ONTARIO SUPERIOR COURT OF JUSTICE (COMMERCIAL LIST) IN THE MATTER OF THE COMPANIES CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c.

Size: px

Start display at page:

Download "ONTARIO SUPERIOR COURT OF JUSTICE (COMMERCIAL LIST) IN THE MATTER OF THE COMPANIES CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c."

Bridget Burns
5 years ago
Views:

1 ONTARIO SUPERIOR COURT OF JUSTICE (COMMERCIAL LIST) Court File No. CV CL IN THE MATTER OF THE COMPANIES CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF ESSAR STEEL ALGOMA INC., ESSAR TECH ALGOMA INC., ALGOMA HOLDINGS B.V., ESSAR STEEL ALGOMA (ALBERTA) ULC, CANNELTON IRON ORE COMPANY AND ESSAR STEEL ALGOMA INC. USA TWENTY-THIRD REPORT OF THE MONITOR January 9th, 2017 INTRODUCTION 1. On November 9, 2015, Essar Steel Algoma Inc. ( Algoma ), Essar Tech Algoma Inc., Essar Steel Algoma (Alberta) ULC, Cannelton Iron Ore Company and Essar Steel Algoma Inc. USA (with Algoma Holdings B.V., collectively, the Applicants ) applied for and were granted protection from their creditors by the Ontario Superior Court of Justice (Commercial List) (the Court ) under the Companies Creditors Arrangement Act (the CCAA ). Pursuant to an Order of this Court granted on November 9, 2015 (the Filing Date ) (the Initial Order ), Ernst & Young Inc. ( EY or the Monitor ) was appointed Monitor of the Applicants in these CCAA proceedings (the CCAA Proceedings ). 2. The Initial Order was amended and restated on November 20, 2015 (the Restated Initial Order ) to provide for a stay of proceedings in respect of the Applicants through January 15, 2015 (the Stay Period ). The Stay Period was subsequently extended to January 31, 2017 pursuant to an Order of this Court dated September 23, 2016.

2 3. On November 9, 2015, the Applicants also commenced ancillary insolvency proceedings under chapter 15 of title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware (the Chapter 15 Cases ). In the Chapter 15 Cases, Algoma (in its capacity as foreign representative for the Applicants) sought and obtained (among other things) Orders recognizing and enforcing in the United States the Orders granted in the CCAA proceedings. 4. Since the Filing Date, the Court has issued a number of further orders, including: (a) an Order dated February 10, 2016 (the SISP Order ) authorizing the Applicants, with the assistance of the Monitor, CDG Group, LLC ( CDG ) as Chief Restructuring Advisor (the CRA ) to the Applicants, Evercore Group LLC in its capacity as financial advisor to the Applicants (the Financial Advisor ), to conduct a sale and investment solicitation process (the SISP ); (b) an Order dated May 27, 2016 (the Reinstatement Approval Order ) authorizing and approving the settlement between Algoma and Cliffs (as defined below) to amend and reinstate the Pellet Sale Agreement (as defined below); (c) an Order dated September 23, 2016 (the DIP Amendment Order ), approving an amendment and restatement of the debtor-in-possession financing facilities agreement (the Amended DIP Facilities ); and (d) an Order dated December 29, 2016 approving a term sheet dated December 16, 2016 between Algoma and Cliffs for the additional supply of iron ore pellets from January 1, 2017 through December 31,

3 BACKGROUND 5. As described in the previous reports of the Monitor, Algoma operates one of Canada s largest integrated steel mills, located in Sault Ste. Marie, Ontario. Algoma purchases approximately 4 million tons of iron ore pellets each year which represent the principal raw material input in steel making. 6. Between 2002 and October 2015, the Cleveland-Cliffs Iron Company, Cliffs Mining Company, Northshore Mining Company (collectively, Cliffs ) supplied almost all of Algoma s iron ore pursuant to a long term iron ore purchase and sale agreement (as amended, the Pellet Sale Agreement ). Prior to the commencement of these CCAA Proceedings, Cliffs purported to suspend supply under the Pellet Sale Agreement and terminate it. Algoma disputed the validity of Cliffs actions and litigation ensued. In May 2016, the litigation was settled and the parties entered into a Reinstatement Agreement dated May 16, 2016 (the Reinstatement Agreement ), which was approved by the Restatement Approval Order. The Reinstatement Agreement, among other things, gave Algoma an option, subject to the fulfillment of certain conditions precedent, to fully reinstate performance under the Pellet Sale Agreement. 7. It is critical for Algoma to take delivery of the majority of its raw materials, including pellets, from Great Lakes vessels in order to maintain continuous production in a cost efficient manner. Accordingly, between October and January Algoma typically stockpiles raw materials inventory before the winter freeze of the shipping lanes, causing a significant increase in Algoma s working capital requirements

4 PURPOSE 8. The purpose of this Twenty-Third Report is to provide information to the Court as to: (a) The Applicants recent operating results; (b) The Applicants actual receipts and disbursements for the period from December 10, 2016 through December 30, 2016 (the Reporting Period ) compared to the cash flow forecast in the Seventeenth Report of the Monitor (the Seventeenth Report ); (c) Developments with respect to Algoma s iron ore supply; (d) The appointment of the Honourable Warren Winkler as mediator to assist with the resolution of the collective bargaining issues between the Unions and the Term Loan Bidders (as such terms are defined below); and (e) Algoma s commencement of collective bargaining. TERMS OF REFERENCE 9. In preparing this Twenty-Third Report and making the comments herein, the Monitor has been provided with, and has relied upon, unaudited financial information and books and records prepared by the Applicants and discussions with management ( Management ) of the Applicants (the Information ). 10. 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 - 4 -

5 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. 11. Some of the Information referred to in this Twenty-Third Report consists of forecasts and projections. The Monitor has not performed an examination or review of those financial forecasts and projections as outlined in the Chartered Professional Accountants Canada Handbook. 12. Future oriented financial Information to which reference is made in this Twenty-Third Report 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. 13. Unless otherwise indicated, the Monitor s understanding of factual matters expressed in this Twenty-Third Report concerning the Applicants and their business is based on the Information and not independent factual determinations made by the Monitor. 14. Capitalized terms not defined in this Twenty-Third Report are as defined in the previous reports of the Monitor and orders of the Court in the CCAA Proceedings. 15. Unless otherwise indicated, all references to monetary amounts in this Twenty-Third Report are denominated in Canadian dollars. Where transactions involving the Applicants have been denominated in U.S. dollars but are reported on in Canadian dollars, U.S dollar - 5 -

6 amounts have been converted to Canadian dollars at the exchange rate of CAD$1.30 = USD$ Copies of the Monitor s Reports, including a copy of this Twenty-Third Report, and all motion records and Orders in the CCAA Proceedings are or will be available on the Monitor s website at (the Monitor s Website ). The Monitor has also established a toll free phone number that is referenced on the Monitor s Website so that parties may contact the Monitor if they have questions with respect to the CCAA Proceedings. RECENT FINANCIAL RESULTS 17. The chart below provides an update for the CRU hot rolled coil ( HRC ) price index for U.S. Midwest, a benchmark for steel prices, included in the previous reports of the Monitor. After experiencing significant recoveries in the first six months of 2016, North American steel prices softened in the second half of 2016 and the CRU price index dropped below US$500/net ton in October. However, the market has shown tangible signs of stabilizing, with the CRU HRC price index hovering slightly below US$600/net ton in recent weeks

7 18. The table below summarizes Algoma s year-to-date operating results for fiscal year 2017 ( F2017 ). Beginning in May 2016, Algoma has been able to generate positive earnings before interest, tax, depreciation, amortization and restructuring costs ( Adjusted EBITDA ) benefiting primarily from favourable selling prices. For the first nine months of F2017, estimated Adjusted EBITDA amounted to approximately $80 million. 19. Adjusted EBITDA for December 2016 is estimated at approximately $13 million, $3 million higher than the previous month primarily due to improved production levels in recent months, resulting in an increase in cost absorption and gross margin. Due to the lag impact of weak spot prices in Fall 2016, Algoma s December Adjusted EBITDA still reflects relatively lower average selling prices. However, Management anticipates that the recently improved market prices will benefit Algoma s financial results in future months. Apr 16 May 16 Jun 16 Jul 16 Aug 16 Sep 16 Oct 16 Nov 16 Dec 16 (E) Total Apr to Dec Tons Produced 168, , , , , , , , ,000 1,648,566 Tons Shipped 203, , , , , , , , ,000 1,661,550 Exchange rate (USD:CAD) Net Sales Realization (C$/Ton, excl. freight) $572 $606 $654 $747 $761 $723 $699 $665 $663 $677 Sales Revenue (C$ millions, incl. freight) $127 $134 $133 $143 $139 $102 $147 $144 $139 $1,208 Other Revenue $2 $4 $4 $4 $2 $1 $6 $4 $3 $29 Total Sales (C$ millions) $129 $138 $136 $147 $141 $103 $153 $148 $142 $1,237 EBITDA before restructuring costs (C$ millions) ($7) $ 1 $ 5 $ 20 $ 19 $ 5 $ 13 $ 10 $ 13 $80-7 -

8 20. The Adjusted EBITDA represents a proxy of normalized cash flow generated from operations. As described in the Twenty-Second Report of the Monitor dated December 20, 2016 (the Twenty-Second Report ), Algoma also had to fund substantial items not included in Adjusted EBITDA, including: seasonal working capital build-up, restructuring costs, capital expenditures and finance costs. ACTUAL RECEIPTS AND DISBURSEMENTS 21. A summary of the Applicants actual receipts and disbursements during the Reporting Period as compared to the cash flow forecast set out in Appendix B to the Seventeenth Report dated September 14, 2016 is attached as Appendix A to this Twenty-Third Report. 22. The Applicants actual combined net cash flow (before draws under the Amended DIP Facilities and realized foreign exchange gain) was negative $5 million for the Reporting Period, which was largely in line with the forecast. As discussed in previous reports of the Monitor, the Applicants working capital continued to ramp up during the Reporting Period driven by seasonal raw material build-up. 23. The Applicants have access to the Amended DIP Facilities, which includes a term facility of US$210 million (the Amended DIP Term Facility ) and a US$10 million revolving facility. 24. The Applicants cash on hand was approximately $32 million as at December 30, The Applicants have fully drawn $273 million under the Amended DIP Term Facilities, of which $265 million had been released to the Applicants as at December 30, 2016, with the remaining $8 million being held in an escrow account (the DIP Escrow Account ) for future use, subject to certain conditions

9 UPDATE ON IRON ORE PELLETS SUPPLY 25. As described in the Twenty-Second Report, Algoma and Cliffs entered into a four year term sheet dated December 16, 2016 (extendable by mutual agreement for an additional year) (the Term Sheet ), which, subject to court approval, provides for additional supplies of pellets as well as the full reinstatement of the Pellet Sale Agreement on January 1, Following the court hearings held on December 22, 2016 and December 27, 2016, this Court granted an Order approving the Term Sheet on December 29, On January 3, 2017, counsel to the Monitor sought and obtained confirmations from counsel to both Cliffs and Algoma that all the conditions precedent under the Term Sheet have been met and that the Term Sheet is in full force and effect. The Term Sheet together with the Pellet Sale Agreement provide for approximately 70% of Algoma s annual iron ore requirements. Algoma has also entered into a short term arrangement with another supplier for its remaining iron ore needs for On January 6, 2017, the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union ( USW ), together with its Local 2724 served a notice of motion for leave to appeal to the Court of Appeal for Ontario the orders of Justice Newbould made in respect of the Term Sheet. APPOINTMENT OF THE HONOURABLE WARREN WINKLER 28. As discussed in the Twenty-Second Report, a group of the prepetition term loan lenders (the Term Loan Bidders ), with the support of a majority of the beneficial holders of Algoma's prepetition 9.5% Senior Notes, have been working toward the closing of a sale transaction which contemplates the acquisition of substantially all of the Applicants assets - 9 -

10 (the Sale Transaction ). In order to advance the Sale Transaction, the Term Loan Bidders and their advisors have had various meetings with the Applicants and stakeholders including: the USW and its Locals 2724 and 2251 (together, the Unions ), as well as relevant provincial and federal governmental authorities. 29. On December 27, 2016, Justice Newbould sent an to counsel for the Monitor for distribution to the service list. In that , Justice Newbould ordered that Mr. Winkler mediate the issues between the Unions and Term Loan Bidders. A copy of that is attached hereto as Appendix B. Under Justice Newbould s order, Mr. Winkler was authorized to obtain assistance in the forthcoming mediation, and he appointed William Kaplan to provide that assistance. 30. On December 28, 2016, Mr. Winkler received a briefing from the Monitor as to the status of the union negotiations with the lenders/buyer. At the conclusion of that briefing, Mr. Winkler asked counsel to the Monitor to report to counsel to the Unions and Term Loan Bidders that he had decided that it would be premature for him to intervene in those negotiations at this time. However, Mr. Winkler remains available to mediate such negotiations when the time is right. COMMENCEMENT OF COLLECTIVE BARGAINING 31. Management has advised that the current Collective Bargaining Agreements between Algoma and Locals 2724 and 2251 have expired and the parties are operating under an extension. Management sees the increasing need to narrow and resolve the collective bargaining issues with the Unions in light of following: (a) the expiry of the current Amended DIP Facilities on January 31, 2017;

11 (b) Justice Newbould s direction in his December 27, that time is of the essence ; (c) Mr. Winkler s determination that mediation would be premature at this stage; and (d) The importance of securing stability for the business and mitigating concerns of customers and suppliers. 32. On January 9, 2017, Algoma delivered a notice to bargain to both Locals 2724 and Management has advised that discussions with the Unions will commence in the week of January 9, The Monitor is of the view that it is important that material progress be made in these discussions and negotiations so as to move Algoma closer towards a successful restructuring and emergence from CCAA proceedings. Tangible progress is also especially important at this time when Algoma is seeking an extension of the Amended DIP Facilities. All of which is respectfully submitted this 9 th day of January, ERNST & YOUNG INC. Solely in its capacity as Court-appointed Monitor of the Applicants, and not in its personal capacity Per: Brian M. Denega Senior Vice President

12 Court File No. CV CL IN THE MATTER OF THE COMPANIES CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT WITH RESPECT TO ESSAR STEEL ALGOMA INC., ESSAR TECH ALGOMA INC., ALGOMA HOLDINGS B.V., ESSAR STEEL ALOGMA (ALBERTA) ULC, CANNELTON IRON ORE COMPANY AND ESSAR STEEL ALGOMA INC. USA Applicants ONTARIO SUPERIOR COURT OF JUSTICE (COMMERCIAL LIST) Proceeding commenced at Toronto TWENTY-THIRD REPORT OF THE MONITOR January 9th, 2017 GOWLING WLG (CANADA) LLP 1 First Canadian Place, Suite King Street West Toronto, Ontario M5X 1G5 Derrick Tay (LSUC No.: 21152A) derrick.tay@gowlingwlg.com Clifton Prophet (LSUC No K) clifton.prophet@gowlingwlg.com Tel: (416) Fax: (416) Lawyers for the Monitor, Ernst & Young Inc. TOR_LAW\ \1

ONTARIO SUPERIOR COURT OF JUSTICE (COMMERCIAL LIST) IN THE MATTER OF THE COMPANIES' CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c.

Court File No.: CV-15-000011169CL 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