Imperial Sugar: Insurance Coverage Adequate to Rebuild

Imperial Sugar (IPSU) recently reported second quarter revenues of $145 million, resulting in a $15.5 million loss (see conference call transcript). The loss was attributed to softer refined sugar prices, but was mainly due to the explosion and shutdown of its Port Wentworth refinery. The company disclosed that the accident and subsequent fire caused $28 million of property damage and that its insurance proceeds for the quarter were $15.9 million, resulting in a one time charge against earnings of $12.1 million.

According to IPSU’s latest 10Q filing, the company estimates that the cost of replacement to its damaged facilities range between $180 million and $230 million and that its policy limit is $350 million, including business interruption coverage. The filing also indicated that the company has a general liability policy limit of $100 million as well as worker’s compensation insurance. The insurance coverage appears more than adequate to make IPSU whole again, and could provide a potential windfall to boot.

There had been some doubt by analysts that IPSU’s insurance would be adequate to handle the rebuilding process, but this uncertainty has been wiped from the slate. It was perplexing why the shares didn’t rally significantly on the release of this very good news. In fact, the company will benefit greatly as it will ultimately receive modern machinery, equipment and new structures that will be far more efficient, productive and cost effective than the previous machinery .

The question arises, if they sustained $28 million worth of damages, why are they potentially receiving between $180-230 million? It’s simply due to the fact that the most of the machinery/facilities being replaced had already been nearly fully depreciated. The insurance coverage provides for replacement value. The business interruption portion of the policy could provide additional proceeds ranging from $120 to $170 million.

The schedule of rebuilding: IPSU’s Gramercy, Louisiana refinery is ramping up production and is generating 110% of normal output to help mitigate the loss of Port Wentworth’s production . About 375 workers (75% of the workforce) have since returned to work at Port Wentworth and are engaged in rebuilding and shipping activities. IPSU has commenced demolition and cleanup action and has since hired an engineering firm to spearhead the rebuilding efforts. Long lead time capital equipment items have already been procured.

This summer, IPSU is intending to start up its specialty sugar operations and is anticipating restarting its refinery operations this fall to supply the industrial market place. In early spring of 2009, IPSU plans to have its storage silos rebuilt and the plant is expected to be functioning at full capacity by summer. IPSU might not have the additional competition it had anticipated, as Cargill’s proposed sugar refinery is not scheduled to be online until the summer of 2010, and there is reasonable doubt that the refinery will even be built. If the project is scrapped, it certainly would be good news for IPSU.

The road to recovery will be a daunting and challenging process. I have no doubt that IPSU will emerge as a stronger and more viable enterprise, offering shareholders the opportunity to profit greatly from the recent all time low share price.

Disclosure: Author is long IPSU

Comments

[MichaelSchmichael]

Insurers don't pay the limits of liability unless the covered loss (or damages, depending on the policy type) exceeds the limits. There will be no windfall on the insurance recovery. Moreover, even if the policy expressly provides for "replacement cost" coverage, there always are factual disputes (real or pretextual) concerning the "replacement cost" (just ask the Allstate insureds whose houses burned in the San Diego fires). The bottom line is insurers don't make money by paying claims promptly and completely, especially 9-digit claims.

[rockymtnway]

Mark, While I would like to blame the dismal second quarter earnings on Imperial's tragedy, profits and share prices have been falling for over a year preceding the event. I share your optimism that new machinery and retooling will pay off in the long run, I have little doubt that they have a rough road ahead. Given the number of unknowns, I don't see a bottom around $13.50-14/share as unreasonable. It's hard for analysts to provide valuable predictions prior to the resumption of production, so the improving forecasts may be a little ahead of their time. While IPSU remains on my value radar, at this point I want to feel comfortable that there's a firm bottom to the reconstruction. In it's absense, there's ample opportunity for competitors to step in and take a piece of the pie.