Subject: [NEXTEL-1] Telstar 4 Failure Hits Intelsat

From: [email-masked]
Date: Fri, 03 Oct 2003 11:22:54 -0400

Telstar 4 Failure Hits Intelsat
Sep 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.

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