IPSUshares are rallying today following the company’s announcement that it had reached a settlement with its property and business interuption insurance providers related to the Savannah refinery accident.  You can read the full release here.  As a result of the settlement, IPSU will receive $345 million in cash proceeds (compared to the policy value of $350 million) and realize a pre-tax gain of $278 million ($180 million tax-affected) in the company’s fiscal first quarter.  Settlement of the company’s property and business interruption claims represents another positive step forward in IPSU’s attempts to get past the Savannah refinery accident. More importantly, we think the settlement will enable investors to gain a better understanding of the true asset value of IPSU from an accounting perspective.

Two Different Approaches to Determine Asset Value of IPSU Shares

On a post-tax basis, we estimate IPSU will report a gain of $15.06/share in 1Q10 exclusively from the accounting treatment of the insurance settlement.  In the table below, we have constructed a simple book value “roll forward” following the insurance settlement.  Overall, pro-forma for the insurance settlement IPSU will have a book value per share of $22.17, which implies that IPSU trades at 0.76x book value even after today’s move.

Source: PAA Research

In the past, we have also evaluated IPSU on a “sum of the parts” basis to determine the value of shares in a scenario in which the company’s insurance policies do not cover all contingent liabilities associated with outstanding civil litigation against the company related to the Savannah refinery.  IPSU management maintains the view that its insurance policies will be sufficient to cover any and ALL claims associated with civil litigation related to the Savannah refinery accident. Our analysis of past industrial accidents suggests that it is more than reasonable to assume that litigation risk can be “boxed”.  In the table below we have analyzed what we think the true asset value of IPSU on a sum of the parts basis is assuming that the company is exposed to $50 million in additional liabilities related to the Savannah refinery accident.  Overall, our analysis suggests that IPSU is worth $25.75 on a sum of the parts basis under the conservative approach that the company faces an additional $50 million in contingent liabilities.  Here are our key assumptions:

• Pro forma cash of $54 million as of 12/31/09.  In its 4Q09 press release,  the company indicated it had cash balances of $49 million and revolver  borrowings of $60 million.  Assuming the company received the $45 million in additional insurance proceeds as of 12/31/09 and spent approximately $40 million to finish the Savannah refinery the company would have a pro-forma cash position of $54 million.
• Port Wentworth/Savannah refinery is worth $225 million.  The company expects to spend approximately $220-$230 million to complete reconstruction of portions of the Savannah refinery that were damaged in the accident.  It is important to note that does not include other areas of the refinery that were largely unharmed.
• Grammercy Refinery is worth $100 million.  IPSU will contribute the bulk packaging operations of its Grammercy facility in a joint-venture structure with Cargill and the Sugar Growers and Refiners of Louisiana.  As part of the deal, IPSU will retain control of the small packaging operations.
• Combined value of $50 million for the ownership stakes in Wholesome Sweeteners and Santos.  Previously, we had valued the company’s investments in these two entities at $35 million.  However, we now think Wholesome Sweeteners could be worth considerably more given the strong growth the company has witnessed over the past few years and its high margins, which are three times IPSU’s average.  IPSU has the right to acquire the remaining ownership stake in Wholesome Sweeteners starting in September 2010 for approximately $35 million.
• OSHA fines of $8.8 million and additional fines from the state of Georgia of $6.4 million.  Neither of these fines would be covered under the company’s insurance policies.
• Other contingent non-insured liabilities of $50 million.

Source: PAA Research

IPSU’s resolution of its property and business interuption claims should bring investors one-step closer to focusing on the company’s fundamental earnings power and asset value.  It is important to note that settlement of the property and busineess interuption claims has NO bearing on the outcome of civil litigation against IPSU.  As we have determined above, the base level equity or asset value of IPSU now is $22-$26/share.  This does not include the benefits of what are likely to be strong earnings for the company over the next 12-24 months. We estimate IPSU could increase its book value by as much as 25-30% over the next two years to $27-$29, which implies shares remain grossly undervalued.

As always, please act accordingly…