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Overview of Proposal for Restructuring Stelco

Backgrounder

Overview of Proposal for Restructuring Stelco

Ministry of Finance

Today, the court supervising the Stelco restructuring under the Companies' Creditors Arrangement Act (CCAA) approved the restructuring plan of Stelco (the operating name of U.S. Steel Canada Inc. effective December 2, 2016).

The restructuring plan also has the necessary support from Stelco creditors, including the province, and Stelco employees. The company will now work with stakeholders to finalize the necessary supporting agreements.

The restructuring plan is supported by a Memorandum of Understanding (MOU) between Bedrock and the Province of Ontario, which sets out a policy framework intended to protect jobs while allowing the continuation of pensions and other post-employment benefits (OPEBs). The MOU also protects the environment while providing the opportunity for Stelco's lands to be used to create value for pensions and OPEBs.

Jobs

Bedrock would continue steel operations and approximately 2,200 existing jobs would continue at Stelco's Hamilton and Lake Erie facilities.

Pensions

This transaction would allow Stelco's five pension plans - which are underfunded and would otherwise face wind-up at reduced benefits levels - to remain in place without reductions, providing benefits for service accrued prior to December 31, 2017. Pension coverage for service after 2017 would be addressed in separate agreements.

The framework also includes provisions for the funding of the pension plans, subject to government approvals. The new company would make various lump sum and ongoing contributions, resulting in $430 million of new contributions to the pension plans over 20 years, $160 million of which is guaranteed directly by Bedrock.

The pension plans would continue to benefit from coverage by the Pension Benefits Guarantee Fund in the event of a wind-up in the future, administered by the Financial Services Commission of Ontario (FSCO). A qualified third party, appointed by FSCO, would ultimately serve as the administrator of the pensions plans.

Other Post-Employment Benefits (OPEBs)

The agreement provides greater certainty for retirees' other post employment benefits (OPEBs) than contemplated in the agreement filed in December 2016. OPEBs are post-employment benefits other than pension payments, including, dental benefits, prescriptions and supplements, and life insurance.

Under the agreement, the newly restructured company is committing to fixed payments totalling $33 million per year for OPEBs for 10 years, backed in part by loans from the province.

For its part, the province would, subject to government approvals, provide a fully-secured loan of $22 million in the first two years, to be repaid in the third and fourth year, to help provide uninterrupted OPEB payments to retirees in early years while the new company is established. The province would also provide, subject to government approvals, an interest-free loan of up to $66 million over 10years to assist in the payment of OPEBs. The 10-year term of the loan is intended to assist in providing OPEB coverage while balancing risk to the province and allowing time to plan for the future use of Stelco's lands to create additional value for pensions and OPEBs.

Between January 1, 2016 and March 31, 2017, the province also provided support under a Transition Fund to ensure the continuation of critical health benefits throughout the CCAA process.

Lands

To create additional value for retirees, Stelco's lands would be transferred to a land vehicle governed by an independent, court-appointed Board of Directors, ultimately on behalf of retirees. The land occupied by Stelco operations would be subject to a lease to the trust. The lands, which are not used for Stelco's operations would be sold, leased or developed, with proceeds going to fund the pensions and OPEBs. There would be no time constraint on the sale, lease or development of the land.

In support of the proposed plan, Ontario would, subject to government approvals, provide a fully-secured, 10-year loan of $10 million to the land vehicle to support its operations. The 10-year term provides the opportunity for Stelco's lands to be used to create value for pensions and OPEBs.

Environmental Protection

As part of the transaction, the province will receive US$61 million, or about C$80 million, to cover costs that may be incurred by the Ministry of the Environment and Climate Change (MOECC) in connection with environmental conditions on the land. With this financial assurance, MOECC would provide a release of certain legacy environmental liabilities. Any portion of the financial assurance that is not required by MOECC will be distributed for the benefit of Stelco's pensioners.

The new Stelco and the land vehicle would be required to comply with all environmental laws and regulations, fund any environmental baseline testing and monitoring costs, and work with MOECC to develop an environmental management plan to ensure that the environment is protected while steel operations are ongoing.

Releases

In order to support the establishment of a newly-restructured company that will operate independently from the former parent company, U.S. Steel's creditors and other stakeholders, including the province would, subject to government approvals, provide certainty to US Steel that it will be free of any continuing liability with respect to Stelco, supported by an indemnity from the province with respect to certain environmental matters.

The province would also, subject to government approvals, support the releases being given to various parties by indemnifying certain Stelco directors for portions of losses, which are not sufficiently covered by U.S. Steel's insurance and Stelco's indemnity. The provincial indemnity would only apply if the directors acted honestly and in good faith.

In light of all the circumstances, the province does not consider the financial risk to be substantial. Such actions are, however, necessary preconditions for the exit of Stelco from creditor protection and the ongoing operation of Stelco.

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