USG: A Best-Laid Plan

Going on 110 years now, Chicago, Ill., USA-based USG Corporation has been a leader in producing innovative products and systems to build the environments in which we live, work and play. As the inventor of wallboard and mineral wool ceiling tile, USG essentially created North America's building materials industry.

USG is North America's leading producer of gypsum wallboard, joint compound and a vast array of related products for the commercial, residential and repair and remodeling industries. It is a global leader in the manufacturing of ceiling suspension systems and is recognized as a premier acoustical panel and specialty ceiling innovator. Its flagship brands include SHEETROCK® gypsum panels, DUROCK® cement board, and MARS™ and RADAR™ ceiling panels. USG has more than 9,000 employees worldwide, and its 2011 sales topped US$3 billion.

In 2012, its plant in Cloquet, Minn., USA, was hit with the worst flood in the history of the St. Louis River. The flood caused more than US$80 million in damage to nearby Duluth. But the USG Cloquet plant suffered only minor damage. Working together, FM Global and USG had implemented flood mitigation measures in 2011 that helped prevent more than US$25 million in flood-related damage.

Chris Rokke, Cloquet Plant Engineer, USG
On June 19, 2012, the St. Louis River watershed received anywhere from 6 to 12 inches (15 to 30 centimeters) of rain in about eight hours. The storm dumped so much water in the St. Louis River basin, in such a short amount of time, that it overwhelmed the region's flood control.

The normal flow of the river is 1,000 to 2,000 cubic feet per second [305 to 610 meters per second]. At the peak of the flood, it was running at 50,000 cubic feet per second [15,240 meters per second]. You could see that kind of change on a small river, but it's unheard of on a river of this size. We have a gauge we use to measure the river. Normally it runs below zero. The last time we were able to get to the gauge, it was at almost nine feet (three meters) and that was well before the peak.

In our flood emergency response plan, we have certain actions we take at each milestone. The water rose so quickly, it blew past all our milestones. Almost immediately, we were at full implementation. The water from this flood was one foot (0.3 meters) over the record peak of the river. It really was a 500-year-plus event.

In Scanlon (where the official measurements were kept), the water level went from 6 feet to 16 feet (2 meters to 5 meters) in less than 24 hours. In Thompson, downstream from the Cloquet plant, the hydro plant was overwhelmed. The flood destroyed the retaining pond, and it is still not operational. Jay Cooke State Park, which sits along the river, was closed all summer. Highway 210 in Thompson was washed out and six months later it was still closed. In some places, the water washed out so much of the road bed it's still uncertain how or if it can be repaired.

Without the flood mitigation repairs, we would have had a long, drawn-out business interruption. Our entire electrical infrastructure would have been compromised. Without the flood gates, flood water would have filled the basement to the ceiling. We would have been down for months.

Chris Rokke, Cloquet Plant Engineer

But thanks to the flood protection work we did six months earlier at the recommendation of FM Global, we had virtually no damage at the Cloquet plant. In fact, we were up and running five days later.

FM Global had identified the potential for flood risk and recommended we make improvements to prevent water from entering the facility during a flood. We made sustainable repairs to the north wall of the facility (the wall on the river side). The facility is almost 100 years old, so there were a lot of openings to the basement that no longer served a purpose. We filled in a lot of old pipes, replaced and cemented over some old windows and filled in abandoned tunnels. We repaired anything that was below flood level. We also installed flood gates at the loading dock and at three main doors.

The plant had been flooded twice before—once in the 1950s and once in the '70s. But Minnesota Power now has two dams on the river above the plant and several more below the plant. So the flow of the whole river is controlled and we thought the likelihood of a flood was pretty low. But the watershed was hit with such a large amount of rain in such a short period of time and the volume rose so fast, it couldn't be controlled.

Bill Schmitt, Cloquet Plant Manager, USG
This is a very large facility. We have more than one million square feet (93,000 square meters) under roof. We make two kinds of mineral fiber acoustic ceiling tiles here, mostly for use in commercial buildings. We ship all over the world. The majority of our production lines run 24 hours a day, five days a week, with one running seven days a week.

We have a five-year plan that we work toward internally for all roofs and infrastructure at the plant. We get recommendations from FM Global and merge them together with our five-year spending plan. We are always making modifications to the plant to improve efficiency and safety.

FM Global has been a good partner. We always rely on them to provide guidance any time we build or make improvements. We do a lot of roof replacement and always follow FM Global guidelines. Whenever we do building or electrical work, we strive to be compliant with FM Global recommendations and, in many cases, we go beyond those recommendations.

Per FM Global's recommendations, we invested about US$500,000 in flood prevention work over the past year. We were looking at an increase in premium (without the flood improvements) so there was an economic reason for it but, honestly, none of us thought that there was much of a likelihood of a flood.

But we did have a pretty good idea of what it would take to get back in operation if we were flooded. Even though a flood was unlikely, we identified flood prevention as critical to our business. We are constrained for space so we keep a lot of vital equipment in the basement (below flood level) because there is nowhere else to put it. If the basement were to flood, the losses were expected to be roughly US$20 million or as high as US$25 million, and we would have been down for up to 20 weeks. That would result in millions of dollars in lost production and inconvenienced customers.

It is very important that this plant stay open. Cloquet and the ceilings products we produce are integral to the success of our ceilings business. If we're down, we would be unable to meet customer demand. It would have an extreme negative impact on USG from a reputation standpoint and our ability to take care of our customers. If our clients have to go someplace else to get the product, we might not get them back. The tiles we produce are also very important to USG as a whole. Despite the downturn in the economy, this product line has continued to be a strong performer.

The flood was devastating. There were a lot of areas that were completely submerged, but we came though this relatively unscathed. Thanks to the flood prevention work we did, we were current with all orders 10 days after the flood hit. We had trucks loaded with product driving through one foot (0.3 meter) of water to get out.

Jim Bencomo, Director of Risk Management, USG
For me, there are two keys aspects to risk management. One is financial, using risk management and insurance programs to manage the exposure that your balance sheet faces when bad things happen. Events will happen. When they do, you might end up paying out of pocket, getting an insurance recovery for the premium you paid, or avoiding losses all together due to investments in loss prevention. Having the right mix in place is an important part of USG's overall financial strategy.

We are planning a major expansion here and we don’t want our exposure to flood to take all that away. FM Global has really worked with us to help us understand the exposure to our business.

Jim Bencomo, Director of Risk Management

Possibly even more important is operational risk—the risk to your ability to operate safely and to reliably serve your customers. The first and foremost precaution we take is to make sure we operate safely. USG's emphasis on safety includes programs to manage exposure to combustible material, electrical hazards and natural catastrophes. We want to make sure we have good, safe, effective production of the products our customers are looking for. FM Global is very involved providing recommendations and in partnering with USG to find practical, effective solutions to operational risk.

USG has always had a very strong safety culture, and we have won more awards in the safety category than any other company our size. We are a founding member of the National Safety Council, which was established in 1914. As a further testament to the company's safety focus, a number of our facilities have achieved OSHA's (Occupational Safety and Health Administration) VPP (Voluntary Protection Program) Star certification. Safety is one of our core values and we've always put a tremendous amount of emphasis on that.

Serving the customer is everyone's job at USG. For risk management an important part of that job is helping manage the possibility of a business interruption at a facility. This is a special concern at the Cloquet plant, where the ceiling tiles made here are a very specific product. Many of the ceiling products shipped from Cloquet are specified for use in individual projects with tight installation deadlines. Delays or substitutions are simply not acceptable. The ceiling tile business has been one of our strongest performers, and that contribution to USG's overall profitability is another reason to dedicate resources to the Cloquet facility. We are planning a major expansion here and we don't want our flood exposure to wash that away. The identification and assessment of the flood risk at Cloquet that FM Global provided was invaluable in helping USG meet its commitments to its customers when the flood hit.

Bob Steinbach, Senior Account Engineer, FM Global
USG has been with us since 1985, and I've been on the account for 25 years. We look at all their existing sites and work with risk management to provide recommendations on where they should invest from a risk management standpoint. We provide them with a top-10 list from all their facilities. Basically, we show them where they can get the most bang for their buck as they budget for capital improvement over time. USG has always been excellent about investing in their infrastructure. Even during the economic downturn, they were implementing a lot of our recommendations.

We put a major emphasis on flood emergency response plans, particularly at the Cloquet location. Basically, we want the plant to have a plan in place in the event of a flood, so they can be ready to go if it happens. They are in a flood plain, and there was going to be a significant but necessary reinsurance cost if they didn't take steps to mitigate the flood risk.

We had the potential to lose the whole site in the event of a flood. USG can’t produce the product at another site and could lose customers and market share. That’s why we made flood mitigation a priority.

Bob Steinbach, Senior Account Engineer, FM Global

This site is unique. There is a lot of old infrastructure. There were a lot of old pipe holes and doors and windows that made the basement vulnerable. Mostly, they were easy fixes. The biggest expense was moving some electrical transformers out of the basement and out of the flood zone. Ideally, you would want to move everything out of the flood plain, but space is at such a premium at this location that there is just no place to put everything. That's why the flood plan is so important, knowing what to do and what critical pieces have to be moved in the event of a flood. We also made recommendations to keep water out of the basement. The investments they made in fixing the walls and installing flood gates prevented an estimated US$25-million loss.

Chad Lykins, Account Manager, FM Global
I utilize the information that Troy Gist reports during his location visits and, working with Bob, use that information to underwrite the business. We're always focused on risk improvement efforts and premium savings for our customers. For Cloquet, we had several recommendations preventing the plant from being considered a highly protected risk, and there were significant savings for USG associated with the completion of those recommendations.

A lot of it comes down to loss expectancy. We had always recognized there was a flood exposure at the Cloquet facility, and our standards allow us to provide a certain amount of capacity for flood. The loss estimates in the event of a flood were getting so high we really needed to mitigate some of that loss potential.

Risk mitigation can lead to significant premium savings and it certainly can be used as a tool to aid the customer as to where to invest their money. I think a real partnership has developed over the last 30 years with USG. They are not the type of client to buy insurance as a commodity; they take seriously our counsel and advice.

Our recommendations involved moving a lot of critical components from the basement and above the floodplain. And if it couldn't be relocated out of the basement, they needed to take additional steps to keep the water out in the event of a flood. That's what they did. By working with us and focusing on mitigating this very real exposure, USG was able to avoid a US$25-million loss. It was a win for all parties.

Troy Gist, Field Engineer, FM Global
As a field engineer, I've been visiting the Cloquet site for a long time, and my job is to help them keep the ball moving on facility improvements. Ideally, we work on the greatest exposures to USG. Our client service team and our risk management team identified flood risk as a priority, and there was a significant impact on premium. USG thought it was highly unlikely that a flood event would occur, but they agreed with us about the need for risk mitigation.

At our recommendation, they got a third party to survey the whole property and then we helped them interpret those results. That's when the dialogue really started. The survey information helped us make recommendations for improvements against potential flood. We recommended installing flood gates and eliminating any way that water could get into the basement.

USG is really proactive and they put a lot of stock in what we recommend. I think a lot of companies are trying to do more with less. We know a lot about losses and loss prevention, and instead of having their own personnel responsible for it, a lot of clients defer to our expertise. Clients tell me that they'll walk by something every day and not notice a potential risk, but I'll be there for a day and spot it as a risk right away. FM Global engineers can bring a lot to the table.

From my perspective, it's great working with a local company like USG. I grew up just downriver and I had two grandparents who worked at this facility. USG is not just interested in doing the minimum. Our recommendation on flood mitigation is to build to the 500-year flood level plus two feet (0.6 meters). In a lot of cases, USG went to 500 plus three feet (0.9 meters), which ended up being the difference during this flood.