Will Philly Shipyard close?

by Michael Hansen, Hawaii Shippers Council, July 18, 2019

Several maritime publications covered on July 16 and 17, 2019, the release of Philly Shipyard ASA’s Second Quarter 2019 Financial Results on July 15th stating the yard remains idle as its continues to burn cash and is seeking new orders while it keeps on 80 staff.

Philly Shipyard Inc. is a major U.S. shipbuilding yard and a wholly-owned subsidiary of the Norwegian company, Philly Shipyard ASA. The results were released in Oslo by the parent company subject to Section 5-12 of the Norwegian Securities Trading Act.

Philly Shipyard Inc was founded in 1997 by the City of Philadelphia, the Commonwealth of Pennsylvania, the United States Government and the Norwegian corporation Kværner Shipbuilding Division as Kværner Philadelphia Shipyard. It is located on a portion of the former Philadelphia Naval Shipyard which was closed in 1995.

In 2005 the former Kvaerner Philadelphia Shipyard became Aker Philadelphia Shipyard, and, in 2015, Philly Shipyard Inc. Its parent company Philly Shipyard ASA is listed on the Oslo Stock Exchange (OSE: PHLY).

Since delivering its first vessel in 2003, Philly Shipyard has delivered 30 large Jones Act oceangoing self-propelled merchant ships of 1,000 gross tons and greater (representing more than 50% of all such ships delivered through 2018) including containerships, product tankers and crude oil tankers.

Its last two ships were delivered to Matson Navigation Company Inc., the gearless containerships DANIEL K INOUYE, on October 30, 2018 and KAIMANA HILA on March 28, 2019, for employment in the U.S. West Coast / Hawaii trade.

Philly Shipyard is one of seven active major U.S. shipbuilding yards constructing large self-propelled oceangoing ships for the U.S. government and commercial domestic (Jones Act) shipowners, and is one of only three of these major yards constructing commercial ships.

These kinds of large commercial ships are essential for maintaining surface transportation between the Contiguous United States (CONUS) and the noncontiguous jurisdictions of the United States subject to the Jones Act namely Alaska, Guam, Hawaii and Puerto Rico. The Jones Act requires among other things that a vessel to be eligible for domestic commercial employment must be constructed in the U.S.

Over time there has been a significant decline in the number of major U.S. shipbuilding yards particularly after the Reagan Administration defunded the federal government’s Construction Differential Subsidy (CDS) program in 1982, which was enacted by the Merchant Marine Act of 1936 and paid domestic shipowners and shipyards the difference between the domestic and international build price for commercial oceangoing ships to be employed in the foreign trade of the United States.

This has led to a very small number of U.S. shipbuilding yards constructing oceangoing self-propelled ships, operating on limited economies of scale, dependent on foreign shipyards for proprietary ship design, main engines and equipment purchasing services, and ever escalating newbuild ship prices, which are now four to five times the international prices for comparable ships.

The fundamental problem is that the Jones Act market is too small to support an internationally competitive major U.S. shipbuilding industry constructing oceangoing self-propelled commercial ships, and is constrained by the Jones Act market limitations to the construction of an extremely narrow range of ship types and capacities.

The Jones Act market in containerships for the noncontiguous trades and tankers for the oil trades is largely built out and major U.S. shipbuilding yards are facing a period of time in the medium to longer term where there will be very few new orders for commercial oceangoing ships.

Philly Shipyard has turned to the federal government for new orders and noted in their financial statement:

Philly Shipyard’s main focus continues to be the pursuit of the opportunity to build National Security Multi-Mission Vessels (NSMV) for the U.S. Maritime Administration (MARAD). The NSMV program seeks to replace as many as five of the aging vessels that serve as training ships for the state maritime academies in the United States

Philly Shipyard is aggressively pursuing several possibilities for short-term work to have some activity in the shipyard in 2019 before a production start of a potential new shipbuilding project. In support of this, Philly Shipyard has submitted to the U.S. Navy a Master Ship Repair Agreement and is in the process of having its two drydocks certified to Naval Sea Systems Command (NAVSEA) requirements.

Philly Shipyard was one of four shipyards selected to conduct industry studies for the Common Hull Auxiliary Multi-Mission Platform (CHAMP) program. Philly Shipyard is teaming with Vard Marine to conduct these studies for the U.S. Navy. The CHAMP program is a multi-phase effort that involves design studies, preliminary design, and detail design and construction (DD&C) to ultimately recapitalize the Military Sealift Command (MSC) fleet of aging ships. The demand for the CHAMP program could approach 60+ vessels. The CHAMP vessels are not combatants, and are more commercially oriented, which fits the structure of Philly Shipyard’s facility.

Entry into, or further development of, lines of business in which the Company has not historically operated may expose Philly Shipyard to business and operational risks that are different from those it has experienced historically. Philly Shipyard’s management may not be able to effectively manage these additional risks or implement successful business strategies in new lines of business.

Should the Group be unsuccessful in continuing ordinary shipbuilding operations and securing contracted customer backlog, or unsuccessful in complying with the shipyard lease minimum employment condition without obtaining additional waivers, there is a material uncertainty that exists that may cast significant doubt as to whether the Group will be able to continue as a going concern. In this scenario, the Group may elect to undergo an orderly liquidation process.

The U.S. maritime blog, gCaptain, published on July 17, 019, “Shipbuilding and repair work dries up at Philly Shipyard,” covering the key aspects of the financial results:

All shipbuilding and repair work has completely dried up at Philly Shipyard following the delivery of the second of two container ships for Matson back in March as the shipbuilder eagerly tries to secure more orders from commercial and government customers.

Philly Shipyard, the leading Jones Act shipbuilder on the U.S. east coast, reported this week that its operating revenues and other income fell to zero in Q2 2019, down from $18.9 million in Q1 2019 and $83.4 million in in the same period in 2018.

Due to a lack of contracts, the company said there is currently no shipbuilding or repair activity going on at the shipyard and all production facilities are idle and both graving docks are empty.

Despite the low level of activity, however, says it is continuing to pursue a mix of newbuild and repair opportunities in both the commercial and now government markets.

As of this week, the company employed only approximately 80 people, down significantly from the approximately 1,200 it employed at the beginning of 2018. The remaining core group of employees is tasked primarily with securing new orders and transitioning the shipyard into a compliant government contractor, the company said.

Back in July, Philly Shipyard was awarded a contract for the modernization, repair and maintenance work on the SS Antares, the Maritime Administration cargo ship, and it is starting to recall some of its laid-off workers to staff the short-term repair contract.

Philly Shipyard reported total cash and cash equivalents of $58.8 million as of 30 June 2019, excluding $69 million of restricted cash. The company expects to maintain a cash burn rate of approximately $1.5 million to $1.7 million per month on average at the current rate.

Philly Shipyard has been out of work since the 28 March 2019 delivery of the containership Kaimana Hila to Matson. The vessel was the second of two vessels ordered in November 2013.