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Telstar 4 Failure Hits Intelsat

By | September 29, 2003

      The in-orbit failure of Bedminster, N.J.-based Loral Skynet’s Telstar 4 satellite could pose significant financial consequences. At greatest risk are the satellite’s insurers and satellite operator Intelsat, which agreed to buy that satellite, along with five other spacecraft and their orbital slots in August for $1 billion.

      Loral Skynet and its parent company, New York-based Loral Space and Communications [OTC BB: LRLSQ], on the other hand, appear protected from the failure’s financial fallout. In the agreement with Intelsat, Loral’s compensation for the six satellites would not be reduced, regardless of the Telstar 4’s failure.

      Intelsat, however, would receive any insurance payment for the failed satellite. In the event the insurance claim is denied, Intelsat still would be obligated to pay the full $1 billion for the six satellites.

      Loral, now operating under Chapter 11 bankruptcy-court protection, declared the Telstar 4 a “total loss” Sept. 22 and is pursuing a $141 million insurance claim. Loral was unable to re-establish contact with the Telstar 4 satellite after the spacecraft incurred a short circuit of its primary power bus on Sept. 19.

      Loral’s sale of six North American satellites and orbital slots to Intelsat cannot be completed until the bankruptcy court holds an auction for those assets. Satellite TV operator EchoStar Communications [Nasdaq: DISH] has also expressed interest in the Loral satellites. No transaction would be final until approved by the judge overseeing Loral’s Chapter 11 bankruptcy court proceedings.

      Loral’s sale agreement with Intelsat is unaffected by the satellite failure, officials with both companies said. Intelsat already has conducted due diligence and its shareholders approved the proposed transaction last month.

      The Telstar 4, launched in 1995, was scheduled to be replaced at 89 degrees West in mid-2004 with the larger and more powerful Telstar 8 satellite, now under construction at Palo Alto, Calif.-based Space Systems/Loral, a sister company of Loral Skynet. Telstar 8 would carry a Ka-band payload, in addition to C- and Ku-band transponders.

      When the satellite failure occurred, Loral Skynet moved nearly all of its Telstar 4 customers to other satellites in its fleet. The service restoration efforts specifically shifted the traffic to Loral’s Telstar 5, Telstar 6 and Telstar 7 spacecraft.

      Intelsat Undaunted

      Dianne VanBeber, Intelsat’s vice president of investor relations, said the asset purchase agreement with Loral includes contingencies for satellite failures. In addition, Intelsat’s interest in pursuing the transaction remains unchanged.

      “It’s unfortunate for the industry when something of this nature happens,” VanBeber said. “Loral has kept us informed of the problem, as it has progressed.”

      Intelsat’s $1 billion purchase would include Telstars 4, 5, 6 and 7, as well as Telstars 13 and 8, both scheduled to be launched later this year and in the first half of next year, respectively. The proposed acquisition of the Loral assets would complement Intelsat’s global network, which includes capacity on 26 satellites, by adding complete coverage of the important North American market and by increasing Intelsat’s customer base in the cable television and broadcasting segments.

      The Telstar 4 covered the continental U.S., Alaska, Hawaii, Puerto Rico, U.S. Virgin Islands, and southern Canada.

      Loral Skynet and Lockheed Martin [NYSE: LMT], the manufacturer of the satellite, continue to work to identify the cause of the problem, said Jeanette Clonan, Loral’s vice president of communications and investor relations.

      “While Loral and Lockheed Martin will undoubtedly both learn some lessons for the future from the failure report, the satellite is an older model spacecraft that is no longer in production,” said Andrea Maleter, technical director at Bethesda, Md.-based Futron Corp., a satellite consulting firm.

      The Telstar 4 was one of a number of assets that Loral purchased from AT&T [NYSE: T] during 1997, said Roger Rusch, president of the TelAstra satellite consulting firm in Palos Verdes, Calif. That deal not only included the Telstar 4, then named Telstar 402R, but also the Telstar 401 that failed before the sale was completed, he added.

      Loral’s management insisted that AT&T cut the purchase price of the assets, in light of the Telstar 401’s in-orbit failure, Rusch said. The price ultimately was reduced, he added.

      “It is obvious that the Loral officials are savvy people and that they protected themselves from the same situation that occurred when they bought the Telstar satellites from AT&T,” Rusch said.

      The Telstar 401 failure occurred in January 1997 when an electrical short disabled the spacecraft’s power subsystem. That spacecraft had been in service for slightly more than three years at the time of its malfunction, said Rusch, who keeps a database on the world’s commercial satellites.

      Lockheed Martin built both the Telstar 401 and the Telstar 4, a satellite that was designed to last 12 years, Rusch said.

      Loral’s availability of in-orbit capacity to maintain service to nearly all the Telstar 4 customers will help to mitigate any potential lost revenue from the failure. The company’s fleet of in-orbit satellites average roughly $42 million a year in annual revenues per spacecraft, based on the financial reports filed by Loral with the Securities and Exchange Commission (SEC), Rusch explained.

      Costly Claims

      Insurance industry sources said the failure is yet another in a series of in-orbit satellite problems. However, the cause of the Telstar 4 failure appears unrelated to other recent in-orbit glitches and may not give the insurers much recourse other than to pay the claim.

      Insurers recently have refused to pay the full amount of damages sought by Washington-based XM Satellite Radio [Nasdaq: XMSR] and Littleton, Colo.-based EchoStar Communications [Nasdaq: DISH] for problems with in-orbit satellites.

      XM’s insurers denied its insurance claims for two flawed Boeing 702 satellites (SN, Sept. 15). The insurers asserted that XM’s two in-orbit satellites currently are performing at adequate levels to sustain the company’s nationwide satellite radio service, according to XM’s SEC filings. In addition, the power trend lines of the satellites are not definitive, the insurers added.

      EchoStar currently is involved in arbitration with insurers over hundreds of millions of dollars, after the company rejected an offer to settle for only a portion of the damages it was seeking. The company now is operating without commercial insurance to cover potential losses from the failure of satellite launches and/or in-orbit satellites (SN, Aug. 18)

      One insurance industry source said the latest failure continues a trend of in-orbit satellite anomalies. During the past two decades, either launch vehicles or satellites tend to go through periods where one sector or the other is incurring failures in relatively quick succession, the source said.

      A number of satellite operators, including PanAmSat [Nasdaq: SPOT], have stepped up efforts in recent years to monitor the construction of satellites with their own employees on the factory floors of the manufacturers. The latest failure could put further impetus on those prevention-oriented initiatives.

      An additional ramification could involve heightened upward pressure on insurance rates to ensure the premiums paid reflect the propensity for in-orbit satellite failures to occur. Satellite operators, in turn, increasingly may opt to follow EchoStar’s lead by self-insuring either all or parts of their fleets.

      –Paul Dykewicz

      (Jeanette Clonan, Loral Space, 212/697-1105; Dianne VanBeber, Intelsat, 202/944-7406; Roger Rusch, TelAstra, 310/373-1925; Andrea Maleter, Futron, 301/347-3450)

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