Echostar Hedging Bets with Leases, Sateliite Orders

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EchoStar Communications Corp. remains uncertain about what to do with its mounting supply of current and planned satellite capacity and has reserved the right to cancel at least some of it if demand does not play out as expected, EchoStar Chairman Charlie Ergen said May 5.

In a conference call reporting on the Litt leton, Colo., satellite-television broadcaster’s quarterly financial results, Ergen said he has loaded up on leased capacity from SES Global of Luxembourg and on satellite-manufacturing contracts with Lockheed Martin and Space Systems/Loral to be able to meet several possible business scenarios.

“You like to put yourself in a position to take advantage of things you think might happen,” Ergen said. “There are things that might happen that make these prudent investments and leases. We obviously will re-evaluate those — we have opportunities to not deploy those, in some cases.”

Asked directly if some of EchoStar’s planned satellite capacity was cancelable, Ergen confirmed that is the case.

EchoStar has agreed to lease all of the capacity on four SES Global satellites, and has three satellites, including two all-Ka-band spacecraft, on order with Lockheed Martin Commercial Space Systems and one on order with Space Systems/Loral.

In recent years contracts to purchase satellites have routinely included clauses that permit the buyers to cancel the procurement with little or no penalty beyond reimbursing the manufacture for costs incurred before the cancellation.

EchoStar also has agreed to purchase, for $200 million in cash, the Rainbow-1 satellite at 61.5 degrees west, from Cablevision Systems Corp., whose Voom high-definition satellite television service was discontinued April 30.

EchoStar has agreed to continue broadcasting 10 of Voom’s 21 high-definition television channels as part of a small-equity stake in the channels that Ergen said he made “so their [Voom] customers will not be disenfranchised.”

Ergen said EchoStar will expand its broadcasts to all 21 of the Voom high-definition channels in 2006, when consumer high-definition television compression products are more widely available, and less costly.

Joshua Sapan, chief executive officer of Cablevision’s Rainbow Media Holdings LLC, which includes the Voom service, said in a May 5 conference call that the 21 channels of programming would continue to be offered, and that EchoStar’s decision to invest “is a vote of confidence.”

For the moment, Cablevision is continuing to offer Voom programming to cable-television networks through the Rainbow-1 satellite and through SES Global’s AMC-6 satellite, on which Cablevision has leased 16 transponders for 10 years.

In the May 5 conference call, Cablevision Chief Financial Officer Michael Huseby said the company is evaluating how to terminate the Voom satellite-broadcast service’s “significant contractual commitments to mitigate our net termination liabilities.”

Huseby said terminating the satellite-broadcast operation’s contracts, which could include substantial penalties in some cases, will not have a material impact on Cablevision’s cash position after taking into account the sale of the Rainbow-1 satellite to EchoStar.

SES Global spokesman Yves Feltes said May 6 that Cablevision continues to use the AMC-6 satellite capacity and remains a customer in good standing. Feltes declined to discuss the early-termination penalties Cablevision would pay to end its 10-year lease agreement with SES.

Ergen said EchoStar still views satellite-delivered broadband as a possible investment in the future, and that such a service is one reason why EchoStar has purchased so much satellite capacity.

While EchoStar has been demonstrating satellite-broadband gear at recent trade shows, Ergen said EchoStar will not be making a significant broadband investment in the next 12 months. After that, he said, is anyone’s guess.

“We have a few more hurdles to overcome before I would give the go-ahead to do that,” Ergen said of a satellite-broadband investment. “I am cautiously optimistic that we will overcome those hurdles. But it’s not clear we will. We wouldn’t launch unless we thought it would be a profitable business.”

Ergen also said EchoStar could use its excess satellite capacity to lease transponders to other companies — “not so different than what a PanAmSat does,” he said, referring to satellite-fleet operator PanAmSat Corp. of Wilton, Conn.