The Ontario government faces a potential bill of $400-million to bailout U.S. Steel Canada Inc. pensioners if the steel maker's pension plans are not restructured, the company's chief executive officer Michael McQuade warned in a court filing.
An affidavit submitted by Mr. McQuade as part of U.S. Steel Canada's filing for protection under the Companies' Creditors Arrangement Act outlines what is likely to be one of the critical issues in restructuring talks between the company, the Ontario government, the United Steelworkers union and other groups such as salaried employees and salaried retirees.
The solvency deficiency in the company's pension plans totalled $838.7-million as of the most recent valuation.
But a pension agreement United States Steel Corp. inherited when it bought Stelco Inc. in 2007 also played a role in the company's decision to seek protection from creditors.
The province provided a $150-million loan with a 1 per cent interest rate to the company, $112.5-million of which would be forgiven if the solvency deficiencies in the plans were eliminated by the end of 2015.
"Given the financial condition of the applicant and current funding status of the main pension plans, there is no reasonable prospect that it will be entitled to this discount on the maturity of the loan," Mr. McQuade said in his affidavit.
Not only that, but U.S. Steel Canada has to repay the Ontario loan by the end of 2015 and then faces additional pension contributions of $117-million in 2016, $105-million in 2017 and $80-million in 2018.
About 12,600 unionized and salaried pensioners, as well as current employees at the Hamilton Works, belong to the pension plans. Another 1,837 at the Lake Erie Works in Nanticoke, Ont., are covered.
The other potential liability facing Ontario would be an environmental clean-up of U.S. Steel Canada's site in Hamilton, Ont., where steel making ceased in 2010.
"While USSC has been a good environmental steward during its relatively brief period of ownership and has made a number of significant investments and improvements, it is understood that there have been a number of spills at Hamilton Works over the past century as well as discharges to the environment during that time," Mr. McQuade said.
Industry analysts and sources familiar with the 26-month Stelco restructuring under the CCAA said they believe U.S. Steel would like to hang on to the Lake Erie operations, but shed the Hamilton assets. The key Hamilton assets that are still running are two galvanizing lines that process steel shipped from the Lake Erie mill.
But if it's unable to find a buyer and shuts down the operations, the questions are who would pay and how much would it cost.
"What is 1,000 acres of brutally contaminated land in Hamilton worth?" one source asked yesterday.
Mr. McQuade said U.S. Steel has pumped $3.9-billion in debt and equity into the Canadian unit since 2007 and forgiven another $430-million in interest payments.
U.S. Steel bought Stelco after a bidding war with OAO Severstal of Russia, which was trying to add the Canadian company to a steel mill it bought in Dearborn, Mich., in an attempt to become a major force in the North American market. Severstal abandoned the North American market on Tuesday by selling the Dearborn mill and another in Mississippi in deals that closed the same day that U.S. Steel Canada filed for creditor protection.
Shares of Pittsburgh-based U.S. Steel jumped 10 percent on the New York Stock Exchange on Wednesday, in part because analysts applauded the move, with Citibank analyst Richard Yu noting the plan is to "bankrupt the bad and keep the good stuff."