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Fallout From 12th LPD: Fine Print in Old Deal Could Cost Yard a Destroyer

Jun. 8, 2014 - 03:45AM   |  
By CHRISTOPHER P. CAVAS   |   Comments
Congress is considering a twelfth amphibious dock ship from Ingalls Shipbuilding, but a 12-year-old agreement might mean a destroyer would be awarded to Bath Iron Works. Here, the future John P. Murtha, the 10th LPD, is under construction at Ingalls, Pascagoula, Mississippi.
Congress is considering a twelfth amphibious dock ship from Ingalls Shipbuilding, but a 12-year-old agreement might mean a destroyer would be awarded to Bath Iron Works. Here, the future John P. Murtha, the 10th LPD, is under construction at Ingalls, Pascagoula, Mississippi. (Christopher P. Cavas / Staff)
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WASHINGTON — The US Navy doesn’t want it, but the Marines and a major shipbuilder do. And since last year, Congress has been moving ahead with approving and funding a new amphibious ship, the unnamed LPD 28.

Money was approved last year to begin buying parts of the ship, and most observers feel it’s a better-than-even bet that Congress will add it to the 2015 defense budget.

LPD 28 would become the twelfth San Antonio-class ship, all built by Huntington Ingalls Industries (HII). The ship would be built at the company’s Ingalls yard in Pascagoula, Mississippi, with an overall price tag of about $1.8 billion.

But here’s a question that, so far, has barely been raised in the public debate arena: Are we talking about one ship, or two?

The answer might be two. Or maybe not.

From the point of view of General Dynamics Bath Iron Works (BIW), should the Navy award a contract for LPD 28 to HII, Bath should receive a compensatory guided-missile destroyer — one that could come from those already awarded to Ingalls.

Ingalls, not unexpectedly, disagrees, contending that Bath already has received extra destroyers, and that no compensation would be needed.

The genesis of the dispute goes back to 2002, when the LPD program was experiencing horrendous production problems. What then was Northrop Grumman’s Avondale shipyard in New Orleans was the lead yard for the LPD program, which was forecast to consist of 12 ships. Of those, four — including LPD 28 — were to be built by BIW in Bath, Maine.

But with the LPD program in disarray, the Navy and its shipbuilders agreed to streamline production. In 2002, all signed a memorandum of understanding (MoU) that transferred all LPDs scheduled to be built at Bath to Northrop’s yards along the Gulf Coast, in exchange for DDG 51-class destroyers contracted to Northrop. Put simply, three Bath LPDs were traded for three Ingalls DDGs.

Since then, the LPD program was cut from 12 to 10, then restored to 11, ending at LPD 27. Northrop got out of the shipbuilding business and a new entity — HII — was formed, including Ingalls and the now-closed Avondale shipyards. The DDG 51 program was also scheduled to end at DDG 112, but subsequently was restarted by the Navy, awarding contracts to both Ingalls and BIW. As of now, all destroyer contracts through DDG 126 in fiscal 2017 have been awarded, split between Ingalls and Bath.

The MoU was reaffirmed by the Navy in 2009, when another swap agreement was signed between the Navy, BIW and Ingalls over work on DDG 1000 Zumwalt-class destroyers.

The sticky part comes with a clause in the original MoU: Should the twelfth LPD materialize, “a fourth DDG 51-class ship or equivalent workload would be awarded to [BIW] preceding, or concurrent with the award of LPD 28.”

By that logic, and with all destroyers already awarded through 2017, should the Navy sign an award in 2015, Bath should get an extra destroyer, either via an added ship in the budget — an extremely unlikely event — or by transferring an existing Ingalls ship contract to BIW.

“Our position is that the original agreement of four-for-four is still binding, and we’re currently at three-for-three,” Andrew Bond, director of strategic planning at Bath, said on June 6.

“We’re not in favor or against the LPD in the budget,” Bond said, “we just want the original terms of the agreement to hold. That would be that if LPD 28 is appropriated, that prior to the award of LPD 28 we would expect a DDG 51 to be awarded to BIW.

“We view it as a binding document from a business standpoint,” Bond added.

The Maine congressional delegation already is watching the issue closely. Steve Ogden, spokesman for Sen. Angus King, I-Maine, noted that, “it is Sen. King’s belief — which has been confirmed by the Navy — that the 2002 MoU, reaffirmed by the parties in 2009, is still in effect and that, per that understanding, the award of an additional LPD requires the Navy to award an additional DDG 51 destroyer to Bath Iron Works.”

On May 10, the Navy, in response to a request from King and other members of the Maine delegation, restated its support for the swap agreements.

“The Navy position is that the 2002 MoU remains in full force and effect and requires the Navy to award a DDG 51 or equivalent workload to BIW if the Navy awards the LPD 28 to HII,” the Navy said in the response. The statement also reiterated the requirement to award a fourth DDG 51 to Bath “preceding or concurrent with the award of LPD 28” to HII.

Ingalls declined to address the issue directly.

“While we do believe the MoUs remain in effect, it would be inappropriate to speculate on the potential impacts,” company spokesman Beci Brenton said on June 6.

In documents obtained by Defense News, however, Ingalls argues that a fourth destroyer already has been awarded, and that no DDG 51 should be transferred should the company receive the LPD 28. A May 14 memo from the law firm of Crowell Moring — hired by HII to examine the issue — contends that the MoU makes no mention of non-competitive sourcing, and that the award of DDG 116 to Bath in 2012 satisfied the requirement.

DDG 116 was the third ship of three ships the Navy sought bids from. Ingalls received one ship, Bath received one ship and, as explained by the Navy, Bath received the extra ship because of a better bid.

Crowell Moring argues that the better bid doesn’t matter, that competitive pricing is not a requirement in the MoU, and the extra ship satisfies the MoU.

In the documents, the firm points out that the company “did not receive full benefit of the bargain” from the 2009 swap agreement, and details numerous inconsistencies between how the Navy interpreted the two agreements.

The Navy — which repeatedly has stated it does not want to invest in a twelfth LPD — declined to provide more information to Defense News.

While the swap agreements remain in effect, Lt. Rob Myers, a Navy spokesman at the Pentagon, said on June 6, “it is important to acknowledge that the congressional process is proceeding and nothing is final. Until then, it is too early to comment. We continue to follow these discussions closely and if funds are authorized and appropriated we will work with our industry partners on the way ahead.”

Compounding the issue of interpreting the MoUs is whether lawmakers should consider them at all.

“Congress is never a party to those agreements,” Laura Chambers, spokeswoman for Rep. Steve Palazzo, R-Miss., said June 6.

It is also not clear what the binding nature of the MoUs is.

“I would think the Navy would operate in the best interests of the country,” said one Capitol Hill source. “If Bath has a steady and reliable workload and LPD 28 ensures that HII has a steady and reliable line of work in the smaller amphibious ship line, everybody should be happy with that. They should not look to give General Dynamics more business just for the sake of giving them more business. But if you’ve got laws that require that, so be it.”

One business analyst agreed there were larger issues afoot than simply interpreting the MoUs.

“It’s not so much about the ship, it’s about the competitive dynamics of the two largest shipbuilders in the US,” said Byron Callan of Capital Alpha Partners.

Whether LPD 28 comes about could also be a factor in the future LX(R) amphibious ship replacement program, Callan said, and could affect GD’s shipyard in San Diego, the National Steel and Shipbuilding Company (NASSCO).

“From GD’s standpoint, trying to get a leg up for NASSCO on LX(R), I’d try and figure out how to make this as painful as possible for the Congress and the Navy,” Callan said. “If Ingalls doesn’t get LPD 28 [and the production line ends], NASSCO or Bath will be in a much stronger position to compete for future amphibious needs.”

For now, the swap issue has raised far more questions than answers.

“I suppose people can sit down and decide this without resorting to lawyers, but I doubt that’s possible,” said one Capitol Hill staffer. “I’m glad I don’t have to figure it all out.” ■

Email: ccavas@defensenews.com.

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