DIRECTV 2003 Annual Report Download - page 58

THE DIRECTV GROUP, INC.
approval. Assuming FCC approval for DIRECTV U.S.’ use of 72.5 WL, DIRECTV 7S, which is expected to be
launched in the second quarter of 2004, will replace DIRECTV 5 at 119 WL, and DIRECTV 5, or a similar
satellite, will be relocated to 72.5 WL and used to provide additional local channels and other programming in
the U.S. through 2008. Once FCC approval is granted, DIRECTV 3 will be used by Telesat in a Canadian orbital
location. If DIRECTV U.S. is successful in obtaining FCC approval to use 72.5 WL, the net book value of
DIRECTV 3, which was $77.8 million at December 31, 2003, will be reclassified as an intangible asset and
amortized over the life of DIRECTV U.S.’ right to use 72.5 WL. However, if DIRECTV U.S. is unsuccessful in
obtaining FCC approval to use 72.5 WL, DIRECTV U.S. will immediately write-off the net book value of
DIRECTV 3.
On February 19, 2003, PanAmSat filed proofs of loss under the insurance policies for two of its Boeing
model 702 spacecraft, Galaxy 11 and PAS-1R, for constructive total losses based on degradation of the solar
panels. Service to existing customers has not been affected, and PanAmSat expects that both of these satellites
will continue to serve these existing customers until PanAmSat replaces or supplements them with new satellites.
PanAmSat is working with the satellite manufacturer to determine the long-term implications of this degradation
to the satellites and will continue to assess the operational impact. At this time, based upon all information
currently available to PanAmSat, as well as planned modifications to the operation of the satellites in order to
maximize revenue generation, PanAmSat expects to operate these satellites for the duration of their estimated
useful lives, although a portion of the transponder capacity on these satellites will not be useable during such
time and there may be a need to offer supplemental capacity from another satellite in later years. PanAmSat and
the Company also believe that the net book values of these satellites are fully recoverable and do not expect a
material impact on 2004 revenues as a result of the difficulties with these two satellites. The insurance policies
for Galaxy 11 and PAS-1R were in the amounts of approximately $289 million and $345 million, respectively,
for total losses, and both included a salvage provision for PanAmSat to share 10% of future revenues from these
satellites with the insurers. On December 29, 2003, PanAmSat reached a partial loss settlement of these
insurance claims for payment to PanAmSat of $260 million with no future revenue share. The receivable was
recorded in “Accounts and notes receivable, net of allowances” with a corresponding reduction to “Satellites,
net” in the Consolidated Balance Sheets. This negotiated resolution balances the expected loss of capacity and
the remaining use expected to be achieved with respect to the satellites. PanAmSat received substantially all of
the settlement amount during the first quarter of 2004 and PanAmSat plans on using these proceeds to replace
existing satellites over the next several years.
PanAmSat and Boeing have determined that the secondary XIPS on two of PanAmSat’s seven Boeing
model 601 HP spacecraft, Galaxy 4R and PAS-6B, are no longer available as a result of failures experienced
during June and July 2003, respectively. The primary XIPS on each of these satellites had previously ceased
working, and both satellites are operating as designed on their completely independent backup bi-propellant
propulsion systems. The C-band capacity of G4R is backed up by in-orbit satellites with immediately available
capacity. The remaining useful lives on Galaxy 4R and PAS-6B are estimated to be approximately 3.5 years and
4.9 years, respectively, from the date of the occurrence of each satellite’s anomaly, based on the bi-propellant
fuel on-board. Accordingly, PanAmSat began accelerating depreciation of these satellites beginning in the third
quarter of 2003 to coincide with the satellites’ revised estimated useful lives. The additional depreciation expense
resulting from this change in estimated useful lives was $14.3 million in the second half of 2003.
PanAmSat has determined that the net book value of these satellites and its investments in sales-type leases
on these two satellites are fully recoverable. On July 31, 2003, PanAmSat filed a proof of loss under the
insurance policy for Galaxy 4R in the amount of $169 million, subject to a salvage provision providing for
PanAmSat to share a portion of the revenues with the insurers. During the third quarter of 2003, PanAmSat
reached an agreement with all but one of the insurers representing, in the aggregate, approximately 83% of the
insurance coverage on the satellite. As a result, in the third quarter of 2003, PanAmSat recorded an insurance
claim receivable of $102.6 million reflecting the insurance policy amount for these insurers less a negotiated
settlement for salvage. PanAmSat received these proceeds during the fourth quarter of 2003. PanAmSat
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