City pleads the need for Essar's tax money

Unless a June 2016 court order is reversed ordering Essar Steel Algoma to pay its post-filing property taxes, the City of Sault Ste. Marie may need to take drastic measures to stabilize its budget.

The City of Sault Ste. Marie has filed a cross-motion with the courts asking a judge to order Essar Steel Algoma to pay its post-filing taxes and continue paying them as the restructuring process continues.

Justice Frank Newbould is scheduled to hear a motion by Portco on Thursday, asking for an order that the steelmaker make its payments under the cargo handling agreement immediately.

The City of Sault Ste. Marie argues that it should receive its property tax payments before other creditors are paid.

The steelmaker now owes about $26 million to the city, representing about 25 per cent of the City's annual tax levy.

The Notice of Motion states that the city and its residents depend on Essar Steel Algoma and payments from the post-filing tax obligations to provide its residents, including the applicants with satisfactory services “and to avoid the draconian measures” mentioned in an attached affidavit by the city solicitor.

That affidavit, signed by city solicitor Nuala Kenny, outlines the history of the non-payment issue for the court and says the city's financial situation has deteriorated as a result of the suspension of Essar Steel Algoma's post-filing tax obligations.

She states that as of March 31, 2017 the City had to borrow about $8 million from existing reserves earmarked for other purposes in order to cover the general operating cash flow shortfall caused by Essar's non-payment of taxes.

Those reserve accounts, earmarked for sanitary sewer operations and capital, can ultimately only be spent for those purposes and need to be repaid in 2018.

The affidavit also states that the only other uncommitted reserves available to the City at the opening of the current tax year that could be used to offset a cash flow shortfall is about $3.7 million in the aggregate, an amount insufficient to repay the borrowed amount from the sanitary sewer operations and capital reserve.

“Unless the June 2016 Property Tax Decision is varied, the City anticipates that it will have no choice but to consider one or more of the following mitigating measures,” a decision which needs to be reached by city council by June.

Those options include levying the unpaid post-filing tax obligations

on the balance of the city's residents – about a 12 per cent to 20 per cent tax increase, cut the city's operational budget which would require employee layoffs of about 80 to 150 employees or cut the city's capital budget, which would result in a loss of funding of about $16 million from upper levels of government. The City could also borrow money, which would necessitate implementation of a combination of the other mitigating measures, the document reads.

The options, Kenny says “are deeply concerning to me, as I believe that any combination of material tax increases, layoffs and/or capital cuts would be a severe blow to the City's economy that is already depressed as as result of the uncertainty surrounding these CCAA proceedings,” the affidavit reads.

She notes that the City and its budget are of a very modest size and without payment of the post-filing tax obligations, significant negative ramifications will be felt on the city's residential, commercial and industrial ratepayers, including the applicants.

In addition, the affidavit says, the City is also concerned that it may never receive the pre-filing tax obligations of about $14 million and that even the post-filing tax obligations may never be paid in full if the June 2016 decision is not varied.

Mayor Christian Provenzano said city council has been quite clear with its decision to ask lawyers move forward with the motion material.

The notice of motion was served Tuesday.

“City council wants to take a strong stand on this and stand up for the community on this matter,” Provenzano said.

He said that in CCAA proceedings, it is rare that municipal taxes are not paid and the City is now owed more than $25 million – a significant chunk of money given the economic situation in Sault Ste. Marie.

Provenzano said city council has also taken the position that it's important the judge has all the information before him on why it is important that the city receive the tax payments owned by the steelmaker.

On Thursday, the Port of Algoma's motion will be heard. In that case, the Port of Algoma's lenders, GIP Primus and Brightwood Loan Services, have filed a motion asking the courts for an order that requires the steelmaker to resume all payments due and owing under the Cargo Handling Agreement directly to GIP beginning immediately.

Portco has said it has not received any payment since April 2016 and in turn, it owes its lenders in excess of $17 million in missed interest payments.

It also wants the judge to make a further order requiring Essar Steel Algoma to immediately make its arrears payment currently owed under the Cargo Handling Agreement and that they be paid directly to GIP.

But the City of Sault Ste. Marie is arguing that it is owed more than $26 million in property taxes by Essar Steel Algoma and that as a special lien holder, it should be paid first, especially before GIP or other secured creditors.

Provenzano said that while the earlier affidavit filed makes the initial argument that the City should be paid prior to the Port of Algoma, this material completes the circle on that argument, providing the reasons why it is important and how the City is suffering without the tax payments by Essar Steel Algoma.

“The circumstances of June 2016 when Justice (Frank) Newbould ordered the stay (of municipal tax payments) is clearly different than what the circumstances are today,” Provenzano said.

The last update provided by the monitor shows that Essar Steel Algoma's DIP loan is not maxed out, steel prices are continuing to rise and the steelmaker is recording strong production volumes.

The court documents show that in February, the Sault Ste. Marie steelmaker produced about 196,000 tons and per net ton average selling price rose to $739 from below $700 in January 2017. Revenue totals about $157 million for the month of February.

In contrast, the city's economic situation has not stabilized and the debt owed to the city is growing and the city's debt load is increasing as a result of the non-payment.

In June 2016, Newbould dismissed the City's 2016 Property Tax Motion and granted the applications their cross-motion, ultimately allowing them to suspend their post-tax filing obligations.

When Essar Steel Algoma filed for CCAA protection, it argued that lowest-ever steel prices, steel dumping, a decreased credit rating and issues with its iron ore pellet supply, were the reasons cited for the need to file for the court protection.

Since then, prices have rebounded, the iron ore pellet supply issue has been settled and the Canadian government is cognizant of the implications of steel dumping on North American markets and is taking measures to create a level playing field through the modernization of the trade remedy plan.