PARIS - EchoStar Chief Executive Charlie Ergen gaveinvestors a sobering assessment of near-term prospects for leasing thecompany?s excess North American satellite capacity to compete with established fleet operators Intelsat, SES and Telesat and said its venture in satellite-deliveredmobile television in China shows no sign of restarting.
In a March2 conference call - roughly a year after the Englewood,Colo.-based company was split off from satellite television broadcaster DishNetwork?- Ergen said he was ?very disappointed that wehaven?t been very successful? in carving out a piece of the North Americanfixed satellite services business for EchoStar.
Thedownturn in the U.S. economy has not helped matters, he said. Selling satellitecapacity has become ?avery soft market in the United States today. I would say it?s extremelysoft.?
EchoStarowns six in-orbit satellites and leases the full capacity aboard two othersover North America. Two other satellites on which it has leased the fullcapacity are under construction, as is one EchoStar-owned satellite.
Most ofEchoStar?s business is selling satellite capacity and digital televisionset-top boxes to Dish Network. EchoStar?s stated mission is to develop theset-top box business globally, and to make a business leasing satellitecapacity in North America to other customers.
Thecompany?s unused capacity has remained vacant, forcing a write-down of thevalue of the investment. In a March 2 filing with the U.S. Securities and ExchangeCommission (SEC), the company said it wrote down by about $138 million thevalue of its 10-year lease of the full capacity of the AMC-15 satellite, ownedby the Americom division of SES of Luxembourg. EchoStar recorded an $80 millionimpairment charge onthe AMC-16 satellite, which is under a similar 10-year lease arrangementwith SES.
EchoStarhad stopped construction in mid-2008 of the CMBStar satellite, whoseconstruction by Space Systems/Loral of Palo Alto, Calif., had been nearlycompleted. At the time, Ergen said Loral had failed to meet unspecified?satellite performance criteria.?
But in theMarch 2 conference call, Ergen said the project was stopped in its tracksbecause EchoStar?s partner, the State Administration of Radio, Film and Televisionof China, had decided to no longer honor the contract. EchoStar hadsaid it would seek alternative uses for the satellite, and continue to workwith the Chinese customer to restart the project.
Neither has been possible in recentmonths, and EchoStar in late 2008 took an impairment charge of $85 million onCMBStar.
?The satellite wasdeveloped for China, and they so far have not honored their contract,?Ergen said in explaining the write-down. ?We still have the contract. Theyhaven?t met their payment obligations. It is a custom satellite and a customorbital slot and it would not make sense? to proceed with the satellite?splanned 2009 launch without a contract with the Chinese. He said it would costEchoStar up to $85 million to redeploy the satellite to another purpose withanother customer.
EchoStar remains hopeful that aChinese customer eventually will be found. Ergen said EchoStar retains therights to the geostationary orbital slot over China that was intended for theS-band CMBStar venture. ?Experience with China is that they have honoredeverything they say they are going to do,? Ergen said. ?Patience is necessary.?
In its SECfiling, EchoStar said it is evaluating whether modifying the satellite to servean entirely different purpose, at a different orbital slot, would be lessexpensive than building a new satellite from scratch.
EchoStarhas agreed to lease for 15 years most of the capacity on Telesat?sNimiq 5 satellite, to be launched late this year, for resale to DishNetwork and to Canada?s?Bell TV satellite-televisionprovider. EchoStar also has leased for 10 years the capacity on SES?sQuetzSat-1 satellite, to be launched in 2011 into a Mexican orbital slot. DishNetwork is also the major customer for QuetzSat-1, and EchoStar?s Dish Mexicojoint venture with Mexican partners also is taking part of the capacity.
EchoStarreported that it had $829 million in cash and marketable securities as of Dec.31. It reported satellite service revenues of $412.3 million in 2008, with allbut $44.4 million of that accounted for by the sale of satellite capacity toDish Network.
Ergen saidthe current state of the debt market makes it unlikely that EchoStar willproceed with a debt offering anytime soon, and that while the company?sbusiness is capital intensive, EchoStar has ?adequate cash? for now. ?We hopeto grow the business into positive cash flow.?
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