Pentagon Rejects Boeing-ULA Bid To Recover Delta 4 Costs

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PARIS — The U.S. Defense Department’s contract-oversight agency has rejected a United Launch Alliance (ULA) request for recovery of $271 million in costs related to the Delta rocket program, a decision that both ULA and one of its two owners, Boeing Co., are fighting, Boeing said July 27.

Chicago-based Boeing said that if the ruling stands, it could be required to indemnify ULA for up to $226 million.

In a filing with the U.S. Securities and Exchange Commission, Boeing said the U.S. Defense Contract Management Agency (DCMA) notified Denver-based ULA in June that $271 million in charges for which ULA is seeking reimbursement do not qualify under government contract rules.

ULA, a 50-50 joint venture between Boeing and Lockheed Martin Corp. of Bethesda, Md., builds the Delta and Atlas rockets and markets them to U.S. government customers. Prior to ULA’s formation in 2006, the Delta and Atlas rockets were manufactured and marketed separately by Boeing and Lockheed Martin, respectively.

Under an agreement that took effect following ULA’s creation, Boeing indemnified the joint venture for more than $3 billion in both Delta rocket inventory that Boeing contributed to ULA, and in other Delta-related assets. The agreement ends in March 2021.

In its more than five years of operations, ULA has used some $1.2 billion of materiel covered by the indemnification agreement, according to Boeing’s SEC filing.

Boeing, ULA and the U.S. Air Force are involved in a separate, long-running dispute over pricing for three Delta 4 missions. The issue has been before the U.S. Armed Services Board of Contract Appeals since late 2009 regarding two Delta 4 missions, with a third being added to the appeal in March.

Boeing said that if the Air Force refuses to renegotiate the price of these three missions, the company would need to reimburse ULA for up to $261 million under the inventory-indemnification agreement, plus up to $21 million to compensate ULA for losses it incurs on the three missions.

In its SEC filing and in a July 27 conference call with investors, Boeing said its Network & Space Systems division, which includes most of its satellite, rocket and space ground infrastructure work, reported a drop in revenue but an increase in operating-profit margin for the three- and six-month periods ending June 30.

As is the case for Lockheed Martin, ULA payments to Boeing played a large role in the higher operating profit margin.

For the three months ending June 30, the Network and Space Systems division reported revenue of nearly $2.1 billion, down 12 percent from the same period a year ago. But the operating-profit margin, at 9.5 percent, was up relative to the 7 percent a year earlier. Boeing said ULA payments were the main driver of the increased profitability, as were the proceeds from the sale of property.

For the six months ending June 30, the Network & Space Systems division reported revenue of $4.4 billion, down 5 percent from a year earlier, while the operating-profit margin was 7.7 percent versus 7.3 percent last year.

In its SEC filing, Boeing said it is still seeking reimbursement from two former partners in the Sea Launch commercial space-launch venture. Sea Launch Co. was headquartered for a decade in Long Beach, Calif., with Boeing as the lead investor, before its recent move to Bern, Switzerland, under new ownership.

Sea Launch filed for Chapter 11 bankruptcy protection in June 2009. As part of that procedure, Boeing paid certain Sea Launch debts under an agreement that called for the other investors — companies in Norway, Russia and Ukraine — to then reimburse Boeing their pro rata shares of the debt.

The Norwegian shareholder did so, but the Russian and Ukrainian shareholders have protested Boeing’s claims. RSC Energia of Korolev, Russia, which took ownership of Sea Launch during the bankruptcy proceedings, owes $223 million, Boeing says. The two operating divisions of Ukraine’s Yuzhnoye rocket designer and builder owe a combined $133 million.

Boeing sought reimbursement in an arbitration proceeding at the Stockholm Chamber of Commerce before that organization claimed it had no jurisdiction in the matter. Boeing has appealed that ruling.

Sea Launch has since emerged from Chapter 11 bankruptcy proceedings, having cleared its books of all debt — much of it held by Boeing — and plans to return to commercial launch operations in September. Sea Launch launches satellites using rockets that lift off from a floating platform on the equator in the Pacific Ocean.