Government Sales Up for Loral’s Xtar Subsidiary But Loral’s Satellite Manufacturing Div. Behind on Contract, Risks Termination

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Loral Space and Communications said its long-struggling Xtar affiliate, which sells X-band satellite capacity to the U.S. and allied governments, posted sharply higher sales for the first half of this year and has restructured its debt.

Loral also said its Space Systems/Loral satellite manufacturing division is far enough behind schedule on one satellite that the customer could terminate the contract for default and demand that Loral refund $137 million in advance payments, plus interest.

In an Aug. 10 filing with the U.S. Securities and Exchange Commission, New York-based Loral said the customer, which it did not name, is nonetheless unlikely to terminate the contract because it “requires the satellite for the continued operation of its business.”

Loral said the customer in question “is an established operator for which Loral has built a sizable portion of its fleet.” That description would fit EchoStar Corp., which has contracted with Loral to build the EchoStar 14 and EchoStar 15 satellites on behalf of satellite-television provider Dish Network.

Loral owns 56 percent of Xtar LLC of Rockville, Md. Hisdesat of Spain owns the remaining 44 percent. Xtar operates the Xtar-Eur satellite, located at 29 degrees east, and is obligated by contract to lease seven 72-megahertz transponders aboard the Spainsat satellite, operated by Hisdesat, which is in orbit at 30 degrees west.

Xtar’s business — selling X-band satellite capacity to the U.S. Defense Department and to other allied forces — has not developed as planned. But company officials in recent months have said they see signs of fresh interest.

For six months ending June 30, Xtar reported $14.6 million in revenue. While still a modest figure, that is a 54.4 percent increase over the same period a year earlier.

Xtar’s difficulties have forced it to fall behind in payments to Hisdesat for the Spainsat capacity. The company is scheduled to pay Hisdesat $23.9 million in 2009.

Xtar and Spainsat have agreed to restructure the past debt, permitting Xtar to make annual $5 million catch-up payments for the next 12 years.

Loral and Hisdesat, as Xtar’s owners, agreed earlier to pay the remaining $8 million on Xtar’s debt to launch services provider Arianespace of Evry, France, which launched Xtar-Eur in 2005.

Loral disclosed in the SEC filing that Sirius XM Radio Inc., whose Loral-built Sirius 5 satellite was launched in June, has demanded that Loral pay $15 million in late delivery penalties.

Loral acknowledges the satellite was late in being delivered but says the Sirius-5 manufacturing contract stipulates that if the delays were due “solely to technical reasons affecting [Loral] subcontractors,” as was the case for Sirius 5, then Loral is not subject to late delivery penalties.

Loral says the two companies have asked an arbitration panel to resolve the issue.

For the six months ending June 30, Space Systems/Loral reported $492.3 million in revenue, up 14.5 percent from the same period a year earlier. The company has booked firm orders for five telecommunications satellites this year, and seven in 2008. Satellite manufacturing backlog stood at $1.8 billion as of June 30, up from $1.4 billion at the end of 2008.

Two Loral customers — ICO North America of Reston, Va., and ProtoStar of San Francisco and Bermuda — are in the midst of Chapter 11 bankruptcy reorganizations overseen by U.S. courts. ICO owes Loral $6 million in back payments and $26 million on future payments related to the Loral-built ICO G1 satellite launched in April 2008.

ProtoStar owed Loral $3 million as of July 31 and also has future payment obligations related to the monitoring of the ProtoStar-1 satellite launched in April 2008.

Loral said it is confident that these contracts will be honored regardless of who ends up owning the ICO and ProtoStar assets because the work is necessary for the smooth operation of the satellites.