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May 25, 2004 |
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Stonecrest Capital Inc.
145 Adelaide Street West, Suite 301
Toronto, Ontario
M5H 4E5
Attention: Hap
Stephen
Dear Mr. Stephen:
Re: In the Matter of Stelco Inc.
Engagement of Actuary, Tom Levy, for the Salaried Retirees of Stelco
Our File No. 04/0174
We write with our suggestions in regard to next steps in the relations between Stelco and its Salaried Retirees ("Retirees"). Before we set out our suggested agenda, please allow us to describe the current situation, as we see it.
As you know, our clients are the Court appointed Salaried Retiree Representatives, who represent approximately 3,500 individuals. If Stelco does restructure its pension and other employee benefit plans, our clients will represent a substantial number of creditors whose support will be required for any Plan of Arrangement. In recognition of our clients' status, the Company has consented to a Court Order appointing them as representatives of the Salaried Retiree Group, and has agreed to pay the legal costs and disbursements they incur in this process, subject to specified limits.
To date, the restructuring process has been moving extremely slowly. More seriously, while much planning can be done at this stage, it would appear that little is actually being done, and much time is being diverted needlessly to confidentiality issues. At this stage, for example, the Retirees have an active political agenda, and are meeting regularly with local, provincial and federal politicians to urge upon them that the role of government is to protect the most vulnerable persons affected by restructurings. We believe that this is an important time to communicate with politicians at all levels of government in order to secure their support for this objective. We have a brief but particularly intense window to convey this message to federal politicians during the election campaign announced two days ago.
At this point, however, we remain unaware of Stelco's position vis-ŕ-vis government, and what, if anything in particular, Stelco seeks by way of government assistance. We believe it urgent that Stelco focus on a set of demands from government that other stakeholders can support. Otherwise, if different stakeholders approach government for assistance on different bases, we risk diluting our political influence and confusing the political message. Delay also risks losing any advantage we can obtain from the federal election campaign.
In regard to pensions, the Retirees face immediate and longer-term issues.
In the immediate term, Stelco is taking a contribution holiday with respect to its Salaried Pension Plans, even as it contributes to its bargaining unit plans. Such a contribution holiday is unacceptable for the following reasons:
(a) The Salaried Pension Plans are all seriously underfunded on a solvency basis.
(b) The Salaried Pension Plans continue to accrue liabilities – but without corresponding contributions - in respect of active salaried employees, thereby worsening the solvency funded position of the Salaried Pension Plans.
(c) The going concern "funding excess" in the Stelco Inc. Retirement Plan for Salaried Employees is a funding fiction. A figure for the Plan's "actuarial value of assets" of $886 million was used to generate a funding excess of $57.6 million (all as at December 31, 2002), but the actual market value of the Plan's assets as at December 31, 2002 was only $831.3 million. Accordingly, if the "smoothing adjustment" used to determine the "actuarial value of assets" is removed, then the "funding excess" falls from $57.6 million to approximately $2.5 million – an insufficient sum to sustain annual contribution holidays. It is noteworthy that the funding protocol recently agreed to by OSFI in regard to the Air Canada pension plans both prohibits smoothing and forbids contribution holidays.
(d) Finally, the Stelco Inc. Pension Summary, attached as Exhibit "F" to the filed affidavit of Hap Stephen dated February 24, 2004, contains the following statements:
"Where bargaining Unit (BU) plans have going-concern funding excess, current service cost is assumed to continue to be contributed to the plans.
Where Salaried (SAL) plans have going-concern funding excess and no solvency payments are required, current service costs and PBGF assessments are assumed to be paid from the funding excess."
In other words, even though Stelco Salaried Pension Plans are considerably underfunded on a solvency basis, a going concern surplus has been created through actuarial adjustments, and Stelco is currently relying upon such assumptions to create a "funding excess". This artificial "funding excess" is being used not only to take a contribution holiday while the Plan's liabilities grow, but also to pay Stelco's premiums to the PBGF. Fortunately for the bargaining unit plans, contribution holidays are apparently not taken on the basis of any "funding excess". No explanation is offered as to the differential treatment as between the bargaining unit and salaried plans. However, Stelco's treatment of its Salaried Pension Plans, and its Retirees, is entirely unacceptable. This is an immediate pension issue of great concern to the Salaried Retirees.
Over the longer CCAA restructuring term, we understand that Stelco wishes to engage the Financial Services Commission of Ontario ("FSCO") and the Government of Ontario in pension restructuring discussions. However, we are not aware of any proposal that Stelco has made in this regard, nor are we aware that any discussions have been initiated.
In order to fully participate in this vital issue, the Retirees require the services of a qualified actuary, which they have found. Tom Levy is an actuary who has practiced in both the U.S. and Canada, and is well familiar with steel company restructurings in the U.S. His skill and experience will be invaluable to us in defining and resolving this issue. However, his retainer agreement remains delayed, and so progress in this area is stalled. We would ask for your immediate attention and assistance in resolving Mr. Levy's retainer.
Finally, the issue of confidentiality has proven extraordinarily frustrating. Our clients are perfectly prepared to respect confidentiality in regard to Stelco's clients, business relationships, trade secrets, production methods and other matters that could materially affect Stelco's competitiveness or economically damage Stelco. Our clients depend on the success of Stelco's business as much as anyone, and have no interest in harming it. On the other hand, our clients are Court Appointed Representatives, with reporting obligations to some 3,500 people. They are constantly barraged with questions from interested retirees, and feel some responsibility to respond to those inquiries. Indeed, if they are unable to provide responsive answers to the retirees, there is every likelihood that they will lose their confidence, and that the mechanisms we have put in place to secure both the respect and the representation of the Retirees will fail. The Representatives have similar obligations to communicate with government officials, including elected officials at all levels of government, and pension regulatory authorities.
At this stage, the Representatives wish to focus on understanding and resolving the pension issue. We do not believe that pension information raises any confidentiality concerns, as pension information does not relate to the operations of Stelco, or its relations with its customers. A full and frank understanding of the pension issue among the Retirees will be impeded, if not precluded, by any confidentiality restrictions.
We are also concerned that the confidentiality issue has been dealt with at different times by two different law firms representing Stelco, McCarthy Tétrault in some instances, and Hicks Morley, at other times. Different drafts have been prepared by the two law firms on different occasions. More seriously, the draft we received from Hicks Morley on May 4, 2004 actually takes us backwards from the one-day agreement we had reached for April 5, 2004. While we are prepared, if necessary, to spend time finalizing an NDA for business disclosures on the basis of the April 5, 2004 agreement signed by our clients and by Stelco, we are not prepared to renegotiate an NDA on the basis of Stelco's initial position, which was so plainly unreasonable.
At this stage, the NDA is not material to pension discussions, which do not involve business sensitive information. At this time, it is urgent to finalize the Tom Levy retainer so that we can commence discussions in regard to the state of the pension problem and alternatives for resolving it.
We trust that this letter sets out a satisfactory basis for us to move forward, and look forward to your early response.
Yours truly,
KOSKIE MINSKY LLP
Murray Gold
MG:jn
c. Gary W. Dallin, George Hanson , John
Hanson, Paul Wendling (via email)
G. Blair Cowper-Smith, McCarthy Tétrault
Elizabeth Brown, Hicks MorleyLLP
Andrew Hatnay, Clio Godkewitsch, Koskie Minsky LLP
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