Dish Network 1998 Annual Report Download - page 64

ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
F–17
EchoStar is currently able to use a maximum of only 20 transponders as a result of the solar array anomaly
described above. The number of available transponders will decrease over time, but based on existing data,
EchoStar expects that approximately 16 transponders will probably be available over the entire expected 12 year life
of the satellite, absent significant additional transponder or other failures. In September 1998, EchoStar filed a
$219.3 million insurance claim for a total constructive loss (as defined in the launch insurance policy) related to
EchoStar IV. However, if EchoStar were to receive $219.3 million for a total constructive loss on the satellite, the
insurers would obtain the sole right to the benefits of salvage from EchoStar IV under the terms of the launch
insurance policy. While EchoStar believes it has suffered a total constructive loss of EchoStar IV in accordance
with that definition in the launch insurance policy, EchoStar presently intends to negotiate a settlement with the
insurers that will compensate EchoStar for the reduced satellite transmission capacity and allow EchoStar to retain
title to the asset.
During the third quarter of 1998, EchoStar recorded a $106 million provision for loss in connection with
the estimated reduced operational capacity of EchoStar IV. This loss provision represents EchoStar’s present
estimate of the asset impairment attributable to lost transmission capacity on EchoStar IV resulting from the solar
array anomaly described above. EchoStar also recorded a $106 million gain attributable to an anticipated insurance
claim receivable that it believes is probable of receipt. While there can be no assurance as to the amount of the final
insurance settlement, EchoStar believes that it will receive insurance proceeds related to EchoStar IV that will be
sufficient to at least fully offset its asset impairment attributable to the reduction in capacity sustained by
EchoStar IV. While EchoStar believes it has sustained a total constructive loss, insurers have requested additional
information and may contest the claim. To the extent that it appears probable that EchoStar will receive insurance
proceeds in excess of the $106 million currently recorded and that no further provision for loss is necessary, a gain
will be recognized for the incremental amount in the period that the amount of the final settlement can be reasonably
estimated. Likewise, if the satellite insurers obtain the right to salvage from EchoStar IV by payment to EchoStar of
the $219.3 million insured amount, EchoStar will record an additional loss for the remaining carrying value of
EchoStar IV.
EchoStar III Anomaly
During 1998, three transponders on EchoStar III malfunctioned, resulting in the failure of a total of six
transponders on the satellite. While a maximum of 32 transponders can be operated at any time, the satellite was
equipped with a total of 44 transponders to provide redundancy. As a result of this redundancy and because EchoStar
is only licensed by the FCC to operate 11 transponders at 61.5° WL, where the satellite is located, the transponder
anomaly has not resulted in a loss of service to date. The satellite manufacturer, Lockheed Martin, has advised
EchoStar that it believes it has identified the root cause of the failures, and that while further transponder failures are
possible, Lockheed Martin does not believe it is likely that the operational capacity of EchoStar III will be reduced
below 32 transponders. Lockheed Martin also believes it is unlikely that EchoStar’s ability to operate at least the 11
licensed transponders on the satellite will be affected. EchoStar will continue to evaluate the performance of
EchoStar III and may be required to modify its loss assessment as new events or circumstances develop.
The time for filing a claim for a loss under the satellite insurance policy that covered EchoStar III at the time
of the transponder failures has passed. While the insurance carriers were notified of the anomaly, as a result of the
built-in redundancy on the satellite and Lockheed Martin’s conclusions with respect to further failures, no claim for
loss was filed. During the anomaly investigation, EchoStar obtained a $200 million in-orbit insurance policy on
EchoStar III at standard industry rates, which was renewed through June 25, 1999. However, the policy contains a
three-transponder deductible if the satellite is operating at 120 watts per transponder, or a six-transponder deductible if
the satellite is operating at 230 watts per transponder. As such, the policy would not cover transponder failures unless
transponder capacity is reduced to less than 26 transponders in the 120 watt mode or 13 transponders in the 230 watt
mode, during the coverage period. As a result of the deductible, EchoStar could potentially experience uninsured
losses of capacity on EchoStar III. Although there can be no assurance, EchoStar expects that in-orbit insurance can be
procured on more traditional terms in the future if no further failures occur in the interim. If further failures do occur,
EchoStar may not be able to obtain additional insurance on EchoStar III on commercially reasonable terms. EchoStar
does not maintain insurance for lost profit opportunity.