Was the Vestas deal good for the city of Portland?

Vestas Wind Systems showed a $152.7 million loss in its most recent quarter, increased its projected fiscal year loss by $13 million and is cutting staff.  Yet, the City of Portland is providing the company with an $8.1 million zero interest loan, and the State of Oregon has provided it $2.25 million in tax incentives to stay and save its 400 jobs.  Was it worth the cost?

The Deal

We (City of Portland and State of Oregon) agree to:

1. Provide $8.1 million zero interest loan from the City of Portland (subject to approval by the Portland Development Commission).
2. Provide $1.25 million in State tax credits for dependent care assistance provided to employees (offset 50 percent of its child care expenditures, to an annual limit of $2,500 per employee, against its state tax liability. 500 workers times $2,500 = $1.25 million)
3. Provide $1 million from the Governor’s Strategic Training Fund ("GSTR"), which will be repaid only if Vestas fails to add 100 workers to its current 400 Oregon employee payroll within a five year period.  The GSTF is part of the Employer Workforce Training Fund which exists to support the retention and growth of living wage jobs, a skilled workforce and competitive Oregon businesses.  The expenditure from this source is equal to $2000 per job if Vestas adds 100 jobs in the next five years.  If those jobs are not added, this money will be repaid by Vestas.

Vestas agrees to:

1. Complete a $66 million green upgrade to house its local workers in the Meier and Frank Building, providing approximately 400 - 500 temporary construction jobs to local workers.
2. Either add 100 workers within five years to its current 400 Oregon payroll, or repay the State $1 million it received from the GSTF.

The Company

Vestas Wind Systems is a Danish company whose quarterly earnings were released publicly on August 18.  Here are some of the highlights:
1. Lost EUR119 million this quarter ($152.7 million US)
2. Increased projected fiscal year loss by almost $13 million US. Projects fiscal year loss of EUR35 million ($44.9 million US). Previous estimate was for a loss of EUR25 ($32 million US).
3. Sees working capital at low end of previous estimate, or 15% of revenues. Previous estimated working capital at 15% - 20% of revenues.
4. Reduced Earnings before interest and taxes (Ebit) margin by half.  Sees Ebit margin as 5% - 6% of revenues.  Previously estimated Ebit margin as 10% - 11%.
5. Reduced fiscal year revenue projection by $1.3 billion US. Sees fiscal year revenues at EUR6 billion ($7.7 billion US). Previously estimated fiscal year revenues at EUR7 billion ($9 billion US).
6. Cutting staff and cutting planned recruiting. Plans to lay off 300 employees and 300 contractors in Denmark. Plans to recruit 3,000 employees companywide during this fiscal year. Had planned to recruit 3,400 employees.
7. Cites reason for increased losses and lower projections as "late deals (delays in orders) in US Spain and Germany."

Vestas Americas President Martha Wyrsch, appearing with Portland Mayor Adams and Oregon Governor Kulongoski when the deal was announced, said the company had a decline in orders heading into 2010 because of the financial crisis, but a rebound is under way.

Is Wyrsch right? Financial statements indicate "Order flow" is improving from the disastrously low levels last year.  Was the recent dismal financial quarter is just a matter of delaying expected revenues until 2011?  We're betting $2.25 million in tax incentives and $8.1 million in a zero interest loan on it.  Analysts at UBS agree.

Analysts at Citigroup, however, do not.  Rather than a "blip" in quarterly earnings, Citigroup cites that the company has provided "limited financial disclosure beyond the headline details".

Let's hope UBS is right.

The Cost

So this is a good deal, right?  The City of Portland is positioning itself to “an international model of sustainable practices and commerce,” and the loss of 400 jobs, if Vestas Wind Systems if moved to another city, would have been a blow to that goal.

Even Mayor Adams, however, admitted Vestas put Portland "through the ringer" to close this deal. Perhaps he meant that saving these jobs 400 jobs (and adding another 100 within five years) will cost Oregon $4,500 per employee, as well as the "opportunity cost" of lending $8.1 at no interest.

One thing is certain. Spending $4,500 per job is unsustainable. Citizens of Portland, as well as others in the State of Oregon, are well advised to hold Kulongoski and Adams’ feet to the fire to ensure this expensive investment pays off.

kittyok@earthlink.net