Willamette Week| News| Politics

When the Port of Portland announced plans to sell the Portland Ship Yard last week, the proposal raised more questions than it answered.

In a deal that's all but signed, the Port proposed selling the 94-acre site--which includes Dry Dock 4, the Western Hemisphere's largest floating dry dock--for $38.8 million to Cascade General Inc., the yard's current operator.

In selling the Swan Island site, the Port faces two challenges. First, Port officials say, they want the facility to continue employing hundreds of highly paid workers. Their second challenge is to maximize the sale price, given that the land and equipment are essentially owned by taxpayers. Critics say the proposed transaction accomplishes neither goal.

Terms of the deal stipulate that Cascade, the yard's current tenant, must continue to run the facility as a shipyard for at least five years. Outgoing State Rep. Mike Fahey, who is also former executive secretary of the Metal Trades Council, praises Cascade's performance but wonders whether such a provision can be enforced. "What constitutes a shipyard? How many workers?" he asks. "They could run voyage repairs on the river with 80 people and develop the rest of the land."

Indeed, many speculate that Cascade might be more than willing to sell the land to developers. Earlier this year, the company announced large layoffs, blaming low oil prices and the Asian crisis. "It kind of makes you wonder, if business is terrible, why they [Cascade] want to take on all that debt," Fahey says.

Converting the shipyard for another use wouldn't be hard. The facility's dry docks and cranes are portable, and the real estate itself is valuable. The Port recently sold nearby land for $250,000 an acre; people familiar with riverfront property think the land alone is worth Cascade's purchase price.

Port spokesman Aaron Ellis agrees that the facility is probably worth more if its assets are sold and the land is developed than if it continues to operate. He also acknowledges that the Port has no control over what Cascade will do with the yard in the future if industry woes continue. "There's absolutely no assurance that they'll be able to continue to operate at the current level," Ellis says, adding that there are no staffing requirements or definitions of what constitutes an operating shipyard in the sales contract.

The announced sale price is a lot of money, but in the eyes of Cascade's competitors, the deal is nothing more than a large subsidy. "The price is an absolute joke," says Tom Maples, owner of Mar Com, a local ship-repair firm. "It's a real coup for Cascade."

Upon closer inspection, even the $38.8 million is less than it seems. The price includes only $22 million in cash. Nearly $7 million is actually credit for rent already paid. Another $9 million of the purchase price consists of loans from the Port--which means taxpayers are essentially lending money to a risky operation.

"It's staggering," says Ed Zajonc, director of government relations for Seattle-based Todd Shipyards. "I'm surprised other people aren't raising their hands and asking how they can get on this gravy train."

The price isn't the only aspect of the proposed deal that's raising eyebrows. Rather than soliciting bids from other ship repair companies or even throwing the bidding open to interested parties, the Port has been negotiating exclusively with Cascade General since early 1997. Cascade's contract allowed a 120-day exclusivity period, but that lapsed long ago. Meanwhile, several other shipyards around the country have been sold, suggesting that the market is active.

Neither Mar Com nor the other two finalists in the 1995 leasing contest, Todd and Nassco of San Diego, were invited to bid for the yard. Maples thinks that was a mistake. "I think if they'd put it out to bid, they'd have tire kickers in the 80- to 100-million dollar range," he says.

Zajonc agrees. "It's a Cadillac facility," he says. "It's worth at least that."

Beyond the issue of how much the shipyard's real estate and other assets are worth, Maples thinks that the price tag undervalues the yard as an operating concern. Last year, Cascade's revenues were $132 million, and the yard has frequently generated more than that in the past. Indeed, information released by the Port says that from 1990 to 1994, Dry Dock 4 alone accounted for revenues of over $1 billion.

Fahey says it's no coincidence that the cash payment in the deal equals the debt outstanding on the shipyard. With Cascade's money, the Port can retire an $84 million bond that was issued 20 years ago to upgrade the yard. Cascade gets the equipment purchased with the bond, including Dry Dock 4, at a significant discount.

Retiring the bond is one the Port's stated reasons for selling the facility, yet Cascade's lease payments of $5.8 million per year would have retired the bond in less than four years anyway. In fact, interest on the bond costs only about $3 million annually, which means the Port currently generates net income from the yard.

Although bond debt disappears with the deal, the Port's risk does not. The deal caps Cascade's environmental liability at $2.5 million; the Port assumes responsibility for everything above that. Fahey says such liability could be significant. Since the middle of the century, companies have sanded, chipped and used solvents at the facility, making contamination of the Willamette riverbed highly likely. In fact, the stretch of the Willamette River on which the yard sits was recently named a potential Superfund site by the Environmental Protection Agency.

Port spokesman Ellis acknowledges that the deal is complicated but offers two reasons for going ahead with it: "The sale to Cascade will preserve jobs and other economic benefits and retire the debt," he says.

Although he agrees that Cascade's current lease payments exceed interest payments on the bond, Ellis says that wasn't always the case. In four of the last 20 years, taxpayers covered the interest because the yard operator couldn't. "Selling the yard now will insulate taxpayers and the Port from the [fluctuations of the] ship-repair industry," Ellis says.

As for the lack of a bid process, Ellis says Cascade has long pursued purchasing the yard. "There's an incentive to do the deal now, while Cascade can afford it," he says. Moreover, Ellis says, Cascade's current contract gives the company the right to operate the yard for up to 27 more years, so it would be difficult for the Port to sell it out from under them. Finally, he says, when the Port conducted a global search for buyers in 1995, only Cascade showed interest. The industry has only deteriorated since then, Ellis says, so there's little point in reopening the whole process.

As for the sale price, Ellis says that independent appraisers valued the facility--as an operating yard--at between $27 million and $41 million in 1997.

Port Commissioner Michael Powell believes critics of the deal are being disingenuous. "Sure, they don't want it in private hands," he says, "but where were they in '95 when the Port wanted to sell?" Powell praises the entrepreneurial skills of Cascade Chairman Frank Foti, whom he says has done the Port a big favor by running the facility profitably.

As for Foti, he scoffs at critics of the deal. "The price we're paying is the appraised value of the yard," he says. "We've worked extremely hard to build and run a profitable business, always with an eye toward buying the facility." When the yard was freely available, Foti says, nobody except Cascade was willing to bear the risk of running it, and his intention is to continue doing just that. "We earned the right to be here," he says.

The Port will hold a public discussion of the proposed sale 8 am Thursday, Dec. 10, on the 13th floor of the Port of Portland Building, and commissioners are expected to vote on the sale Dec. 16. Port Executive Director Mike Thorne declined to comment.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Willamette Week | originally published December 9, 1998