS Claims;
b. reviewed and summarized the nature, timing and quantum of all advances from USS
and its subsidiaries to USSC dating back to October, 2007, when USS acquired
Stelco (the predecessor corporation to USSC);
c. reviewed the books and records and bank statements of USSC to determine whether
the amounts claimed by USS and its subsidiaries in respect of loan agreements were,
in fact, received by USSC;
d. reviewed certain historical financial, banking and other information;
e. conducted a security review and other legal analysis;
f. reviewed matters relating to any amounts USS and its subsidiaries claimed to be
secured, including the amount and timing of any advances asserted as secured
relative to the timing of the amendments to the loan and security agreements and the
funded debt agreements between USS and USSC;
g. reviewed the historical trade activity between USS and its subsidiaries and USSC,
the terms of inter-company trade payable payments and the types of documentation
generated regarding these activities;
h. met with Management to develop an understanding of the sources of historical
financing available to USSC, including the process utilized by USSC to request
financing, and the corresponding approval process by USS; and
i. reviewed public filings of USS.
37. The above noted review procedures were conducted by the Monitor (in consultation with
Bennett Jones, where appropriate) with the assistance of senior personnel from Ernst &
Young LLP’s Valuation & Business Modelling and Litigation Support groups. In addition,
prior to the commencement of the review, the Monitor met with counsel for certain of the
primary stakeholders to enquire whether they wanted the Monitor to focus on any
particular aspects or elements in the course of its review. The Monitor also met with such
counsel after it had conducted its review and before the preparation of this report to inform
them, on a high level, of the matters addressed in this report.
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38. The review team included specialists with expertise in restructuring, forensic analytical
procedures, accounting systems and extensive Oracle system/database knowledge.
39. In undertaking the review of the USS Claims, the Monitor and Bennett Jones considered
the potential application of sections 95 to 101 of the Bankruptcy and Insolvency Act
(Canada), the Fraudulent Conveyances Act (Ontario), and the Assignments and
Preferences Act (Ontario). The review did not include a consideration of the potential
application of equitable principles, doctrines or remedies contained in these statues that
might be claimed to alter the rights created by written agreements.
40. Attached as Appendix “B” is a chart which identifies the persons who served as directors
of USSC since its acquisition by USS. The Monitor understands that, from the time of the
acquisition until January 2014, the individuals on the board of USSC and its predecessors
were all employees of USSC or USS. In January 2014, the USSC board was reconstituted
with two independent directors appointed to the USSC board and one then-existing board
member continuing. These three individuals continue to serve as the directors of USSC.
REVIEW OF THE USS CLAIMS
41. In this section of the Seventh Report, the Monitor will provide an overview of each of the
USS Claims and the review procedures conducted and the analysis performed by the
Monitor with respect to these Claims. For ease of reference, each of the Claims is referred
to by a “Claim Reference Number” which corresponds to the Claim Reference Number
denoted in the table in paragraph 35.
Claim Reference #1 to #5 – Assigned Transportation Claims
Summary of the Claims
42. USS filed five unsecured Claims for a total of USD$3,085,745.61 for trade claims
originally owed by USSC to third party shipping and transportation vendors. These five
Claims were subsequently assigned by each of the trade creditors to USS and are
summarized below:
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Background
43. Certain of USSC’s transportation vendors also provide similar services for USS. The
Monitor understands that, subsequent to the Filing Date in order to avoid disruption of
these services, USS purchased and took an assignment of the right, title and interest of the
Claims of the vendors as against USSC.
Review procedures conducted by the Monitor
44. The Monitor has reviewed the assignment documents provided by USS. The assignment
documents appear to have been properly executed in all five cases by both USS and the
given vendor.
45. The Applicant and the Monitor have reviewed each Claim on an invoice by invoice basis
and reconciled each invoice to the shipping records of USSC. Each invoice was reconciled
to a USSC purchase order which the Monitor confirmed was a valid purchase order issued
by USSC.
46. The Monitor confirmed that each invoice was supported by proper bills of lading to
confirm receipt of the goods by either USSC or the end customer of USSC and, as the case
may be, to confirm that the transportation companies provided the service associated with
the invoiced amounts in each of the Proofs of Claim.
47. The Monitor confirmed that the invoices referenced in each of the five Proofs of Claim
were unpaid by USSC as of the Filing Date.
48. As a result of the reconciliation process, it was determined that Ficel Transport Inc.
(“Ficel”) and Cole Carriers Corporation (“Cole”) each bifurcated their outstanding debt
Claim
Reference # USD CAD
Total
(CAD) (Note 1)
Assigned Transportation Claims
Campbell Transportation Company 1 305,462.16$ -$ 335,702.91$
American Steamship Company 2 746,685.53 - 820,607.40
Canadian National Railway Company 3 1,946,401.69 - 2,139,095.46
Ficel Transport Inc. 4 31,686.84 - 34,823.84
Cole Carriers Corporation 5 55,509.39 - 61,004.82
3,085,745.61$ -$ 3,391,234.43$
Note 1: For illustrative purposes in this Seventh Report only, USS Claims dominated in USD claims were converted to CAD using the
exchange rate as at the Filing Date (1 USD = 1.099 CAD)
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owed by USSC into two separate claims, one of which they assigned to USS (as described
above) and one which they assigned to another third party.
49. In order to avoid one legal entity having two Claims for purposes of voting on any
proposed plan of compromise or arrangement in respect of the Applicant, the Monitor
confirmed with the legal counsel of USS that USS is prepared to not have these two
assigned Claims be counted towards any future CCAA Plan vote for “head count”
purposes.
Observations of the Monitor
50. After review of the Applicant’s books and records, the Monitor confirmed that each of the
five Claims assigned to USS were supported by purchase orders issued by USSC and were
valid outstanding pre-filing invoices owed by USSC.
51. The Monitor has also confirmed that each of the five vendors have not filed their own
Proofs of Claim against the Applicant for the invoices included in the claims assigned to
USS. In other words, there has been no duplication of the invoices associated with these
Claims.
52. The Monitor has reviewed the assignment documents giving rise to the assignments of the
Claims of these trade vendors, and each appears to have been properly executed.
Claim Reference #6 to #8 – Other USS Entity Claims
Summary of the Claims, and review procedures conducted by the Monitor
53. USS filed three unsecured Claims on behalf of the following USS subsidiaries, for a total
amount of USD$288,880.59, related to inter-company invoices as summarized below.
Claim
Reference # USD CAD
Total
(CAD) (Note 1)
Other USS Entity Claims
U. S. Steel Kosice, s.r.o 6 13,511.86$ -$ 14,849.53$
USS International Services, LLC 7 110,436.31 - 121,369.50
United States Steel and Carnegie Pension Fund 8 164,932.42 - 181,260.73
Total Other USS Entity Claims 288,880.59$ -$ 317,479.77$
Note 1: For illustrative purposes in this Seventh Report only, USS Claims dominated in USD claims were converted to CAD using the
exchange rate as at the Filing Date (1 USD = 1.099 CAD)
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U.S. Steel Kosice, s.r.o.
54. U.S. Steel Kosice, s.ro. (“USSK”) is a Slovakian subsidiary of USS and filed its Claim
pursuant to a business services agreement dated January 1, 2014 (the “Business Services
Agreement”).
55. As set out in EY’s Report dated September 16, 2014 (the “Report of the Proposed
Monitor”), the services provided by USSK are performed by USSK staff and are of the
nature of certain information technology and accounting related data processing services
provided to USSC. The outstanding invoices relate to services provided up to the Filing
Date.
56. As part of the monitoring procedures since the Filing Date, the Monitor has been reviewing
costs related to the Business Services Agreement to test that the services were properly
supplied and the costs therefore were properly apportioned to USSC, consistent with past
practices.
57. The Monitor has reviewed the USSK invoices for such services both prior to and
subsequent to the Filing Date and is of the view that they are properly supported and the
invoiced amounts were consistent with past practices. The Monitor has also confirmed that
the amount claimed of USD$13,511.86 as at the Filing Date had not been paid by USSC.
USS International Services, LLC
58. The USS International Services, LLC (“USSI”) Claim is pursuant to the corporate services
agreement dated November 1, 2007 (the “Corporate Services Agreement”) which
governs the specific financial and accounting services provided by USS to USSC. The
Corporate Services Agreement, among other things, governs the collection of customer
receipts, bad debt write-offs, payment of suppliers for expenses, payment of inter-company
charges for costs incurred and the manner in which they are calculated and paid, and
personnel recruitment and expatriate assignment services.
59. USSI’s Claim relates to unpaid invoices in connection with the services of American
expatriates providing services for USSC but employed at the relevant times by USS.
Charges relate to salaries, rent, moving expense and other charges incurred by the
expatriates living and working in Canada.
60. As part of the monitoring procedures, the Monitor has reviewed costs related to the
Corporate Services Agreement, including those charges related to the services provided by
expatriates to test that the services were properly supplied.
61. The Monitor has reviewed the outstanding invoices of USSI for such services both prior to
and subsequent to the Filing Date and is of the view that they are properly supported, and
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that the claimed amount of USD$110,436.31 as at the Filing Date had not been paid by
USSC.
United States Steel and Carnegie Pension Fund
62. The United States Steel and Carnegie Pension Fund (“UCF”) Claim is pursuant to a
pension administration agreement between USSC and UCF. UCF is a Pennsylvania non-
profit membership corporation. It is a standalone corporation that is not owned by USS.
The members of UCF (who in turn appoint the board of trustees for UCF) consist of a
number of USS executives. Although USS does not own UCF, a Claim was filed on behalf
of UCF and included in the USS Proofs of Claim package submitted to the Monitor.
63. UCF provides actuarial services and acts as an investment manager to administer a portion
of the assets in the pension and retirement plans and related funds for certain of USSC’s
current employees and retirees.
64. Costs related to UCF are accumulated on an annual basis and allocated to each individual
pension or retirement plan trust based on the assets under management for each plan.
Similar to the Corporate Services Agreement, costs incurred in one year are used as a
proxy for costs incurred in the next year with an adjustment occurring at the end of the
year, if necessary.
65. These costs are paid on a quarterly basis by USSC to UCF.
66. The Monitor has reviewed the UCF invoices both prior to and subsequent to the Filing
Date and is of the view that they are properly supported and consistent with previous
invoice practices and that the claimed amount of USD$164,932.42 as at the Filing Date
had not been paid by USSC.
Observations of the Monitor
67. Based on its review, the Monitor is of the view that each of the three Proofs of Claim from
USSK, USSI and UCF are based on inter-corporate agreements, are consistent with past
practice, are supported with invoices or other supporting documentation and were owed by
USSC as at the Filing Date.
Claim reference #9 –Term Loan
Summary of the Claim
68. Canada LP, a subsidiary of USS (and currently the direct 100% owner of USSC), filed an
unsecured Claim for $1,847,169,934.04, including accrued interest to the Filing Date of
$427,883,079.48, pursuant to a term loan agreement entered into on October 29, 2007 (the
“Term Loan”) between 1344973 Alberta ULC (“ABULC”), which at the time was a
15
wholly-owned subsidiary of Canada LP and USS. Attached as Appendix “C” is a copy of
the Term Loan agreement.
69. The original Term Loan advance, as further described herein, was used to facilitate the
acquisition of Stelco by USS, including the funding of loans to Stelco to enable it to repay
third party debt owed by Stelco. ABULC ultimately amalgamated with Stelco on
December 31, 2007 (the “Amalgamation Date”) and formed what is now known as
USSC.
70. The Term Loan is an unsecured loan maturing on October 31, 2037 and had an original
maximum borrowing amount of $1,000 million but was amended on December 21, 2007 to
provide for an increase in the maximum amount of $1,500 million. Attached as
Appendix “D” is a copy of the Term Loan amendment. Interest on the Term Loan accrues
daily and compounds semi-annually (in May and November) at an interest rate of 9.03%
per annum. Interest is payable on the last business day of the year on the second
anniversary after the year in which it was accrued and can be waived at USS’s discretion.
Background
71. In October 2007, USS acquired Stelco through a plan of arrangement pursuant to the
Canada Business Corporations Act.
72. According to audited financial statements for USS for the fiscal year 2007, the total
amount paid to acquire Stelco was approximately USD$2,056 million (CAD$1,939 million
using the prevailing foreign exchange rate at the time), consisting primarily of:
a. USD$1,237 million (CAD$1,166 million) to acquire all the outstanding stock,
stock equivalents and options consisting of CAD$1,046 million for stock,
CAD$59 million for options and CAD$61 million for warrants;
b. USD$785 million (CAD$741 million) to retire substantially all the outstanding
3rd party debt of Stelco; and
c. USD$34 million (CAD $32 million) payment in respect of Stelco’s pension plans.
73. A flow chart of the sources and uses of funds in connection with the acquisition is
summarized below:
16
Source: USS Annual Report 2007 and internal presentation provided by USSC
internal legal counsel to support the acquisition flow of funds entitled
Stelco Acquisition – Currency Flow Diagram
74. In preparation for the amalgamation, ABULC and Stelco entered into a series of foreign
exchange swap arrangements and made certain loan repayments, which are described in
paragraphs later in this Seventh Report. In addition, a number of legal structure changes
were implemented shortly after the acquisition, which are summarized below:
United States
Steel Credit
Corporation
("Credit Corp.")
Loan:USD$535 M plus
CAD$200 M (USD$744 M)
U.S. Steel
Canada Limited
Partnership
("Canada LP")
$700M Loan, $600M Equity
1344973
Alberta ULC
("ABULC")
Stelco Inc.(“Stelco”)
3rd party
debt
$741M
Option
holders
Warrant
holdersPensions
Share
consider-
ation
$59M $61M$32M$1,046M
$900M Loan
= ownership
= intercompany
financing
Legend:
= uses of cash
ABULC and Stelco Sources and Uses of CashAll amounts in CAD unless otherwise specified (foreign exchange rate CAD $1 = USD $1.045)
17
75. USS, through a number of its subsidiaries, capitalized ABULC with both debt and equity.
In connection with the acquisition, ABULC received an equity injection from Canada LP
in an amount equal to CAD$600 million and an additional equity injection prior to the
Amalgamation Date of approximately CAD$20 million. In addition, as of the acquisition
date ABULC was indebted to:
a. Canada LP in an amount equal to CAD$700 million pursuant to the Term Loan
which was amended as of December 21, 2007 to increase the maximum availability
from CAD$1,000 million to CAD$1,500 million; and
b. United States Steel Credit Corporation (“Credit Corp.”) for an amount equal to
approximately USD$744 million (USD$535 million plus CAD$200 million)
pursuant to a loan agreement between ABULC and Credit Corp. entered into as of
October 29, 2007.
76. A forward exchange agreement between ABULC and Canada LP was entered into on
October 29, 2007 in which ABULC exchanged its loan balance owing to Credit Corp. of
USD$744 million (consisting of a loan of USD$535 million plus a loan of CAD$200
million) to Canada LP in exchange for a loan of CAD$710 million on December 31, 2007
(the “Foreign Exchange Agreement”). The effect of the Foreign Exchange Agreement
At acquisition date Stelco Inc. renamed 1344973 Alberta ULC 1344973 Alberta Inc. Amalgamation of 4444591
October 31, 2007 U.S. Steel Canada Inc. name changed to continued as Canada Inc. and
post acquisition 1344973 Alberta Inc. 4444591 Canada Inc. U.S. Steel Canada Inc.
November 1, 2007 December 20, 2007 Pre-Amalgamation December 31, 2007
December 31, 2007 to form U. S. Steel Canada
Inc.
Legal structure changes between the Acquisition Date and the Amalgamation Date
U.S. Steel
Canada Limited Partnership
1344973 Alberta
ULC(ABULC)
Stelco Inc.
U.S. Steel Canada
Limited Partnership
1344973 Alberta
ULC(ABULC)
U.S. Steel Canada
Inc.
U.S. Steel
Canada Limited Partnership
1344973 Alberta
Inc.
U.S. Steel
Canada Inc.
U.S. Steel
Canada Limited Partnership
4444591 Canada
Inc.
U.S. Steel
Canada Inc.
U.S. Steel
Canada Limited Partnership
U.S. Steel
Canada Inc.
18
together with the original Term Loan advance of CAD$700 million was that it increased
the balance owing by ABULC under the Term Loan to Canada LP to a total of
approximately $1,410 million and eliminated the loan balance owing by ABULC to Credit
Corp.
77. Prior to the Amalgamation Date, ABULC entered into three foreign exchange swap
agreements dated November 20, 2007, December 4, 2007 and December 21, 2007 with
Canada LP in which it prepaid approximately CAD$26 million, CAD$41 million and
CAD$87 million respectively, against the balance owing referenced in the Foreign
Exchange Agreement. In addition, in December 2007 ABULC made a payment of
approximately CAD$29 million.
78. As a result of the payments made by ABULC to Canada LP, as of the Amalgamation Date,
the books and records of USSC indicated USSC was indebted to Canada LP for
approximately $1,227 million plus interest of approximately $13 million pursuant to the
Term Loan.
79. A summary of the principal amounts of the debt loaned by USS entities to USSC between
the acquisition date and the Amalgamation Date are summarized below:
80. The table above summarizes the initial debt financing of approximately $1,227 million
pursuant to the Term Loan. As described above, the majority of the quantum relates to
indebtedness incurred in connection with the acquisition of Stelco by USS and which, as a
result of certain amalgamations described above, is now a Claim of USS against USSC.
81. As set out in the following paragraphs, the Term Loan principal balance was increased by
further advances of approximately $192 million in 2008 and 2009 (on a net basis), plus
interest accrued and in some cases waived over the next 6 ½ years which resulted in a total
loan balance in the amount of approximately $1,847 million as of the Filing Date. There
Pre-Amalgamation Date transactions (CAD $Millions)
Period
Advances
(A)
Payments
(B)
Total Balance
(A + B = C)
Accumulative
Balance
(D)
Advances
(E)
Payments
(F)
Total Balance
(G = E + F)
Total
Financing
(H = D + G)
October 29, 2007 (2)
700 - 700 700 744 - 744 1,444
Foreign Exchange Agreement (3)
710 710 1,410 - (744) - 1,410
November 2007 (4)
- (26) (26) 1,384 - - - 1,384
December 2007 (5) (6)
(157) (157) 1,227 - - - 1,227
Amalgamation Date - - - 1,227 - - - 1,227
Note 1: Advances and payments made by and to Credit Corp. are in United States dollars.
Note 2: October 29, 2007 financing includes initial loans to ABULC from Canada LP of $700 million and Credit Corp. of USD$744 million.
Note 3: ABULC enters into a Foreign Exchange Agreement in which it exchanged its USD$744 loan with Credit Corp. for a CAD$710 million loan to Canada LP.
Note 4: ABULC makes payments of $26 million to Canada LP pursant to the Foreign Exchange Agreement.
Note 5: ABULC makes payments of $41 million and $87 million to Canada LP pursant to the Foreign Exchange Agreement.
Note 6: ABULC makes payment of $29 million to Canada LP.
Source: Intercompany Loan Continuity Schedule
Transactions with Canada LP Transactions with Credit Corp. (1)
19
were no further advances under the Term Loan after 2009. The continuity of the loan
balance is summarized in a table in paragraph 83.
82. The Monitor reviewed the books and records of USSC, and was able to confirm that the
outstanding principal and accrued interest (net of all interest waivers) to the Filing Date
totaled approximately $1,847 million, which is consistent with the claim filed by USS.
The total principal owing as of the Filing Date totaled approximately $1,419 million with
total accrued interest of approximately $428 million.
83. A summary of the annual drawings, repayments of principal, payments of interest and
waived interest with regard to the Term Loan is set out in the chart below. A detailed
schedule showing the loan amounts on a monthly basis has been provided in Appendix “E”
84. As set out in the table above, of the total Term Loan balance owing as at the Filing Date of
approximately $1,847 million, most of the balance relates to the funding of the original
acquisition of Stelco in October 2007 (including funding for loans made to Stelco to enable
it to repay third party debt), plus accrued interest (net of interest waivers), other than a net
of $192 million of net funding advanced in 2008 and 2009.
Review procedures conducted by the Monitor regarding the Term Loan
85. In addition to a review of the Term Loan and the related amendment, procedures were
performed by the Monitor including the review of the documents related to the flow of
funds, approvals and the decision process by Management in respect of requesting
additional advances or making repayments to USS.
86. The Monitor reviewed documentation with regard to the initial $700 million advance from
Canada LP to ABULC on October 29, 2007, which included a review of the Term Loan
and the resolution of the board of directors of USSC dated December 31, 2007 (which
included details of the initial advance, subsequent repayments and confirmation of the
Foreign Exchange Agreement for each transaction).
Unsecured Term Loan (CAD $Millions)
Period
Original
Principal
(A)
Funding
(repayments)
(B)
Net principal
(C = A +B)
Interest
(D)
Interest
Repayment
(E)
Interest
Waivers
(F)
Net Interest
(G = D + E +
F)
Previous year
end balance
(H)
Accumulative
Term Loan
balance
(I = C+ G + H)
Dec 31, 2007 1,227 - 1,227 13 - - 13 - 1,240
2008 - (19) (19) 111 (113) - (2) 1,240 1,219
2009 - 211 211 120 - - 120 1,219 1,550
2010 - - - 143 - (10) 133 1,550 1,683
2011 - - - 154 - (121) 33 1,683 1,716
2012 - - - 157 - (143) 14 1,716 1,730
2013 - - - 159 - (154) 5 1,730 1,735
Sept 15, 2014 - - - 112 - - 112 1,735 1,847
Total 1,227 192 1,419 969 (113) (428) 428 1,847
Source: Intercompany Loan Continuity Schedule
20
87. The Monitor also reviewed all subsequent advances provided by Canada LP and Credit
Corp. to ABULC (before the Amalgamation Date) and USSC (after the Amalgamation
Date), which were all reconciled to signed approval forms (“Requests for Advance”).
88. The Monitor reconciled the outstanding principal and interest balance related to the Term
Loan as of the Amalgamation Date to a continuity schedule which was reviewed and
maintained by USSC and Canada LP, which recorded all advances of principal made by
Canada LP to USSC, payments made by USSC to Canada LP and the interest calculation
of all loans between USS and USSC (the “Loan Continuity”). In addition the Monitor was
able to review USSC’s tax working papers, which provided additional evidence and
support that all advances made by Canada LP were recorded by USSC as loans and in
accordance with the quantum of funds actually received.
89. The Monitor also conducted a review of the Loan Continuity schedule, which included
creating a detailed schedule, by month, of each advance and payment to facilitate
additional review procedures and analytics with regard to the Term Loan balances.
90. The Monitor verified that advances by and payments to Canada LP from February 2008 to
August 2009 occurred by reconciling the funds to USSC’s bank statements based on the
US dollar equivalent and prevailing foreign exchange rates existing during the month of
the draw. Funds were advanced in US dollars and then immediately converted to Canadian
dollars on each advance.
91. USSC changed financial accounting software to Oracle in September, 2009 and as part of
its review procedures, the Monitor had full access to review all transactions and account
balances between Canada LP and USSC from this date onwards. The Monitor reconciled
the Loan Continuity schedule to the opening general ledger account balance in Oracle to
confirm the opening balance was properly recorded.
92. The Monitor confirmed all advances after September, 2009 were properly recorded in the
general ledger and all advances were traced to bank statements showing the receipt of the
funds by USSC.
93. The interest accrual calculation, as calculated in the Loan Continuity schedule, was
reviewed by the Monitor to ensure consistency with the terms and interest rate as outlined
in the Term Loan.
94. The Monitor reviewed all interest waiver calculations from December, 2010 to December,
2013, which were agreed to signed waiver forms from Canada LP indicating it had
confirmed its agreement that the interest for the period would be waived. In addition, the
quantum provided in each signed waiver form was tied to a general ledger entry. The
Monitor notes that, during its review, one exception occurred regarding the waiver
21
documentation in December 2013, relating to the interest accrued in fiscal 2011. The
December 2013 waiver document recorded total interest to be waived as $156.2 million,
whereas the amount per the Loan Continuity schedule indicated the interest accrual for
2011 was $153.6 million. USSC Management noted a formula error in the interest accrual
for December 2011. The error was discovered in November 2014, and an adjusting entry
was recorded in the general ledger as well as in the Loan Continuity schedule. The
Monitor requested a copy of the Loan Continuity schedule from October 2014 (prior to the
adjusting entry) and confirmed that the December 2013 interest waiver did reconcile to the
schedule at the time the transaction took place.
95. As a result of the above exception, the interest accrual adjustment for all interest waivers
was recalculated by the Monitor and agreed to the updated Loan Continuity schedule, and
no other such errors were noted.
Observations of the Monitor
96. Based on the Monitor’s review of the Term Loan advances, it appears that the amount
claimed by Canada LP was for amounts advanced to USSC, and the accrued interest
claimed is calculated correctly, net of all approved interest waivers. As noted above, the
majority of the Claim for the Term Loan relates to principal advances made in 2007 to
fund the acquisition of Stelco and its subsidiaries (and repayment of Stelco third party
debt) plus accrued interest (net of interest waived).
Claim Reference # 10 – Amended Revolver Loan – unsecured Claim
97. USS has filed both a Secured Claim and an unsecured Claim with respect to an Amended
Revolver Loan (as defined below) with USSC. The unsecured portion of the Amended
Revolver Loan was included in Claim Reference #10, and the secured portion of the
Amended Revolver Loan was included in Claim Reference #11.
98. This section of this Seventh Report will include a summary and review of both the secured
and unsecured components of the Amended Revolver Loan.
99. The Claim under the Amended Revolver Loan was made by USS Holdings, a subsidiary of
USS. USS Holdings (previously, Credit Corp.) filed the unsecured portion of the Claim
under the Amended Revolver Loan pursuant to a loan agreement dated May 11, 2010 (the
“Revolver Loan”) between USSC and Credit Corp. (later amended on 3 occasions and
henceforth referred to herein as the “Amended Revolver Loan”). Attached as Appendix
“F” is a copy of the original Revolver Loan. The unsecured portion of the Claim was for
all advances under the Amended Revolver Loan to October 30, 2013 in the amount of
USD$116,969,996 plus accrued interest of USD$3,180,932.15. USS Holdings filed a
22
further Secured Claim for advances under the Amended Revolver Loan in the amount of
USD$71,000,000 plus accrued interest of USD$1,938,389.99 for advances made after
October 31, 2013 to the Filing Date.
100. The secured and unsecured amounts claimed by the USS Holdings are summarized in the
table below:
Summary of the Claim
101. The Amended Revolver Loan was originally an unsecured loan maturing on May 11, 2025
with a maximum availability of an amount up to USD$350 million. Advances bear interest
at the applicable federal interest rate for the month in which the advance was drawn and
compounds semi-annually on the first day of the months of May and November. Interest is
calculated on the basis of a 360-day year consisting of twelve equal 30 day periods.
102. The Monitor understands that the primary purpose of the Amended Revolver Loan was to
provide financing to USSC to support operating activities. The Monitor further
understands that requests for additional funding were initiated by USSC’s manager of cash
management located in Hamilton, based on expected cash flow requirements and
projections.
UNSECURED
Claim
reference # USD CAD
Total
(CAD) (Note 1)
Amended Revolver Loan 10
Principal 116,969,996.00$ -$ 128,550,025.60$
Accrued interest (to Sept. 16, 2014) 3,180,932.15$ -$ 3,495,844.43$
Total Amended Revolver Loan 120,150,928.15$ -$ 132,045,870.04$
SECURED
Claims pursuant to Amended Security Agreement (Note 2)
11
Amended Revolver Loan
Principal 71,000,000.00$ -$ 78,029,000.00$
Accrued interest (to Sept. 16, 2014) 1,938,389.99$ -$ 2,130,290.60$
Total Amended Security Agreement Claims 72,938,389.99$ -$ 80,159,290.60$
Total value of Unsecured and Secured Amended Revolver Claim 193,089,318.14$ -$ 212,205,160.64$
Note 1: For illustrative purposes in this Seventh Report only, Claims dominated in USD were converted to CAD using the exchange rate as at the Filing date (1 USD = 1.099 CAD)
Note 2: Secured claims filed pursuant to Amended Security Agreement (as defined in paragraph 118).
Revolver Loan Claims
23
Background
103. The original Revolver Loan dated May 11, 2010 provided for an unsecured revolving
credit facility of up to USD$350 million. While the facility type is referred to in the
agreement as “revolving credit agreement”, the Revolver Loan does not contain any
language with respect to the mechanics that would actually enable the facility to be repaid
and readvanced in the form of a typical revolving loan.
104. USSC and Credit Corp. entered into an Amended and Restated Revolver Loan dated
July 31, 2012 (the “First Amended and Restated Revolver Loan”) which increased the
maximum amount available under this facility to an amount up to USD$500 million, with
all other material provisions largely unchanged (except that a solvency representation in
the original agreement was removed). Attached as Appendix “G” is a copy of the First
Amended and Restated Revolver Loan.
105. USSC and Credit Corp. then entered into a Second Amended and Restated Revolver Loan
dated January 28, 2013 (the “Second Amended and Restated Revolver Loan”) which
increased the maximum amount available under this facility to an amount up to USD$600
million, with all other material provisions largely unchanged (except as noted below).
Attached as Appendix “H” is a copy of the Second Amended and Restated Revolver Loan.
106. Prior to the Second Amended and Restated Revolver Loan, the agreement contained a
provision that stated “Security: unsecured”. The Secured Amended and Restated Revolver
Loan amended that provision to say “intentionally omitted”. USSC granted security at that
time pursuant to a Security Agreement dated January 28, 2013 (the “Security
Agreement”). Attached as Appendix “I” is a copy of the Security Agreement.
107. Under the Security Agreement, the collateral was limited to certain iron ore pellets sold to
USSC by Stelco Holding Co., a wholly-owned subsidiary of USS, plus related books and
records and proceeds. The security granted under the Security Agreement covered
advances made under the Revolver Loan, as amended.
108. The Security Agreement contains a recital noting that Credit Corp. was willing to enter into
the Second Amended and Restated Revolver Loan only if USSC granted the security in the
Security Agreement. There does not appear to have been a Personal Property Security Act
(Ontario) (“PPSA”) registration affected in respect of the security granted under the
Security Agreement at the time it was granted.
109. USSC and Credit Corp. then entered into a Third Amended and Restated Revolver Loan
dated October 30, 2013 (the “Third Amended and Restated Revolver Loan”, and,
together with the Revolver Loan, the First Amended and Restated Revolver Loan and the
Second Amended and Restated Revolver Loan, the “Amended Revolver
24
Loan”). Attached as Appendix “J” is a copy of the Third Amended and Restated Revolver
Loan.
110. The recitals to the Third Amended and Restated Revolver Loan state that, by the date of
that agreement (i.e. October 30, 2013) USD$617 million in aggregate had been advanced
by Credit Corp. to USSC under the facility since its inception, the majority of which had
been repaid (from funds advanced by USS to USSC as additional equity contributions in
USSC, which are discussed later herein under the heading “Equity Capital Injections”),
leaving approximately USD$117 million outstanding as at that date (which amount was
defined as the “First Tranche Indebtedness”). The Monitor's review of USSC’s books
and records confirms that such recital was accurate.
111. The recitals to the Third Amended and Restated Revolver Loan further state that USSC and
USS wished to amend and restate the facility to permit USSC to “access the balance” of the
facility. At the time the Third Amended and Restated Revolver Loan was entered into, only
USD$117 million of the USD$600 million limit provided for under the Second Amended
and Restated Revolver Loan was drawn. The USD$483 million difference is defined in the
Third Amended and Restated Revolver Loan as the “Second Tranche Indebtedness”.
112. The Third Amended and Restated Revolver Loan provides that the Second Tranche
Indebtedness is to be paid before the First Tranche Indebtedness.
113. The Third Amended and Restated Revolver Loan specified that the First Tranche
Indebtedness was secured by only the collateral described in the Security Agreement as it
existed as at January 28, 2013 (i.e. certain iron ore pellets plus related books and records
and proceeds), whereas the Second Tranche Indebtedness was to be secured by expanded
security, now covering all of the property of USSC. That expanded security was provided
for under an Amendment To Security Agreement between USSC and USS also dated
October 30, 2013 (the “First Amended Security Agreement”). A broad spectrum PPSA
registration was made in favour of Credit Corp. at this time. Attached as Appendix “K” is a
copy of the First Amended Security Agreement.
114. The First Amended Security Agreement contains a recital stating that Credit Corp. was
willing to continue to provide loans under the Third Amended and Restated Revolver Loan
only if USSC entered into the First Amended Security Agreement.
115. The Third Amended and Restated Revolver Loan and the First Amended Security
Agreement were authorized by a Resolution of the Directors of USSC which provided in
part as follows:
“AND WHEREAS [USSC] anticipates that its requirement for cash for, among other purposes,
funding payroll, pension contributions, purchases of inventory (including raw materials
25
inventory), and general corporate purposes, will substantially exceed its ability to generate cash
between the date hereof and the end of 2013.
AND WHEREAS [Credit Corp.] has informed [USSC] that it is willing to continue to provide
loans to [USSC] provided that [USSC] enters into a Third Amended and Restated Loan
Agreement [i.e. the Third Amended and Restated Revolver Loan] in the form attached hereto as
Schedule A and an Amendment to Security Agreement [i.e. the First Amended Security
Agreement] in the form attached hereto as Schedule B.”
116. The Monitor reviewed all advances and repayments between USSC and Credit Corp.
which were recorded in USSC’s records and has confirmed that, while there were further
advances made by Credit Corp. to USSC after the amendments put in place on October 30,
2013 (described below), there were no repayments made by USSC to Credit Corp. during
that period. In particular, there were no repayments of debt by USSC within the one year
period preceding the commencement of these CCAA proceedings.
117. The Monitor has further confirmed that Credit Corp. has only claimed security in respect of
advances made on or after October 31, 2013 (see Claim Reference #11), which is after the
date of the Third Amended and Restated Revolver Loan and the First Amended Security
Agreement. The amount of those advances totals USD$71 million, plus interest (Claim
Reference #11).
118. USSC and Credit Corp. also entered into a Second Amendment and Joinder to Security
Agreement dated November 12, 2013 (the “Second Amended Security Agreement” and,
together with the Security Agreement and the First Amended Security Agreement, the
“Amended Security Agreement”), which added three new secured parties (USS, United
States Steel International, Inc. and Stelco Holding Company) and broadened the definition
of the obligations secured such that all obligations owing by USSC to Credit Corp. and the
three new secured parties were now secured, including but not limited to a specific list of
obligations. The PPSA registration was expanded to cover the new secured parties at this
time. Attached as Appendix “L” is a copy of the Second Amended Security Agreement.
119. USS asserts a Secured Claim only in respect of advances made under the Amended
Revolver Loan subsequent to October 30, 2013. The Amended Security Agreement
provides that it also secures advances made under the Amended Revolver Loan prior to
October 30, 2013; however, USS has not asserted a Secured Claim in respect of advances
made prior to October 30, 2013.
120. During the period in which USSC agreed to grant the Security Agreement and the two
amendments thereto, USSC operated as a wholly-owned subsidiary of USS. Over the same
period, USS was the sole source of debt and equity financing that enabled USSC to carry
on operations. Each of the agreements which comprise the Amended Revolver Loan
26
contain a restriction on granting liens, which would have precluded USSC from borrowing
funds from a third party on a secured basis. As of January 16, 2014, two independent
directors joined the Board of Directors of USSC, following which, for the first time since
USS acquired Stelco, independent directors constituted a majority of the Board of
Directors of USSC.
121. Since the Amended Revolver Loan was first put in place, there have been numerous
advances and repayments. Based on a sampling review of the various advances undertaken
by the Monitor, it appears that each advance and repayment was initiated by USSC’s
manager of treasury and that an exchange of correspondence took place between USSC
and Credit Corp. on the occasion of each such transaction, and that the transactions were
documented with formal approval and recommendation forms (“Approval and
Recommendation”) accompanied by flowcharts mapping the movement of funds.
Approval and Recommendations were a formal signed document from the USS Vice
President and Treasurer approving a capital contribution to Credit Corp. and
recommending that Credit Corp. make an advance to USSC pursuant to the Amended
Revolver Loan. Attached as Appendix “M” is a sample of a typical Approval and
Recommendation form.
122. As set out above, the Amended Revolver Loan maximum availability was increased
through a number of amendments from USD$350 to USD$600 million over the span of 3
½ years. The following chart shows a history of the Amended Revolver Loan maximum
availability as well as its subsequent security agreements amendments.
Revolver Loan Agreement History
in USD
Date
Maximum
Face Amount Collateral Secured Party
May 11, 2010 $350 million n/a n/a
July 31, 2012 $500 million n/a n/a
January 28, 2013 $600 million Inventory of iron ore pellets sold to USSC by Stelco
Holding Co. only
Credit Corp.
October 30, 2013 $600 million Inventory, equipment, goods, fixtures, accounts,
documents of title, instruments and money, chattel
paper, general intangibles, investment property and
deposit accounts
Credit Corp.
November 12, 2013 $600 million Inventory, equipment, goods, fixtures, accounts,
documents of title, instruments and money, chattel
paper, general intangibles, investment property and
deposit accounts
Credit Corp., USS, United
States Steel International
Inc., Stelco Holding
Company
Source: Revolver Loan Agreements and Security Agreements
27
123. An overview, on an annual basis, of the historical continuity of the Amended Revolver
Loan balances, including the details of annual drawings repayments of principal and
payments of interest is summarized below (a detailed schedule showing the revolver loan
balance continuity on a monthly basis has been provided in Appendix “N”):
124. As set out in the table above, during the period from January 1, 2013 to September 30,
2013 there was a paydown of the Amended Revolver Loan of principal and interest in the
amount of USD$384 million. The Monitor has reviewed this paydown and determined that
this occurred as a result of approximately $707 million of equity injections from USS
during the same period of time. The Monitor has provided an overview of the equity
injections by USS later in the Seventh Report in the section titled Equity Capital Injections
commencing on paragraph 176.
125. As set out in the table above, the total Amended Revolver Loan balance owing as at the
Filing Date was approximately USD$193 million, which is consistent with the aggregate
amount of the unsecured Claim of USD$120 million and the Secured Claim of
approximately USD$73 million filed by USS Holdings with respect to the Amended
Revolver Loan through Claim Reference #10 and Claim Reference #11.
126. The advances made by USS Holdings for which it filed a Secured Claim are summarized
below:
Revolver Loan (USD millions)
Period
New Loan
Advances
(A)
Payments
(B)
Net Change
in new
advances
(C = A + B)
Accumulated
Principal
Balance
(D)
Total
Accrued
Interest
(E)
Interest
Payments
(F)
Net Interest
(G = E + F)
Revolver
Loan Balance
(H = D + G)
2010 100 - 100 100 2 - 2 102
2011 45 (18) 27 127 7 (7) 0 127
2012 407 (43) 364 491 8 (2) 6 497
YTD Sept 2013 10 (384) (374) 117 12 (11) 1 118
Oct - Dec 2013 71 - 71 188 1 - 1 189
Sept 15, 2014 - - - 188 4 - 4 193
Total 663 (475) 188 25 (20) 5
Source: Intercompany Loan Continuity Schedule
28
Review procedures conducted by the Monitor
127. In addition to a review of the Amended Revolver Loan and Amended Security Agreement,
specific procedures performed by the Monitor include having discussions with
Management to understand the flow of funds, approvals, and decision process in respect of
requesting additional draws or making repayments.
128. The Monitor conducted a review of the Loan Continuity schedule, which included creating
a detailed schedule, by month, of each advance and repayment to facilitate additional
review procedures and analytics with regard to the Amended Revolver Loan balances.
129. Documentation of all advances, including Approval and Recommendation forms which
were issued by USS authorizing Credit Corp. to advance the funds were reviewed and
compared against the general ledger entry and to the bank statements to ensure the funds
were received by USSC.
130. The following two exceptions were noted with regard to the signed Approval and
Recommendation:
a. An advance in August 2010 in which the Approval and Recommendation form
indicated an approved advance to USSC of USD$15 million, however the amount
advanced (per the Loan Continuity and bank statement) was actually USD$25
million; and
b. An advance in November 2012 in which the Approval and Recommendation form
indicated an approved advance to USSC for USD$65 million, however the amount
advanced (per the Loan Continuity and bank statement) was actually USD$55
million.
Amended Revolver Loan - Secured Loan Advances
USD $Millions
Date New Advance
Interest to Filing
Date (1)
Security
Agreement Collateral Lending Party
October 31, 2013 $12.00 $0.37 October 30, 2013 All assets Credit Corp
November 19, 2013 30.00 0.83 November 12, 2013 All assets Credit Corp
November 27, 2013 10.00 0.27 November 12, 2013 All assets Credit Corp
December 5, 2013 9.00 0.23 November 12, 2013 All assets Credit Corp
December 30, 2013 10.00 0.24 November 12, 2013 All assets USS Holdings Inc.
$71.00 $1.94
Note 1: The accrued interest is calculated from the date of the advance to the Filing Date
Source: Intercompany loan continuity and Approval & Recommendation forms
29
131. The Monitor reviewed all repayments, including principal and interest for the period of
November 2011 to March 2013. All payments during this period were agreed to the
general ledger and the Approval & Recommendation forms issued by USS confirming the
repayments by USSC pursuant to the Amended Revolver Loan.
132. Repayments made after March 2013 were verified by reviewing of journal entries made by
USSC and by matching the repayments to bank statements. The Approval and
Recommendation forms for this period were also requested by the Monitor but USSC
could not locate copies of these records.
133. During the review conducted by the Monitor, the Monitor noted a discrepancy relating to a
payment made by USSC to USS in April 2013 for USD$24 million under the Amended
Revolver Loan. Both the Loan Continuity schedule and the general ledger recorded the
full amount of the USD$24 million being paid to USS. However, the allocation between
the principal amount and interest amount being paid differed between the Loan Continuity
and the general ledger by approximately USD$102,000. The Loan Continuity schedule
recorded a higher principal amount being paid of USD$102,000. As a result, USSC
adjusted its general ledger to reflect the correct balance as recorded in the Loan Continuity
schedule.
134. The Monitor reviewed the interest accrual calculation to ensure consistency with the terms
outlined in the Amended Revolver Loan and the calculation was also agreed to the
published applicable federal rate (“AFR”) the prescribed interest rate to be accrued
pursuant to the Amended Revolver Loan. The books and records of USSC indicated the
outstanding principal as of the Filing Date was USD$188 million with total accrued
interest of USD$5.1 million which as described earlier is consistent with the Proofs of
Claim filed by USS Holdings pursuant to the Amended Revolver Loan.
135. The Monitor made inquiries of Management as to why USSC made the decision to grant
security to USS in respect of amounts advanced under the Amended Revolver
Loan. Management informed the Monitor that USS had advised USSC that it was not
prepared to make any additional advances to USSC unless it received the grant of security
referred to in the Amended Security Agreement.
Claim Reference #11 – Secured Claim pursuant to the Amended Security Agreement
Summary of the Claim
136. USS filed a Secured Claim for USD$122,432,496.11 of which USD$72,938,389.99 was
claimed by USS under the Amended Revolver Loan as secured pursuant to the Amended
Security Agreement as described in the previous section with respect to Claim Reference
30
#10. The remaining USD$49,494,106.12 relates to inter-company trade transactions with
USSC which USS claimed as secured pursuant to the Amended Security Agreement. In
addition, in the same Proof of Claim filed by USS, it included an unsecured Claim of
USD$4,280,261.01 for payments made by USS in error to USSC related to commissions
owed to U.S. Steel Tubular Products Canada GP Inc. (“Tubular”). Each of the
components of the inter-company trade activity will be described further herein.
137. As noted in paragraph 96 of the Report of the Proposed Monitor, the Monitor has received
an opinion from Bennett Jones that, subject to the typical assumptions and qualifications
customary in such opinions, the security documents which comprise the Amended Security
Agreement constitute valid and binding obligations of USSC in accordance with the terms
thereof, and that the security interests created by such security documents have been
registered, filed or recorded in all public offices where the registration, filing, or recording
thereof is required under the laws of Ontario to perfect the security interests created
thereby in the applicable property described therein to which the PPSA applies.
SECURED CLAIMS
Claim
Reference # USD CAD
Total
(CAD) (Note 1)
Claims pursuant to Amended Security Agreement (Note 2)
11
Amended Revolver Loan
Principal 71,000,000.00$ -$ 78,029,000.00$
Accrued interest (to Sept. 16, 2014) 1,938,389.99 -$ 2,130,290.60
Inter-Company Trade Claims
Cliffs LRD transaction 11a 14,538,462.95 -$ 15,977,770.78
Credit support payments 11b 3,703,450.12 -$ 4,070,091.98
Inter-company trade claim (Note 3)
11c 31,252,193.05 -$ 34,346,160.16
Total Amended Security Agreement claims 122,432,496.11$ -$ 134,553,313.52$
UNSECURED CLAIMS
Inter-company Trade Claims (Note 4)
11
Inter-company trade claim 4,280,261.01$ -$ 4,704,006.85$
Total inter-company trade claims 4,280,261.01$ -$ 4,704,006.85$
Total Unsecured and Secured Claims 126,712,757.12$ -$ 139,257,320.37$
Note 1: For illustrative purposes in this Seventh Report only, USS Claims dominated in USD claims were converted to CAD using the
exchange rate as at the Filing date (1 USD = 1.099 CAD)
Note 2: Secured Claims filed pursuant to a security agreement dated January 28, 2013.
Note 3: Includes amended Claims filed by USS on February 2, 2015, February 15, 2015 and February 25, 2015 for USD$27.6 million USD$5.3 million and
USD$0.827 million respectively which, increased the Secured Claim by approximately USD$29.4 million and unsecured claim by USD$4.3 million.
Note 4: The unsecured component of the inter-company trade claim, which was part of the amended Claim filed on February 15, 2015 was included
as an amendment to the Proof of Claim filed pursuant to the Amended Security Agreement (Claim Reference # 11 ). The value of the
amendment was approximately USD$5.3 million, of which USD$4.3 million was unsecured and USD$1 million was secured.
Summary of the Secured USS Claims
31
Claim Reference # 11a - Secured Claim related to a payment made directly by USS to Cliffs
Natural Resources Inc. and Cliffs Sales Company (collectively, “Cliffs”) for iron ore
delivered to USSC
Summary of the Claim
138. USS filed a Secured Claim pursuant to the Amended Security Agreement for
USD$14,538,462.95 with respect to a payment USS made to Cliffs for certain iron ore (the
“Iron Ore”) delivered to USSC.
139. The payment made by USS relates to four shipments of Iron Ore (and the associated
screening charges) which were delivered to USSC in August 2014, totaling approximately
USD$14.1 million (the “Cliffs Invoices”) and a payment of approximately USD$0.4
million related to screening charges incurred in January and May 2014.
140. Cliffs and USS are parties to an agreement dated January 1, 2008 for the supply of iron ore.
The Iron Ore from Cliffs that gives rise to this part of the Secured Claim by USS was
sourced by the USS Procurement Department as part of the usual raw material services
arrangement between USS and USSC as provided for in the Limited Risk Distributor
Agreement between USSC and USS, dated February 1, 2008 (the “Raw Material
Agreement”) and as was described in the Report of the Proposed Monitor. The Iron Ore
was delivered to USSC prior to the Filing Date.
141. On September 16, 2014, USS agreed to and subsequently paid for the Cliffs Invoices and
in turn had a claim against USSC pursuant to the Raw Material Agreement.
Review procedures conducted by the Monitor
142. The Monitor has confirmed with USSC that the Iron Ore was received by USSC prior to
the Filing Date and that USSC did not pay Cliffs directly the amounts set out on the Cliffs
Invoices.
143. The Monitor also reviewed the agreement between Cliffs and USS and the Raw Materials
Agreement, and spoke with Management of USSC to confirm that the procurement of the
Iron Ore from Cliffs by USS for USSC was consistent with past practice.
144. In addition to the charges for the Iron Ore, there were two other invoices totaling
approximately USD$0.4 million in respect of screening charges related to January, 2014
and May, 2014 for which Cliffs had not previously issued invoices. As a result, as of the
Filing Date these two additional invoices remained outstanding.
32
145. USSC has confirmed that these two additional outstanding invoices were valid charges
against USSC consistent with past practice.
146. As part of the review of this part of the USS Claim, the Monitor requested support from
USS with regard to the confirmation that the Cliffs Invoices and the two additional
invoices related to screening charges for January and May 2014 were paid by USS on
behalf of USSC. The support provided (including wire transfer confirmations) indicated
these invoices were paid.
147. Given the expanded definition of “Obligations” secured under the Amended Security
Agreement, USS has asserted a Secured Claim for the aggregate amount it paid to Cliffs on
USSC’s behalf, described above.
Claim Reference #11b – Credit Support Payments
Summary of the Claim
148. USS filed a secured Proof of Claim in the aggregate amount of USD$3,703,450 for
contribution and indemnity as guarantor of certain USSC obligations related to various
guarantees (collectively the “Guarantees”) provided by USS on behalf of USSC. A listing
of the payments made by USS under the Guarantees is summarized below:
149. According to the Claim filed by USS, USS received demands subsequent to the Filing Date
from the IESO, Union Gas and Norfolk pursuant to guarantee agreements dated April 16,
2008, April 28, 2008 and March 26, 2008 respectively, and payments were made by USS
to those vendors pursuant to the demands.
Claim
Reference # USD CAD
Total
(CAD) (1)
Credit Support Payments
Independent Electricity System Operator ("IESO") 11b 2,616,156.27$ -$ 2,875,155.74$
Union Gas Limited ("Union Gas") 11b 616,115.99 - 677,111.47
Union Gas 11b 13,965.22 - 15,347.78
Norfolk Southern Corporation ("Norfolk") 11b 416,108.30 - 457,303.02
Norfolk 11b 41,104.34 - 45,173.67
Total Credit Support Payments 3,703,450.12$ -$ 4,070,091.68$
Note 1: For illustrative purposes in this Seventh Report only, USS Claims dominated in USD claims were converted to CAD using the
exchange rate as at the Filing date (1 USD = 1.099 CAD)
33
Review procedures conducted by the Monitor
150. The Monitor reviewed the Guarantees to understand USS’ obligations thereunder, the
demand letters delivered to USS by the vendors pursuant to the Guarantees, and the
Amended Security Agreement to ensure such amounts pursuant to the Guarantees would
be considered Secured Claims under the Amended Security Agreement.
151. The Monitor also reviewed the invoices associated with the amounts described in each of
the demand letters. The review of the invoices confirmed that the invoices were not paid
by USSC at the time the demand was made and that the invoices were pre-filing
obligations of USSC, consistent with previous billing practices by the vendors.
152. The Monitor confirmed that the vendors have not filed claims against USSC pursuant to
the General Claims Process with respect to the invoices subject to the demand letters.
153. The Monitor also received confirmation documentation from USS with regard to the
amount paid to each of the vendors, which matched the amount reflected on Proof of Claim
of USSC with respect to the Guarantees.
154. Given the expanded definition of “Obligations” secured under the Amended Security
Agreement, USS has asserted a Secured Claim for payments made pursuant to the
Guarantees as described above.
Claim Reference #11c – Inter-company trade activity and Raw Material Agreement
Summary of the Claim
155. USS filed a Secured Claim totaling USD$31,252,193.05 and an unsecured Claim of
USD$4,280,261.01 with regard to the inter-company trade activity between USSC and
USS relating to raw material purchases, corporate expenses, commissions, and customer
incentive programs rebates a summary of which is described in the chart below. The
secured portion of the Claim relates to trade activity after October 31, 2013, while the
unsecured portion relates to trade activity before that date.
34
Background
156. As described in greater detail in the Report of the Proposed Monitor, given the integrated
nature of USS and USSC’s production and sales and marketing processes, steel is often
manufactured in either a Canadian or U.S. based mill and then sold cross-border between
Canada and the U.S. USS and USSC have a number of agreements that govern cross-
border sales. Details of the operative agreements are summarized below:
a. The LRD-North Agreement governs the sale of steel produced at a USS mill in the
U.S. which is sold to a Canadian customer (the “LRD-North Arrangement”).
USSC purchases this steel from USS and immediately sells the steel to the end
customer in Canada. Although the full value of the sale is accounted (and has been
collected by USSC) in the LRD-North balance above of USD$52.7 million, the cash
collected belongs to USS and USSC earns a 2% margin on such sales.
b. The LRD-South Agreement governs the sale of steel produced in USSC’s Canadian
mills to customers in the U.S. (the “LRD-South Arrangement”). It works in a
similar fashion as the LRD-North Agreement in that the cash collected belongs to
USSC and USS earns a 2% margin on sales through the LRD-S. The full value of the
sale is accounted for in the LRD-South balance above of USD$51.9 million.
157. The effect of these agreements is that the mill that produces a product that is then sold
across the border receives a benefit for the cross border sales, netting a 2% sales margin.
Claim
Reference # USD CAD
Total
(CAD) (1)
Inter-company trade claim category
LRD - North transactions 11c (52,673,951.13)$ - (57,888,672.29)$
LRD - South transactions 11c 51,872,961.00 - 57,008,384.14
Purchase of Raw Materials 11c (20,631,725.09) - (22,674,265.87)
Customer Rebate Programs 11c (3,962,829.81) - (4,355,149.96)
ERP Allocation 11c (1,587,585.00) - (1,744,755.92)
SG&A Charges 11c (2,621,586.00) - (2,881,123.01)
Global Cost Allocation 11c (1,020,501.50) - (1,121,531.15)
Other 11c (626,975.52) - (689,046.10)
Total Secured Inter-Company trade claim (31,252,193.05)$ - (34,346,160.16)$
Unsecured Inter-company trade claim (4,280,261.01)$ - (4,704,006.85)$
Total I/C claim filed by USS (35,532,454.06)$ - (39,050,167.01)$
Note 1: For illustrative purposes in this Seventh Report only, USS Claims dominated in USD claims were converted to CAD using the
exchange rate as at the Filing date (1 USD = 1.099 CAD)
35
Review procedures conducted by the Monitor
158. Invoices related to the trade of raw material purchases, commissions, customer incentive
programs rebates and other corporate expenses received by USSC in a calendar month are
typically paid on a gross basis on or about the 15th
of the following month as part of the
normal reconciliation process between USSC and USS. The Monitor conducted trending
analysis on USSC’s trade payables balances from January, 2014 to August, 2014 to verify
the typical timing of repayments and confirmed that the gross amount owing between
USSC and USS was generally settled on or about the 15th
of the following month in which
invoices were generated.
159. With the exception of USS Claims for certain corporate annual allocations, the majority of
the USD$35.5 million Claim relates to transactions between August 1, 2014 and
September 15, 2014.
160. The Monitor reviewed invoices related to each of the categories of the inter-company trade
claim to ensure USSC had not previously paid for these invoices, that the invoices related
to the appropriate pre-filing period and that the invoiced amounts were generally consistent
with the invoiced amounts in previous months.
161. The Monitor reviewed certain steel purchase and raw material invoices and tied these
invoices to proper USSC purchase orders and shipping documents including the bills of
lading from the transportation company to confirm the materials were ordered and received
by USSC.
162. Invoices relating to corporate or global allocation costs were reviewed to confirm the
invoiced amounts were consistent with past invoice practices and the cost allocation
methods (head count, tonnes produced or service usage) to calculate these costs were
reasonable.
163. After reviewing the books and records of USSC, the Monitor is of the view that the amount
claimed by USS with respect to the inter-company trade activity between USS and USSC
reconciled to USSC’s accounting records as of the Filing Date.
164. Given the expanded definition of “Obligations” secured under the Amended Security
Agreement USS has asserted a Secured Claim totaling USD$31,252,193 and an unsecured
Claim of USD$4,280,261 regarding the inter-company trade activity as described above.
36
Claim reference #12 – Contingent Pension Claim
Summary of the Claim
165. USS filed a contingent Secured Claim in the amount of $75,916,084 for indemnity and
contribution as a guarantor of certain USSC obligations under a Pension Agreement dated
March 31, 2006 as amended (the “Pension Agreement”).
166. The Claim was calculated by USS based on the total future obligations of USSC from
December 2014 to December 31, 2015 pursuant to the Pension Agreement that are
guaranteed.
167. Given the contingent nature of this asserted Secured Claim and the fact that USSC has
continued to fund all of its pension funding obligations subsequent to the Filing Date, the
Monitor believes it is appropriate to defer completing the review and making a
determination in respect of this Secured Claim.
Claim reference #13 – Letters of Credit
Summary of the Claim
168. USS filed a contingent Secured Claim in the aggregate amount of $2,845,311 for
indemnity and contribution as a guarantor under the following letters of credit
(collectively, the “Letters of Credit”) with respect to certain USSC obligations:
169. The Monitor has reviewed the Letters of Credit documentation to understand the
contingent obligations being claimed by USS. However, since this Secured Claim is
contingent and the Letters of Credit have not been drawn on by the beneficiary, the
Claim
Reference # USD CAD
Total
(CAD) (Note 1)
Letters of Credit - Beneficiary
Minister of Environment (Note 2)
13 -$ 1,659,231.00$ 1,659,231.00$
Independent Electricity System Operator ("IESO") (Note 3)
13 - 874,309.00$ 874,309.00$
Minister of Environment (Note 4)
13 - 311,771.00$ 311,771.00$
Total Letters of Credit -$ 2,845,311.00$ 2,845,311.00$
Note 1: For illustrative purposes in this Seventh Report only, USS Claims dominated in USD claims were converted to CAD using the
exchange rate as at the Filing date (1 USD = 1.099 CAD)
Note 2: Date of Letter of Credit - June 28, 2011
Note 3: Date of Letter of Credit - July 21, 2012
Note 4: Date of Letter of Credit - September 5, 2012
37
Monitor believes it as appropriate to defer completing the review and making a
determination in respect of this Secured Claim.
Claim reference #14 – Environmental remediation costs
Summary of the Claim
170. USS filed a unliquidated contingent Secured Claim for any payments made by USS on
behalf of USSC and/or its directors and officers related to any environmental remediation
costs in the event the Minister of the Environment (“MOE”) issues orders of payment
against USSC and its directors and officers for such costs.
171. The Monitor has not yet reviewed this contingent Secured Claim as it is an unliquidated
contingent claim and the Monitor in not aware of any orders issued by the MOE regarding
payment against USSC or its directors and officers for such costs. Should these facts
change, the Monitor will review the legal merits of this claim by USS and provide a
supplemental report.
ADDITIONAL REVIEW PROCEDURES CONDUCTED BY THE MONITOR WITH
RESPECT TO THE TERM LOAN AND AMENDED REVOLVER LOAN CLAIMS
172. As set out in this Seventh Report, USS and its subsidiaries have filed 14 Claims pursuant to
the General Claims Process Order. The most significant of these Claims are with respect
to the Term Loan for CAD$1,847,169,934 (see paragraph 68) and the Amended Revolver
Loan for USD$193,089,318 (or approximately CAD$212,205,160 based on the foreign
exchange rate as of the Filing Date) (see paragraph 100).
173. The two facilities (which aggregate approximately CAD$2,059 million) represent the
funded debt advances made by USS or its subsidiaries to fund the acquisition of Stelco
(and fund loans made to Stelco to enable it to pay its third party debt) and to fund the
operations of USSC post the Stelco acquisition to the Filing Date.
174. The other Claims filed by USS and its subsidiaries for the most part relate to trade activity
between USS and USSC, or are contingent Claims related to certain pension or
environmental guarantees or letters of credit posted by USS for USSC’s benefit.
175. In addition to the funded debt advanced by USS to USSC, USSC periodically received
equity injections from USS. The Monitor is of the view that it would be of assistance to
readers of this Seventh Report to be provided with a summary of all the funded debt
advances and equity injections made by USS to USSC since the acquisition of Stelco and
its subsidiaries and analyze the purposes for which funds were required. The following
paragraphs 176 to 181 provide an overview of the equity injections made by USS, and
paragraphs 182 to 192 provide analysis of the total funded debt advances and equity
38
injections in comparison to the operating losses generated by USSC since the date of the
Stelco acquisition.
Equity Capital Injections
176. As set out in paragraphs 71 to 75, as part of the intermediary steps to affect the overall
acquisition of Stelco, Canada LP made a $600 million equity investment in ABULC on
October 29, 2007. ABULC in turn became the sole registered shareholder of Stelco after
paying cash consideration for all of the outstanding shares of Stelco on October 30, 2007.
177. After the acquisition date but prior to the Amalgamation Date, Canada LP made two
further equity investments of $20 million in 2007 and $55 million in 2008, for a total
equity investment of $675 million. Subsequent to the Amalgamation Date, USSC treasury
issued a share certificate to Canada LP for 108 shares in consideration of the $675 million
invested in ABULC, which became the initial capitalization of the post-amalgamated
USSC.
178. On an annual basis, additional equity injections from Canada LP after the initial
capitalization until the Filing Date are summarized in the table below. A detailed schedule
showing the equity investments on a monthly basis has been provided in Appendix “O”
179. As at the Filing Date, the total equity investment made by USS in respect of USSC was
$2,325 million.
180. USSC’s financial controller informed the Monitor that the primary intent of the post
Amalgamation Date equity injections were to provide non-debt financing to support
operating cash flow requirements. The decision to provide equity injections rather than
Equity Contributions (CAD $Millions)
Period
Original
Contribution Equity Advances Total
Oct 31, 2007 600 600
Nov 30, 2007 - - 600
Dec 31, 2007 - 20 620
2008 - 55 675
2009 - 61 736
2010 - 612 1,347
2011 - 213 1,561
2012 - - 1,561
2013 - 764 2,325
Sept 15, 2014 - - 2,325
Total 600 1,725 2,325
Source: USSC Share Consideration Registry
39
additional debt financing was influenced primarily by tax thin capitalization rules as
described further herein.
181. In addition to a review of the share purchase agreement dated August 27, 2007, (the
“Share Purchase Agreement”) relating to the acquisition of Stelco, specific procedures
performed by the Monitor with respect to the equity injections included:
a. discussions with Management to understand the flow of funds, approvals, and
decision process with respect to making additional requests for funding;
b. creating a detailed equity investment summary schedule based on USSC’s share
consideration registry to facilitate additional review procedures and analytics;
c. reviewing documentation in respect of the initial $600 million equity investment in
ABULC on October 29, 2007 (including the executed Resolution of the Board of
Directors of U.S. Steel Global Holdings II B.V., the general partner of Canada LP, as
well as the share certificate issued by ABULC);
d. reviewing documentation in respect of the additional $75 million equity investment
by Canada LP;
e. reviewing documentation below in respect of all subsequent equity investments made
by Canada LP in USSC including:
i. signed share subscription agreement between USSC, Canada LP, and its
general partner;
ii. signed resolution of the directors of USSC approving the issuance of shares;
iii. signed receipt from Canada LP acknowledging receipt of the share certificate;
iv. signed receipt from USSC acknowledging receipt of the cash consideration;
and
v. the USSC share consideration registry; and
f. matching all equity injections between January 2009 and the Filing Date to bank
statements and the general ledger.
Total Capital Advances by USS to USSC (Term Loan and Amended Revolver Loan
advances plus Equity Injections)
182. Funding received by USSC pursuant to the Term Loan or Revolver Loan were requested
by USSC and would undergo an approval and recommendation process by the USS Vice
President and Treasurer.
40
183. Funding received by USSC via equity injections were requested by USSC and would undergo an approval process by a resolution of the Canada LP directors.
184. The Monitor enquired of Management as to what was the principal driver in making equity versus funded debt advances by USS. The Monitor was informed that the decision was driven primarily to adhere to tax thin capitalization rules, which required USSC to maintain a certain debt to equity ratio but which resulted in substantial amounts being advanced to USSC in the form of equity rather than debt and substantial amounts of interest owing to USS (approximately $428 million over the applicable period) being forgiven. This is more fully described in Appendix “P”.
185. Term Loan and Revolver Loan agreement advances were tracked and maintained on a monthly basis through the Loan Continuity schedule which were reviewed by both USS and USSC. Equity contributions and share issuances were also tracked and maintained on a monthly basis by a schedule (“Equity Continuity”). A detailed continuity schedule for all funded debt (Term Loan and Revolver Loan advances) and equity injections from January 1, 2008 to September 15, 2014 was prepared by the Monitor using the Loan Continuity and Equity Continuity schedules. A summary of annual new financing net of interest paid and balances as of the Filing Date is presented below:
186. As described above, the total financing including funded debt and equity, provided by USS to USSC after the Amalgamation Date to August 31, 2014 was approximately $2,115 million. A graphical summary of the annual total debt and equity financing provided by USS is below:
Net new debt and equity funding (CAD $Millions)Equity
Period
Initial Funding
(A)New Advances
(B)Net Payments
(C)
New Term Loan
Financing (D = B + C) g
New Advances(E)
Net revolver payments
(F)
New Revolver funding
(G = E + F) l
New financing
(H) m
Total New Financing
(I = D + G + H)
Initial Funding 1,227 - - - - - Dec 31, 2007 - - - - - - - 20 20
2008 - - (19) (19) - - - 55 36 2009 - 211 - 211 - - - 61 272 2010 - - - - 105 - 105 612 717 2011 - - - - 45 (17) 28 213 241 2012 - - - - 406 (42) 364 0 364 2013 - - - - 85 (384) (299) 764 465 Sept 15, 2014 - - - - - - - - Total 1,227 211 (19) 192 641 (443) 198 1,725 2,115
Note 1: Revolver Loan advances were made in USD but have been converted to CAD using the monthly exchange rate at the time of the advanceSource: Intercompany Loan Continuity and Equity Continuity Schedules
Term Loan Revolver Loan (1)
41
187. The requirement for the quantum of financing which USSC received from USS through
both debt and equity can be understood by an analysis of USSC’s summarized Income
Statement and Cash Flow Statements over this period of time which demonstrates that
USSC incurred substantial operating losses and cash flow burn. As a result USSC required
significant injections of debt and equity financing to maintain sufficient liquidity.
188. USSC’s operating results from fiscal 2008 to 2013 and year-to-date August 31, 2014,
based on internal unaudited financial statements, have been summarized below:
-
500,000,000
1,000,000,000
1,500,000,000
2,000,000,000
2,500,000,000
3,000,000,000
3,500,000,000
4,000,000,000
4,500,000,000
Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13
Fin
an
cin
g (
CA
D)
USS Canada - Total Financing
Total
Debt
Equity
Source: Intercompany loan and equity continuity schedules
Summarized Income Statements
CAD $Millions
YTD
2008 2009 2010 2011 2012 2013 31-Aug-14 Total
Revenue 3,147 1,116 1,834 1,935 1,922 1,350 1,507
Cost of goods sold 2,925 1,666 2,292 2,039 2,092 1,633 1,504
Gross profit 222 (551) (457) (103) (170) (282) 3
Operating expenses
Selling, general & admin expense 37 48 34 35 33 30 26
Depreciation 88 103 111 113 118 351 66
Other expenses (income) (3) (5) (1) (3) (5) 635 1
Total operating expenses 122 145 144 144 146 1,015 93
Operating income (loss) 101 (696) (601) (248) (317) (1,298) (89) (3,148)
Total net interest and other financing costs 57 133 142 46 27 37 121 564
Total income tax provision 74 (2) 0 0 (0) (151) 0 (78)
Net Income (loss) (30) (827) (744) (293) (344) (1,184) (211) (3,633)
For the Years Ending December 31,
42
189. USSC incurred substantial net losses from 2008 to August 31, 2014 which was driven by
negative gross profit as well as non-cash charges, such as a $230 million depreciation
expense as a result of the decision to shut down the steelmaking facilities at Hamilton
Works in 2013. In addition, a full write-down of USSC's remaining $634 million in
goodwill was a major contributor to the $1,298 million loss realized in 2013.
190. As demonstrated in the summarized Cash Flow Statement the net losses suffered by USSC
resulted in substantial usage of cash for the period:
191. USSC experienced significant negative cash flow from operations and investing activities
from 2008 to August 31, 2014 of approximately $1,979 million, creating a need for
financing to maintain liquidity and to fund capital expenditures.
192. Subsequent to the initial financing and additional injection of equity by USS of
approximately $20 million in December, 2007, USSC received net new financing from
January 2008 to the Filing Date from USS through funded debt and equity of
approximately $2,095 million, which indicates that most of the capital injected by USS was
used to fund USSC’s negative cash flow from operations and capital investments.
CONCLUDING COMMENTS
193. In completing its review of the USS Claims, the Monitor was able to rely principally on the
books and records provided by USSC Management and staff, and had full co-operation in
the review. Where necessary, the Monitor also had access to USS accounting staff.
194. As a general comment, the Monitor would note that USSC’s books and records regarding
the inter-company transactions were well organized and documented including with
respect to documenting each specific advance of cash from USS to USSC in the form of
equity or debt. Through its review, the Monitor was able to confirm all the funded debt
advances from January 2008 onwards (which formed the basis for the Term Loan claim -
CAD $Millions
YTD
2008 2009 2010 2011 2012 2013 31-Aug-14 Total
Operating activities
Net income (30) (827) (744) (293) (344) (1,184) (211) (3,633)
Normal operating activitiesadd: depreciaiton and goodwill imparment 88 103 111 113 118 985 121 1,639
All other - intercompanyOther operating activities (10) 482 (67) (18) (153) (237) 178 175
Net cash provided by (used in) operating activities 48 (242) (700) (199) (379) (436) 88 (1,820)
Investing activities
Capital expenditures (14) (23) (48) (24) (22) (12) (7) (150)
Other investing activities (17) (2) (0) 9 (0) 1 0 (9)
Net cash provided by (used in) investing activities (32) (25) (49) (14) (22) (11) (7) (160)
Net cash provided by (used in) operating and investing activities 16 (267) (749) (213) (401) (447) 81 (1,979)
Financing activities
3rd party financing activities 0 0 0 0 (0) (0) (0) 0
Intercompany financing * 36 272 717 241 364 465 - 2,095
Net cash provided by (used in) financing activities 36 272 717 241 364 465 (0) 2,095
For the Years Ending December 31,
* New advances net of interest accruals and interest waivers
44
APPENDICES
APPENDIX “A”
Organization Chart of USS And Those Subsidiaries Of USS,
Which Filed The USS Claims
U. S
. STE
EL C
ANAD
A LI
MIT
ED P
ARTN
ERSH
IP (A
lber
ta)
U. S
. STE
EL C
ANAD
A IN
C.
100%
U. S
. STE
EL G
LOB
AL
HO
LDIN
GS
II B
.V. (
Net
herla
nds)
U. S
. STE
EL G
LOB
AL H
OLD
ING
S I B
.V.
(Net
herla
nds)
100%
1.0%
99.0
%
U. S
. STE
EL K
OSI
CE,
s.r.
o(S
lova
kia)
WO
RLD
WID
E ST
EEL
C.V
.2(N
ethe
rland
s)
U. S
. ST
EEL
HOLD
INGS
, IILL
C (D
elawa
re)
U. S
. STE
EL H
OLD
ING
S, IN
C.¹
(Del
awar
e)US
SIN
TER-
NATI
ONAL
SE
RVIC
ES,
LLC
(Dela
ware
)
UN
ITED
STA
TES
STEE
L C
OR
POR
ATIO
N (“
USS
”)(D
elaw
are)
UN
ITED
STA
TES
STEE
L AN
D
CAR
NEG
IE P
ENSI
ON
FU
ND
3(D
elaw
are)
(US
SC
P is
a P
enns
ylva
nia
M
embe
rshi
p C
orpo
ratio
n an
d is
no
t ow
ned
by U
nite
d S
tate
s S
teel
C
orpo
ratio
n)
Not
e 1:
Uni
ted
Stat
es S
teel
Cre
dit C
orpo
ratio
n w
as m
erge
d in
to U
. S. S
teel
Hol
ding
s, In
c. o
n D
ecem
ber
20, 2
013.
Not
e 2:
Wor
ldw
ide
Stee
l CV
is a
par
tner
ship
with
U. S
. Ste
el H
oldi
ngs,
II L
LC a
s its
gen
eral
par
tner
hol
ding
10%
and
U. S
. Ste
el H
oldi
ngs,
Inc.
as
its li
mite
d pa
rtner
hol
ding
90%
.
Lege
nd:
Lim
ited
Liab
ility
Com
pany
Who
lly-o
wne
d su
bsid
iarie
s of
US
S
Who
lly-o
wne
d su
bsid
iary
of
U
. S. S
teel
Hol
ding
s , I
nc.
100%
90%
Not
e 3:
The
Uni
ted
Stat
es S
teel
and
Car
negi
e Pe
nsio
n Fu
nd (“
USS
CPF
”) is
a n
on-p
rofit
mem
bers
hip
corp
orat
ion.
It i
s a
stan
dalo
ne c
orpo
ratio
n th
at is
not
ow
ned
by U
SS.
10%
Appendix “B” Listing of USSC Board of Directors
Date Directors Employee of: October 31, 2007 to June 10, 2008
William C. Harrison Donald C. Ross Douglas R. Matthews Robert M. Stanton
USS USSC USS USS
June 10, 2008 to June 12, 2008
William C. Harrison Douglas R. Matthews Robert M. Stanton
USS USS USS
June 12, 2008 to March 1, 2009
William C. Harrison Douglas R. Matthews Robert M. Stanton Thomas H. Ferns
USS USS USS USSC
March 1, 2009 to December 31, 2009
William C. Harrison Robert M. Stanton Thomas H. Ferns David John Rintoul
USS USS USSC USS
December 31, 2009 to January 1, 2010
Robert M. Stanton Thomas H. Ferns David John Rintoul
USS USSC USS
January 1, 2010 to December 31, 2010
Robert M. Stanton Thomas H. Ferns David John Rintoul Michael A. McQuade
USS USSC USS USSC
December 31, 2010 to January 1, 2011
Robert M. Stanton Thomas H. Ferns Michael A. McQuade
USS USSC USSC
January 1, 2011 to August 31, 2013
Robert M. Stanton Thomas H. Ferns Michael A. McQuade Anton Jura
USS USSC USSC USS
August 31, 2013 to December 18, 2013
Thomas H. Ferns Michael A. McQuade Anton Jura
USSC USSC USS
December 18, 2013 to January 14, 2014
Michael A. McQuade Anton Jura
USSC USS
January 14, 2014 to January 16, 2014
Michael A. McQuade
USSC
January 16, 2014 to present
Michael A. McQuade Charles H. Cremens Richard E. Newsted
USSC Independent Independent
Appendix “C” Term Loan Agreement
Appendix “D” Term Loan Amendment
Appendix “E” Term Loan Amounts On A Monthly Basis
Unsecured Term Loan (CAD)
PeriodOriginal Principal
Funding (repayments) Interest
Interest Repayment
Interest Waivers Total
Dec 31, 2007 1,227,363,150 12,645,994 1,240,009,143 Jan-08 (19,232,095) 9,096,010 (12,953,857) - 1,216,919,201 Feb-08 - 9,091,186 - - 1,226,010,387 Mar-08 - 9,091,186 - - 1,235,101,574 Apr-08 - 9,091,186 - - 1,244,192,760 May-08 - 9,362,551 - - 1,253,555,310 Jun-08 - 9,362,551 - - 1,262,917,861 Jul-08 - 9,362,551 - - 1,272,280,411
Aug-08 - 9,362,551 - - 1,281,642,962
Sep-08 - 9,362,551 - - 1,291,005,512 Oct-08 - 9,342,375 (90,716,330) - 1,209,631,557 Nov-08 - 9,099,554 (9,224,578) - 1,209,506,533 Dec-08 - 9,091,186 - - 1,218,597,720 Jan-09 - 9,091,186 - - 1,227,688,906 Feb-09 55,921,800 9,259,511 - - 1,292,870,217 Mar-09 - 9,511,998 - - 1,302,382,214 Apr-09 - 9,511,998 - - 1,311,894,212 May-09 - 9,872,004 - - 1,321,766,216 Jun-09 43,549,000 9,999,798 - - 1,375,315,014 Jul-09 - 10,199,710 - - 1,385,514,724 Aug-09 - 10,199,710 - - 1,395,714,434 Sep-09 37,534,000 10,275,028 - - 1,443,523,462 Oct-09 - 10,482,154 - - 1,454,005,616 Nov-09 10,501,000 10,941,392 - - 1,475,448,008 Dec-09 63,650,000 11,190,974 - - 1,550,288,982 Jan-10 - 11,499,379 - - 1,561,788,361 Feb-10 - 11,499,379 - - 1,573,287,739 Mar-10 - 11,499,379 - - 1,584,787,118 Apr-10 - 11,499,379 - - 1,596,286,496 May-10 - 12,012,056 - - 1,608,298,552 Jun-10 - 12,012,056 - - 1,620,310,608 Jul-10 - 12,012,056 - - 1,632,322,664 Aug-10 - 12,012,056 - - 1,644,334,720 Sep-10 - 12,012,056 - - 1,656,346,776 Oct-10 - 12,012,056 - - 1,668,358,832 Nov-10 - 12,554,400 - - 1,680,913,232 Dec-10 - 12,554,400 - (10,466,665) 1,683,000,967 Jan-11 - 12,475,639 - - 1,695,476,606 Feb-11 - 12,475,639 - - 1,707,952,244 Mar-11 - 12,475,639 - - 1,720,427,883 Apr-11 - 12,475,639 - - 1,732,903,521 May-11 - 13,040,099 - - 1,745,943,620
Unsecured Term Loan (CAD) (continued…)
PeriodOriginal Principal
Funding (repayments) Interest
Interest Repayment
Interest Waivers Total
Jun-11 - - 13,040,099 - - 1,758,983,719 Jul-11 - - 13,040,099 - - 1,772,023,818 Aug-11 - - 13,040,099 - - 1,785,063,917 Sep-11 - - 13,040,099 - - 1,798,104,016 Oct-11 - - 13,040,099 - - 1,811,144,115 Nov-11 - - 12,721,830 - (120,535,465) 1,703,330,481 Dec-11 - - 12,721,830 - 2 1,716,052,313 Jan-12 - - 12,721,830 - - 1,728,774,143 Feb-12 - - 12,721,830 - - 1,741,495,973 Mar-12 - - 12,721,830 - - 1,754,217,803 Apr-12 - - 12,721,830 - - 1,766,939,633 May-12 - - 13,296,221 - - 1,780,235,854 Jun-12 - - 13,296,221 - - 1,793,532,075 Jul-12 - - 13,296,221 - - 1,806,828,295 Aug-12 - - 13,296,221 - - 1,820,124,516 Sep-12 - - 13,296,221 - - 1,833,420,737 Oct-12 - - 13,296,221 - - 1,846,716,958 Nov-12 - - 13,896,545 - - 1,860,613,503 Dec-12 - - 12,819,126 - (143,178,652) 1,730,253,977 Jan-13 - - 12,819,126 - - 1,743,073,102 Feb-13 - - 12,819,126 - - 1,755,892,228 Mar-13 - - 12,819,126 - - 1,768,711,354 Apr-13 - - 12,819,126 - - 1,781,530,480 May-13 - - 13,406,017 - - 1,794,936,496 Jun-13 - - 13,406,017 - - 1,808,342,513 Jul-13 - - 13,406,017 - - 1,821,748,530 Aug-13 - - 13,406,017 - - 1,835,154,547 Sep-13 - - 13,406,017 - - 1,848,560,564 Oct-13 - - 13,406,017 - - 1,861,966,581 Nov-13 - - 14,011,299 - - 1,875,977,879 Dec-13 - - 12,855,558 - (153,586,808) 1,735,246,629 Jan-14 - - 12,855,558 - - 1,748,102,186 Feb-14 - - 12,855,558 - - 1,760,957,744 Mar-14 - - 12,855,558 - - 1,773,813,302 Apr-14 - - 12,855,558 - - 1,786,668,860 May-14 - - 13,444,683 - - 1,800,113,543 Jun-14 - - 13,444,683 - - 1,813,558,226 Jul-14 - - 13,444,683 - - 1,827,002,909 Aug-14 - - 13,444,683 - - 1,840,447,592 Sept 15, 2014 - - 6,722,342 - - 1,847,169,934 Total 1,227,363,150 191,923,705 968,545,433 (112,894,765) (427,767,588) 1,847,169,934
Appendix “F” Revolver Loan Agreement
Appendix “G” First Amended and Restated Revolver Loan
Appendix “H” Second Amended and Restated Revolver Loan
SECOND AMENDED AND RESTATED LOAN AGREEMENT
THIS SECOND AMENDED and RESTATED LOAN AGREEMENT dated as of January 28, 2013 (this "Loan Agreement") between United States Steel Credit Corporation (the "Lender") and U. S. Steel Canada, Inc. (the "Borrower") , respecting the granting by the Lender of a loan in the amount up to USD 600,000,000 (the "Loan") to the Borrower ..
Witnesseth :
WHEREAS, the Lender and Borrower entered into a Loan Agreement dated as of May 11 , 2010 (the "Original Loan Agreement"); and
WHEREAS, the Borrower and the Lender amended and restated the Original Loan Agreement dated as of July 31, 2012 (the "First Amendment") to increase the Face Arrtount from USD 350,000,000 to USD 500,000,000; and
WHEREAS , the Borrower and the Lender now wish to again amend and restate the Original Loan Agreement to increase the Face Amount from USD 500,000,000 to USD 600,000,000 ("Second Amendment"); and
NOW, THEREFORE, the Lender grants the Borrower the Loan on the following terms and conditions:
1. Face Amount: USD 600,000,000.
2. ~: Revolving Credit Agreement.
3. Purpose: General corporate purposes.
4. Term. From the date hereof until May 11 , 2025 (the "Maturity Date").
5. Interest: Any advance under the Loan shall bear interest from the date of the advance until the date on which the advance is paid in full at 100% of the applicable Federal Rate ("AFR"), as defined in Treasury regulations under Internal Revenue Code Section 482, in effect during the month the advance is made, as announced from time to time by the Internal Revenue Service. Interest on the Loan shall accrue semi-annually on each May 1 and November 1 in arrears. Interest shall be calculated on the basis of a 360-day year consisting of twelve equal thirty day periods. However, interest may continue to accrue and shall only be due upon the second anniversary of the date hereof and biennially thereafter. Any loan repayment shall be applied to outstanding advances in the order in which made.
When any payment to be made hereunder shall be stated to be due on a day that is not a Banking Day, such payment shall be made on the next succeeding Banking Day, and such extension of time shall be included in the computation of payment of interest. As used herein, the term "Banking Day" shall mean any day that banking business is transacted in Pittsburgh, Pennsylvania, U.S.A.
6. Security: Intentionally omitted.
392829v3
7. Repayment: The outstanding principal balance is due on the Maturity Date. The Borrower shall have the right, upon payment of all accrued interest, to repay without premium or penalty, all or part of the outstanding principal amount of the Loan.
8. Currency. The Loan, even if made in another currency, is denominated in USD if any payment (whether of principal or interest) is made in a currency other than USD, the Lender shall convert the payment to USD using any commercially reasonable means.
9. Representations: The Borrower makes the following representations and warranties (which shall survive the execution of this Loan Agreement and the making of each borrowing hereunder).
a. The Borrower is duly organized, validly existing and in good standing under the laws of Canada;
b. The Borrower has the power to enter into and perform this Loan Agreement and to borrow hereunder and it has taken all necessary corporate actions to authorize the borrowings upon the terms and conditions of this Loan Agreement and to authorize the execution, delivery and performance of this Loan Agreement in accordance with its terms; and
c. This Loan Agreement is legally enforceable against the Borrower in accordance with its terms except to the extent that enforcement thereof may be limited by bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally.
10. Covenants:
a. If a person or entity other than United States Steel Corporation or one of its wholly owned subsidiaries acquires any equity interest in the Borrower, Borrower will, immediately upon the occurrence thereof, give the Lender notice thereof. Upon receipt of such notice Lender may at any time thereafter, with or without notice to the Borrower, declare the outstanding principal amount of the Loan (together with accrued interest thereon) and any other amounts payable hereunder to be, such amounts shall become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower.
b. So long as this Loan Agreement shall remain in effect, the Borrower shall not, without the consent of Lender, consolidate or merge with or into any other person or convey, transfer or lease all or substantially all of its assets as an entirety to any person or entity.
c. So long as this Loan Agreement shall remain in effect, the Borrower shall not mortgage, lease or allow any liens upon its properties except liens that have not matured (including any which Borrower is contesting in good faith by adequate proceedings).
11. Events of Default: If any of the following events of default shall occur:
2
a. the Maturity Date;
Borrower shall default in the payment when due of the principal on
b. Borrower shall default for five (5) days in the payment when due of any interest;
c. Borrower consents to the appointment of a receiver, trustee or liquidator of all or substantially all of its assets, is unable to meet debts, or files bankruptcy;
d. Borrower shall have filed against it any receivership, bankruptcy or other similar proceedings and the same shall not have been stayed or dismissed within sixty (60) days;
e. any representation or warranty made by the Borrower in this Loan Agreement proves to be incorrect in any material respect when made; or
f . the Borrower shall fail to observe or perform any covenant contained in th1s Loan Agreement,
then, the Maturity Date shall be accelerated, and the Lender shall have the right to demand payment by the Borrower, of all sums due pursuant to this Loan Agreement.
12. Increased Costs. If Lender's cost of borrowing is increased by an amount deemed by Lender in its sole discretion to be material, Lender will provide notice thereof to Borrower as soon as practicable and Borrower shall compensate Lender for all such increased costs. Any certificate of Lender in respect of the foregoing will be conclusive and binding upon the Borrower, absent manifest error, provided that the Lender shall determine the amounts owing to it in good faith using any reasonable averaging and attribution methods.
13. Miscellaneous:
a. This Loan Agreement and the rights, duties and obligations contained herein shall be solely for the benefit of the parties hereto and their permitted assignees and transferees, and no third person or entities shall have any rights hereunder as a third-party beneficiary, or otherwise.
b. Borrower shall not have the ability to assign any of its rights or duties under this Loan Agreement, whether voluntarily or by operation of law, without Lender's prior written consent (which consent may be unreasonably withheld).
c. Following the funding of the Loan, the Lender shall be free to assign all or any part of its rights under this Loan Agreement.
d. Any provision of this Loan Agreement which is invalid, Illegal or unenforceable in any respect in any given instance in any jurisdiction shall , as to such instance and jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without in any way affecting the validity, legality or enforceability of the remaining provisions hereof, and any such invalidity, illegality or unenforceability in any
3
instance in any jurisdiction shall not invalidate or in any way affect the validity, legality or enforceability of such provisions in any other instance or in any other jurisdiction.
e. Section headings are inserted in this Loan Agreement for convenience of reference only and shall not be used to construe any provision hereof.
f . This Loan Agreement shall be construed in accordance with and governed in all other respects by the internal substantive laws of the Commonwealth of Pennsylvania.
g. Any interest payments hereunder that are subject to withholding taxes shall be made net of any such taxes without gross-up.
14. WAIVER OF JURY TRIAL: THE BORROWER AND THE LENDER HEREBY IRREVOCABLY WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS LOAN AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
WITNESS the due execution hereof as of the date first written.
LENDER: UNITED STATES STEEL CREDIT CORPORATION.
,. . ':\ . ;._;
d) I~> • ' X ·- .,.. / By: __________ _ John J. Quaid President
DATE: _______ _
BORROWER: U . S . STEEL CANADA INC.
By~ ~ Vice President & Chief Financial Officer
DATE: ,(o I J . O.l... 0 ?
4
Appendix “I”
Security Agreement
SECURITY AGREEMENT
This Security Agreement dated as of January 28, 2013 is made by and between United States Steel Credit Corporation, a corporation organized under the laws ofthe State of Delaware ("Secured Parly"), and U.S. Steel Canada Inc., a corporation-organized under the Jaws of Canada ("Debtor'').
\Vitncsseth:
WHEREAS, contemporaneous with the execution and delivery of this Agreement, the Debtor and the Secured Pa11y are entering into a Second Amended and Restated Loan Agreement dated as of January 28 , 2013 ("Loan Agreement") which provides for the making ofloans by the Secured Party in the amount up to USD 600,000,000 (the "Loans") to the Debtor;
WHEREAS, the Secured Party is willing to enter into the Loan Agreement only ifDebtor grants Secured Party a security interest in the Collateral (as hereinafter defined) to secure repayment of all amounts owed pursuant to the Loan Agreement;
WHEREAS, Debtor is willing to grant a security interest in f.:·wor of Seemed Party as herein provided.
NO\V, THEREFORE, in consideration of the premises, the mutual covenants contained herein and for other good and valuable consideration, the r!!ccipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, the pa1iies hereto agree as follows:
1. Definitions.
1.1 When used in this Agreement, the following tenns shall have the following meanings:
430557v1
(a) "Agreement" shall mean this Security Agreement, including all exhibits and schedules hereto, as the same may be amended or supplemented from time to time.
(b) "Collateral" means all of the right, title and interest of the Debtor in, to and under the following property, wherever located, and whether now existing or hereafter arising or acquired from time to time:
(i) all of Debtor's Inventory of iron ore pellets sold to Debtor by Stelco Holding Co.;
(ii) all books and records relating to the Collateral; and
(iii) all Proceeds and products of each of the foregoing and all accessions to, substitutions and replacements lor, and rents, proiits and products of, each of the foregoing, and any and all Proceeds of any insurance, indemnity or
warranty payable to the Debtor from time to time with respect to any of the foregoing.
(c) "Debtor" has the meaning set forth in the introductory paragraph hereof.
(d) "Event of Default" means (i) any Event of Default as defmed in the Loan Agreement; (ii) any failure by Debtor to pay or pcrfonn any of its obligations under this Agreement when due; and (ii) any loss, theft, substantial damage or destruction to or of any Collateral, or the issuance or filing of any attachment, levy, garnishment or the commencement of any proceeding in connection with any Collateral or of any other judicial process in respect of any Collateral.
(e) "Loan Agreement" has the meaning set forth in the first WHEREAS clause above.
(f) "Loans" has the meaning set forth in the first WHEREAS clause above.
(g) "Person'' means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, governmental authority or agency or other entity.
(h) "PPSA" means the Personal Property Security Act, as in effect from time to time in the Province of Ontario, Canada.
(i) "Secured Obligations" means all obligations, duties, indebtedness and liabilities of the Debtor from time to time arising under, or in cotmection with: (i) the Loan Agreement; (ii) any amendment or restatement of the Loan Agreement, including any such amendment or restatement which increases or decreases the maximum amount of Loans that may be made by Secured Patiy to Debtor thereunder; (iii) this Agreement; and (iv) any other document made, delivered or given in connection with any of the foregoing; in each case whether now existing or hereafter arising, whether evidenced by a note or other writing, whether allowed in any bankruptcy, inso lvency, receivership or other similar proceeding, whether arising from an extension of credit, issuance of a letter of credit, acceptance, loan, guarantee, indemnification or othenvise, and whether direct or indirect, absolute or contingent, due or to become due, primary or secondary, or joint or several.
G) "Secured Party" has the meaning set forth in the introductory paragraph hereof.
1.2 All capitalized tcnns used herein which are not otherwise defined herein and which arc defined in the PPSA shall have the same meanings given to them in the PPSA.
1.3 The definitions of terms herein (including those incorporated by reference to the PPSA or to another document) apply equally to the singular and plural fonns of the tenus defined. Whenever the context may require, any pronoun includes the corr-esponding masculine,
2
feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires othenvise, (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as rcfening to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified; (b) any reference herein to any Person shall be construed to include such Person's successors and assigns; (c) the words "herein", "hereof' and "hereunder", and words of similar import, shall be constmed to refer to this Agreement in its entirety and not to any particular provision hereof; and (d) all references herein to sections, exhibits and schedules shall be construed to refer to sections of, and exhibits and schedules to, this Agreement.
2. Grant of Security Interest. In order to secure the payment and perfonnance in :full of all of the Secured Obligations, the Debtor hereby pledges and assigns to, and grants a security interest in, the Collateral to the Secured Patiy.
3. Other Actions. The Debtor fmiher agrees, at the request and option of Secured Patiy, to take any and all actions that Secured Party may detenuine to be necessary or desirable for the attachment, perfection and first primity of: and the ability of Secured Party to enforce, Secured Party's security interest in any and all of the Collateral, including, without limitation, executing, delivering and, where appropriate, filing financing statements and amendments relating thereto under the PPSA. ·
4. &J)resentations and Warranties of Debtor. The Debtor hereby represents and warrants to Secured Party as follo,:vs:
4.1 Debtor is a cmvoration duly organized and validly existing under the laws of Canada. Debtor is qualified to do business and in good standing in each province of Canada where the nature of its business requires such qualification.
4.2 Debtor is the owner of, or has other rights in or power to transfer, the Collateral, free from any adverse lien, security interest, encumbrance or other right or claim of any Person, except for the security interest created by this Agreement.
5. Covenants ofDebtor. The Debtor covenants with Secured Pmiy as follows:
5.1 Without providing at least 30 days prior written notice to Secured Party, Debtor will not change its name, its place of business, its type of organization, its jurisdiction of organization or other legal structure.
5.2 Except for (i) the security interest herein granted and (ii) the effects of actions of Debtor petmitted under Section 5. 7 hereof, Debtor shall be and at all times remain the o·wner of the Collateral, free from any lien, security interest, encumbrance, or other right or claim of any other Person, and Debtor shall defend the same against all claims and demands of all Persons at any time claiming the same or any interests therein adverse to Secured Party.
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5.3 Except as a result of action of Debtor permitted under Section 5.7 hereof, Debtor shall not pledge, mortgage or create, or suffer to exist any right of any Person in, or claim by any Person to, the Collateral, or any security interest, lien or encumbrance in the Collateral in favor of any Person, other than Secured Party.
5.4 Debtor will keep the Collateral in good order and repair, subject only to natural degradation or its use in accordance with Section 5.7 hereof, and will not use the same in violation of lav.; or any policy of insurance thereon.
5.5 Debtor will pennit Secured Pat1y, or its designee, to inspect the Collateral at any reasonable time, wherever located.
5.6 Debtor will pay promptly when due all taxes, assessments, governmental charges and levies upon the Collateral or incmTed in connection with the use or operation of the Collateral or incuned in connection with this Agreement.
5.7 Debtor will not sell or otherwise dispose, or offer to sell or otherwise dispose, of the Collateral or any interest therein, except for: (i) sales of Inventory in the ordinary course of business; and (ii) use by Debtor of the Inventory in the manufacture and production of steel products and activities ancillary thereto.
6. Rights and Remedies. If an Event of Default shall have occurred and be continuing, Secured Party, without any other notice to or demand upon Debtor shall have in any jurisdiction in which enforcement hereof is sought, in addition to all other rights and remedies, the rights and remedies of a secured party under the PPSA and any additional rights and remedies which may be provided to a secured party in any jurisdiction in which Collateral is located, including, without limitation, the 1ight to take possession of the Collateral, and for that purpose Secured Patiy may, so far as Debtor can give authority therefor, enter upon any premises on which the Collateral may he situated and remove the same therefrom. The Secured Pm1y may in its discretion require Debtor to assemble all or any part of the Collateral at such location or locations within the jurisdiction of Debtor's principal office or at such other locations as Secured Party may reasonably designate. Unless the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, Secured Party shall give to Debtor at least five Business Days prior written notice of the time and place of any public sale of Collateral or of the time after which any private sale or any other intended disposition is to be made. The Debtor hereby acl<11owledges that five Business Days p1ior written notice of such sale or sales shall be reasonable notice. Jn addition, Debtor waives any and all rights that it may have to a judicial hearing in advance of the enforcement of any of Secured Party's rights and remedies hereunder, including, without limitation, its right following an Event of Default to take immediate possession of the Collateral and to exercise its rights and remedies with respect thereto.
7. No Waiver by Secured Pa1iy. The Secured Party shall not be deemed to have waived any of its rights or remedies in respect ofthe Secured Obligations or the Collateral unless such waiver shall be in vvriting and signed by Secured Party. No delay or omission on the pmi of Secured Party in exercising any right or remedy shall operate as a waiver of such right or remedy
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or any other right or remedy. A waiver on any one occasion shall noi be construed as a bar to or waiver of any right or remedy on any future occasion. All rights and remedies of Secured Patty with respect to the Secured Obligations or the Collateral, whether evidenced hereby or by any other instrument or papers, shall be cumulative and may be exercised singularly, alternatively, successively or concurrently at such time or at such times as Secured Party deems expedient.
8. Expenses. The Debtor shall pay to Secured Patty on demand any and all expenses, including reasonable legal fees and disbursements, incurred or paid hy Secured Pmty in protecting, preserving or enforcing Secured Party's rights and remedies under or in respect of any of the Secured Obligations or any of the Collateral.
9. Goveming Law. This 1\greement shall be governed by, and construed m accordance with, the laws of the Province of Ontario, Canada.
10. Miscellaneous. The headings of each section of this Agreement are for convenience only and shall not define or limit the provisions thereof. This Agreement and all rights and obligations hereunder shall be binding upon Debtor and its respective successors and assigns, and shall inure to the benefit of Secured Party and its successors and assigns. If any tenn of this Agreement shall be held io be invalid, illegal or unenforceable, the validity of all other tcm1s hereof shall in no way be affected thereby, and this Agreement shall be construed and be enforceable as if such invalid, illegal or unenforceable term had not been included herein.
IN WITNESS WHEREOf, intending to be legally bound, Debtor and Secured Party have caused this Agreement to be duly executed as of the date first above \Vrittcn.
U. S. Steel Canada Inc. ("Debtor")
,·
By: _____ ·~-~-~/~·_.,:_.1_,_/_":~-~~- ~-~· '_·~ ---'-... _· ______ ___ Name: / : ,-. -I · / / ! .·: (\ t: •..• ,·_, ;:.
--------------~~~~-------Ti tl c: - --"'L_ .. · ._ .. _· '-' -'-·- _;_· _( _' ----------------
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Appendix “J” Third Amended and Restated Revolver Agreement
Appendix “K” First Amended Security Agreement
Appendix “L” Second Amended Security Agreement
Appendix “M” Approval and Recommendation Form
Appendix “N” Revolver Loan Amounts on Monthly Basis
Revolver Loans (USD)
PeriodOriginal Principal
Net Funding (repayments) Interest
Interest Repayments Total
Dec 31, 2007 - - - - - Jan-08 - - - - - Feb-08 - - - - - Mar-08 - - - - - Apr-08 - - - - - May-08 - - - - - Jun-08 - - - - - Jul-08 - - - - - Aug-08 - - - - - Sep-08 - - - - - Oct-08 - - - - - Nov-08 - - - - - Dec-08 - - - - - Jan-09 - - - - - Feb-09 - - - - - Mar-09 - - - - - Apr-09 - - - - - May-09 - - - - - Jun-09 - - - - - Jul-09 - - - - - Aug-09 - - - - - Sep-09 - - - - - Oct-09 - - - - - Nov-09 - - - - - Dec-09 - - - - - Jan-10 - - - - - Feb-10 - - - - - Mar-10 - - - - - Apr-10 - - - - - May-10 75,000,000 174,958 - 75,174,958 Jun-10 - - 276,250 - 75,451,208 Jul-10 - - 276,250 - 75,727,458 Aug-10 - 25,000,000 339,792 - 101,067,250 Sep-10 - - 354,375 - 101,421,625 Oct-10 - - 354,375 - 101,776,000 Nov-10 - - 360,794 - 102,136,794 Dec-10 - - 360,794 - 102,497,588 Jan-11 - - 360,794 - 102,858,382 Feb-11 - - 360,794 - 103,219,176 Mar-11 - - 360,794 - 103,579,970 Apr-11 - - 360,794 - 103,940,764 May-11 - - 368,503 - 104,309,267
Revolver Loans (USD) continued
PeriodOriginal Principal
Net Funding (repayments) Interest
Interest Repayments Total
Jun-11 - 20,000,000 372,959 - 124,682,226 Jul-11 - - 372,959 - 125,055,185 Aug-11 - - 435,337 - 125,490,522 Sep-11 - - 497,715 - 125,988,237 Oct-11 - - 497,715 - 126,485,952 Nov-11 - (18,339,563) 339,526 (6,660,437) 101,825,478 Dec-11 - 25,223,983 330,120 (223,983) 127,155,598 Jan-12 - 50,366,090 373,439 (366,090) 177,529,037 Feb-12 - 60,000,000 502,814 - 238,031,851 Mar-12 - (33,866,386) 506,460 (1,133,614) 203,538,311 Apr-12 - (9,568,279) 449,769 (431,721) 193,988,080 May-12 - 20,000,000 460,467 - 214,448,547 Jun-12 - 50,000,000 535,206 - 264,983,753 Jul-12 - 40,000,000 623,592 - 305,607,345 Aug-12 - 20,000,000 674,170 - 326,281,515 Sep-12 - 65,000,000 744,402 - 392,025,917 Oct-12 - - 818,845 - 392,844,762 Nov-12 - 65,000,000 882,397 - 458,727,159 Dec-12 - 37,000,000 975,275 - 496,702,434 Jan-13 - 10,000,000 1,047,694 - 507,750,128 Feb-13 - (12,680,862) 1,022,933 (7,319,138) 488,773,061 Mar-13 - (40,361,924) 913,983 (638,076) 448,687,044 Apr-13 - (23,025,085) 867,139 (974,915) 425,554,183 May-13 - (153,812,778) 627,080 (1,187,222) 271,181,263 Jun-13 - (54,578,173) 451,626 (421,827) 216,632,889 Jul-13 - (99,387,026) 367,949 (612,974) 117,000,838 Aug-13 - - 231,304 - 117,232,142 Sep-13 - - 231,304 - 117,463,446 Oct-13 - 12,000,000 232,461 - 129,695,907 Nov-13 - 40,000,000 304,552 - 170,000,459 Dec-13 - 19,000,000 401,073 - 189,401,532 Jan-14 - - 430,866 - 189,832,398 Feb-14 - - 430,866 - 190,263,264 Mar-14 - - 430,866 - 190,694,130 Apr-14 - - 430,866 - 191,124,996 May-14 - - 436,516 - 191,561,512 Jun-14 - - 436,516 - 191,998,028 Jul-14 - - 436,516 - 192,434,544 Aug-14 - - 436,516 - 192,871,060 15-Sep-14 - - 218,258 - 193,089,318 Total 75,000,000 112,969,997 25,089,318 (19,969,997) 193,089,318
Source: USSC Share Consideration Registry and internal tax working papers provided by USSC management.
APPENDIX “O” Equity Injections On A Monthly Basis
Equity Contributions (CAD)
PeriodOriginal
Contribution New Funding Total
Dec 31, 2007 600,000,000 19,888,724 619,888,724 Jan-08 - - 619,888,724 Feb-08 - - 619,888,724 Mar-08 - - 619,888,724 Apr-08 - - 619,888,724 May-08 - - 619,888,724 Jun-08 - - 619,888,724 Jul-08 - - 619,888,724 Aug-08 - - 619,888,724 Sep-08 - - 619,888,724 Oct-08 - 55,247,337 675,136,061 Nov-08 - - 675,136,061 Dec-08 - - 675,136,061 Jan-09 - - 675,136,061 Feb-09 - 7,053,200 682,189,261 Mar-09 - - 682,189,261 Apr-09 - - 682,189,261 May-09 - - 682,189,261 Jun-09 - - 682,189,261 Jul-09 - 17,433,000 699,622,261 Aug-09 - - 699,622,261 Sep-09 - - 699,622,261 Oct-09 - 36,022,000 735,644,261 Nov-09 - - 735,644,261 Dec-09 - - 735,644,261 Jan-10 - - 735,644,261 Feb-10 - - 735,644,261 Mar-10 - - 735,644,261 Apr-10 - - 735,644,261 May-10 - - 735,644,261 Jun-10 - 82,304,000 817,948,261 Jul-10 - 180,460,000 998,408,261 Aug-10 - - 998,408,261 Sep-10 - 200,499,000 1,198,907,261 Oct-10 - 123,351,000 1,322,258,261 Nov-10 - - 1,322,258,261 Dec-10 - 25,140,000 1,347,398,261 Jan-11 - 49,695,000 1,397,093,261 Feb-11 - 44,485,500 1,441,578,761 Mar-11 - - 1,441,578,761 Apr-11 - - 1,441,578,761 May-11 - - 1,441,578,761
Equity Contributions (CAD) continued
PeriodOriginal
Contribution New Funding Total
Jun-11 - - 1,441,578,761 Jul-11 - 14,422,500 1,456,001,261 Aug-11 - 19,634,000 1,475,635,261 Sep-11 - 59,670,000 1,535,305,261 Oct-11 - 25,407,500 1,560,712,761 Nov-11 - - 1,560,712,761 Dec-11 - - 1,560,712,761 Jan-12 - - 1,560,712,761 Feb-12 - - 1,560,712,761 Mar-12 - - 1,560,712,761 Apr-12 - - 1,560,712,761 May-12 - - 1,560,712,761 Jun-12 - - 1,560,712,761 Jul-12 - - 1,560,712,761 Aug-12 - - 1,560,712,761 Sep-12 - - 1,560,712,761 Oct-12 - - 1,560,712,761 Nov-12 - - 1,560,712,761 Dec-12 - - 1,560,712,761 Jan-13 - 24,069,600 1,584,782,361 Feb-13 - 80,944,000 1,665,726,361 Mar-13 - 47,979,600 1,713,705,961 Apr-13 - 26,702,000 1,740,407,961 May-13 - 246,866,600 1,987,274,561 Jun-13 - 69,421,200 2,056,695,761 Jul-13 - 113,818,000 2,170,513,761 Aug-13 - 97,026,800 2,267,540,561 Sep-13 - - 2,267,540,561 Oct-13 - 57,040,500 2,324,581,061 Nov-13 - - 2,324,581,061 Dec-13 - - 2,324,581,061 Jan-14 - - 2,324,581,061 Feb-14 - - 2,324,581,061 Mar-14 - - 2,324,581,061 Apr-14 - - 2,324,581,061 May-14 - - 2,324,581,061 Jun-14 - - 2,324,581,061 Jul-14 - - 2,324,581,061 Aug-14 - - 2,324,581,061 Sept 15, 2014 - - 2,324,581,061 Total 600,000,000 1,724,581,061 2,324,581,061
APPENDIX “P”
Tax Thin Capitalization Summary
For Canadian tax purposes, the deduction of interest by a Canadian corporation on debt owing to "specified non-residents" is subject to certain restrictions under the so-called thin capitalization rules. In general terms, a "specified non-resident" is a shareholder that is not resident in Canada and that holds, either alone or together with non-arm's length entities, 25% or more of the votes or 25% or more of the value attributable to all of the issued and outstanding shares of the Canadian corporate debtor.
The purpose of thin capitalization rules is to prevent the Canadian tax base from being artificially eroded through deductible related party interest payments on excess debt exceeding the level debt that might otherwise reasonably be found in arm's length situations.
The amount of interest denied under the thin capitalization rules is based on a complex formula, which is calculated on a monthly basis. The formula incorporates the following key variables:
a. the greatest debt amount owing to the specified non-resident (and any other nonresident person who does not deal at arm's length with the specified non-resident) at any time during the applicable month; and
b. an equity amount attributable to the specified non-resident, which equity amount includes an opening retained earnings amount, the paid-up capital at the beginning of the applicable month attributable to shares of the debtor owned by the specified non-resident, and any contributed surplus at the beginning of the applicable month to the extent it was contributed by the specified non-resident.
To the extent the ratio calculated under the above formula exceeds the applicable thin capitalization ratio (discussed below), the deduction of interest on the excess portion of the debt owing to the specified non-resident (and any other non-resident person who does not deal at arm's length with the specified non-resident) is denied.
As at the date of the acquisition by USS of Stelco and certain of its subsidiaries in October, 2007, the thin capitalization rules provided that the ratio of relevant debt to equity could not exceed 2:1.
Management understood that the thin capitalization rules would deny the ability of USSC to deduct interest on that portion of the debt owing to USS that exceeded the relevant debt to equity ratio (and, following the amendment of the rules in 2012, would also result in the excess being re-characterized as a dividend for USSC withholding tax purposes). Accordingly, thin capitalization calculations were maintained on a monthly basis by Management, and the decision by Management to request and receive financing in the form of either debt or an equity injection would take into consideration the potential tax impacts of the Canadian thin capitalization rules.
As described earlier, USSC generated significant operating losses in fiscal 2009 and 2010, which negatively impacted its retained earnings balance. As noted above, retained earnings constitute one of the equity components in the thin capitalization formula described above. Thus the reduction in retained earnings also decreased USS's equity amount for purposes of the thin capitalization rules, resulting in a corresponding increase in the USSC debt that would have been subject to the thin capitalization limitations. To off-set this impact, significant equity investments in USSC were made by Canada LP in the latter half of fiscal 2010.
In March 2012, the Canadian government announced that the thin capitalization rules would be amended to reduce the permitted debt to equity ratio from 2:1 to 1.5:1. These changes came into force for taxation year beginning after 2012 (i.e. for USSC, fiscal 2013 and thereafter). All other things being equal, the reduction in the permitted debt to equity ratio meant that additional equity injections would be required by USS after 2012 in order to be in compliance with the more stringent thin capitalization rules.
In March 2012, the Canadian government also announced that, effective after March 28, 2012, any interest whose deduction was denied under the thin capitalization rules would be treated for Canadian withholding tax purposes as a dividend paid by the Canadian corporate debtor to the specified non-resident shareholder. Under the Canada-United States Income Tax Convention, interest paid by a Canadian resident debtor to a person who is a resident of the United States is generally exempted from Canadian withholding tax, whereas dividends are not. Instead, under the Canada-United States Income Tax Convention dividends paid by a Canadian corporation to a resident of the United States is generally subject to withholding at a rate of 15%, which is reduced to 5% to the extent the recipient owns at least 10% of the voting stock of the corporation paying the dividend or deemed dividend.