PARIS — Start-up satellite operator ProtoStar Ltd. has begun talks with SES of Luxembourg over the sale of the just- launched IndoStar 2/ProtoStar-2 satellite to permit ProtoStar-2 creditors to cash out of their investment and avoid the long battle for satellite frequency rights that has undermined the company’s ProtoStar-1 satellite launched in mid-2008, according to industry officials.

ProtoStar-2 is a Boeing 601HP model satellite that was originally designed in 2000 for Intelsat‘s Latin American business before being placed, nearly completed, in storage for four-and-a-half years and then resold to Bermuda- and San Francisco-based ProtoStar in 2007.

The refurbished spacecraft, originally intended to carry an all-Ku-band payload, is now equipped with 27 Ku-band transponders and 13 S-band transponders, the latter intended to replace the aging IndoStar 1/Cakrawarta 1 satellite launched in 1997.

IndoStar 2/ProtoStar-2 is intended to operate at 107.7 degrees east. While that slot poses no frequency conflicts in the little- used S-band, ProtoStar’s principal Ku-band business plan has been stymied by satellite operators with higher priority Ku-band reservations there with the International Telecommunication Union (ITU).

SES’s NSS-11 satellite in particular, at 108.2 degrees, is just a half-degree away from the IndoStar 2/ProtoStar-2 and SES has made clear to the ITU that it intends to develop the slot to the full extent of its frequency registration filings.

Robert Bednarek, president of SES Americom New Skies, the SES division that operates NSS-11, said May 19 that the company is seeing increased demand for television broadcasts from , the and elsewhere within the coverage area of NSS-11 and will be expanding its capacity at the 108-degree position.

“Audiences continue to grow, which makes follow-on capacity increasingly valuable,” Bednarek said during a presentation to SES investors in . “We have additional spectrum … especially at 108 degrees. As we develop that orbital location, it wouldn’t be a surprise to see us add some additional satellite capacity at or near that location.”

What value SES would be willing to place on ProtoStar-2 now that it is healthy and in orbit remains unclear. The satellite’s S-band payload likely presents little interest to SES.

For ProtoStar, a sale to SES would permit the company to end what industry officials say is an uphill fight to secure Ku-band frequency rights in the region at a time when ProtoStar’s creditors are already showing signs of impatience.

Whether timed to coincide with the launch or not, one of ProtoStar’s key partners announced May 18 that it was scrapping plans to invest in the company and to engage in a broader strategic relationship.

In a letter to the Philippine Stock Exchange dated May 15 and published May 18, the Philippine Long Distance Co. (PLDT) said it has canceled agreements under which ProtoStar would lease capacity on PLDT’s existing satellite and take control of the satellite’s customer contracts and ground assets in exchange for ProtoStar stock, and PLDT would make a separate cash investment in Protostar.

PLDT said it had notified ProtoStar on May 12 that it was terminating the transponder-lease agreement “due to non-fulfillment of certain closing conditions.”

The announcement further complicates ProtoStar’s situation. The company’s first satellite, ProtoStar-1, launched in July 2008, faces continued difficulties in coordinating its planned broadcasts so as to avoid frequency interference and has been unable to secure many customers. ProtoStar-1 bond-holders are seeking strategic alternatives for the operation.

PLDT had been scheduled to transfer control of the Agila 2 satellite, set to be retired in 2010 or 2011, to ProtoStar. ProtoStar had set up a subsidiary, called ProtoStar 3, that was to manage the PLDT relationship, and in particular to develop the for satellite operation and control. As part of this agreement, PLDT was to have received $22.5 million in ProtoStar preferred stock.

The company did not spell out what conditions were not met, but when the agreement was signed last September PLDT said the deal was conditioned on the “requisite regulatory approvals and certain consents.”

The same September agreement included a second chapter under which PLDT would purchase $27.5 million in ProtoStar preferred stock. The PLDT letter said simply that the company is not exercising its share-purchase option.

PLDT said it is retaining its relationship with ProtoStar to assure continued service to customers of PLDT’s 67-percent owned subsidiary, Mabuhay Satellite Corp., which operates Agila 2.

PLDT, through Mabuhay, still plans to lease four C-band transponders and one non-pre-emptible extended-C-band transponder on ProtoStar-1 from 2011 to 2017, the letter said.

The letter said Mabuhay and ProtoStar “are nonetheless in continued discussions to determine and arrive at the appropriate operating agreements to govern the collaboration … in various areas such as marketing and sales, and in providing of backup TT&C [telemetry, tracking and control] and [operating] services for ProtoStar’s satellites, among others.”

El Segundo, Calif.-based Boeing Satellite Systems International announced May 18 that ProtoStar-2 was operating as planned in orbit following the launch aboard an International Launch Services Proton rocket from ‘s Baikonur Cosmodrome in

ProtoStar-2 builder Boeing Satellite Systems International expects to complete in-orbit testing in time to deliver ProtoStar-2 to its owners by early July.

ProtoStar spokesman Reid Stephenson did not respond to a request for comment on the possible sale of ProtoStar 2. SES spokesman Yves Feltes said the company would have no comment.