Sea Launch Owes HNS $52M

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PARIS — An arbitration panel ruling that Sea Launch Co. must reimburse Hughes Network Systems (HNS) $52 million in advance payments for a 2007 launch contract HNS terminated comes at a particularly delicate time for Sea Launch, which continues to lose money and is already counting on its 40 percent shareholder, Boeing Co., to back $250 million in Sea Launch bank loans coming due by June.

The panel’s decision, disclosed by Chicago-based Boeing in an April 22 filing with the U.S. Securities and Exchange Commission (SEC), is the most recent of several legal decisions that have gone against Boeing’s commercial space divisions.

A group of insurance underwriters said in March they would seek to reverse an arbitration panel ruling that did not force Boeing to pay the full $240 million the insurers wanted, according to Boeing’s SEC filing.

Industry officials said Boeing had been ordered to pay around $16 million related to the 2004 loss of the Superbird 6 telecommunications satellite.

The underwriters argued that Boeing, as prime contractor for the satellite, had set the launch-injection coordinates without taking into account the gravitational pull of the Moon. As a result, the satellite was placed into an orbit with a perigee that was too low. It was declared a total loss several months later.

In the HNS decision, the arbitration panel ruled Germantown, Md.-based HNS should receive full reimbursement of advance payments it made to Sea Launch for the launch of HNS’sSpaceway 3 Ka-band broadband satellite.

Long Beach, Calif.-based Sea Launch had set the launch for May 2007. But in January of that year, an on-pad launch failure destroyed the SES New Skies NSS-8 satellite and grounded Sea Launch for a year.

HNS, in a hurry to put Spaceway 3 into service, contracted with Arianespace whose Ariane 5 rocket lofted the satellite in August 2007.

Most launch contracts permit customers to pull out if the contracted launch date is missed by a certain number of weeks.

In an August 2007 SEC filing, HNS said Sea Launch’s refusal of the reimbursement demand represented a “breach of contract and a violation of the California statute prohibiting unlawful and unfair business practices.”

HNS had sought $44.4 million, but the award came to $52 million with interest Sea Launch President KjellKarlsen said April 24.

“Looking forward, I would think long and hard before taking another customer to arbitration,” he said. “Our legal advisers tell us the chances are between slim and none to get the ruling overturned on appeal, so we consider this is the end of the matter.”

Karlsen said Sea Launch used much of the HNS prepayment to order rocket hardware for the launch. He said the company is now working on a payment plan. Boeing was not directly involved in the arbitration and did not guarantee the Sea Launch reimbursement beyond its status as a major Sea Launch shareholder, Karlsen said.

Boeing’s SEC filing said payment terms were still being discussed. It also said Sea Launch ended 2008 in the red and continued to lose money in the first quarter of 2009.

Sea Launch owes some $250 million by June and will be seeking a fresh credit guarantee from Boeing for the refinancing. Karlsen has said he is confident Boeing will agree to back the new line of credit.

Boeing has a special interest in ensuring Sea Launch is refinanced. A default would put Boeing in the front lines of having to repay the debt. In addition, a default would trigger a default on a second tranche of Sea Launch debt, in the amount of $200 million, Boeing said in the SEC filing. Boeing’s total liabilities in that event could be up to $514 million if it is unable to recover cash from Sea Launch’s Ukrainian, Russian and Norwegian shareholders.

Sea Launch’s 2007 launch failure may pose still another problem for Boeing. Satellite fleet operator SES of Luxembourg, whose NSS-8 satellite was destroyed in the failure, has long said Boeing refused to honor a commitment to build an identical replacement satellite for the same price, a claim Boeing denies.

SES says it has not abandoned going to arbitration, and on Jan. 29 SES reiterated to Boeing a formal dispute notification.

“The dispute notice included neither a quantification of potential damages nor a sum certain demand,” Boeing said in the SEC filing. “We do not believe that [SES] could have any valid claims relating to the satellite contract, but await further developments.”