XM Insurance woes

[TonyJ]

Technology - washingtonpost.com
XM Insurance Claim Denied As Losses Rise
Fri Aug 8, 9:02 AM ET



By Anitha Reddy, Washington Post Staff Writer

XM Satellite Radio Inc. has fought for three years to attract a following for its digital radio service, which offers listeners a hundred channels with music by artists including Ashanti and Elvis, as well as such features as NASCAR (news - web sites) commentary. The Washington-based company is on track to have 1.2 million customers by the end of the year, and nearly half of those are subscribers whose new cars include XM's radio service.

But yesterday XM gave investors a jolt when it revealed that its insurers rejected its $400 million claim on the two orbiting satellites its service depends on. The satellites, launched in 2001, were supposed to work for about 17 years, but defects related to their solar panels mean they will only be useful until 2008. Moreover, the malfunctions are forcing the company to take on $320 million in expenses early because XM must now launch its spare satellite next year and pay for a fourth, spare satellite in 2005.

The company says it has enough money to launch the third satellite, but not enough to pay for a new spare unless the insurance settlement comes through or it can find alternative financing.

The insurance dispute comes when XM is still vulnerable as a start-up. The company's revenues have grown quickly in the past year, but it is still losing money as it attempts to lure new customers with cheeky advertising and $9.99 monthly prices.

News of the denied claim and a wider quarterly loss sent XM's shares plunging by 20 percent, or $2.75, yesterday to close at $10.52. Shares of its smaller rival, New York-based Sirius Satellite Radio, slipped 18 cents to close at $1.53. Sirius, with 105,186 customers, earlier this week reported that its second-quarter loss narrowed to $111.8 million.

XM reported it lost $164.3 million ($1.38 per share) in the quarter ended June 30, compared with a loss of $122.4 million ($1.38) a year earlier. XM lost money despite a jump in revenue, due almost entirely to an increase in the number of subscribers. Revenue climbed to $18.3 million, from $3.8 million a year ago. The company added 210,000 customers during the quarter, bringing its subscriber count to nearly 700,000.

But depreciation expenses related to the falling value of its satellites ballooned to $39.8 million from $24.5 million a year ago.

Hugh Panero, XM's chief executive, told analysts on a conference call yesterday that its insurer rejected the claim because it contended that the satellites were still performing above their insured level and that XM Radio had violated certain policy provisions.

"We disagree with the group's position," Panero said. He added that XM is prepared to pursue arbitration or litigation to cover the satellite loss.

The satellites, built by Boeing, have defective mirrors that are not properly reflecting light to their solar panels, but the problems are not affecting the quality of the radio broadcasts, said XM spokesman Chance Patterson.

Problems have surfaced with all six satellites Boeing produced in its 702 series, and insurers have already paid a claim submitted by one owner, Thuraya Satellite Telecommunications Co. If the insurers pay for claims on all six, they will face a $1.6 billion liability, said April Horace, an analyst for Janco Partners Inc. in Denver.

"It doesn't surprise me that the insurance companies are going to make this a long and protracted fight," she said.

XM revealed in its 2002 annual report, filed in April, that it had submitted an insurance claim. The company also said in the report that Boeing had advised it of inadequate levels of output power by the satellites' solar panels in September 2001. XM also described the performance issue as "common to Boeing 702 satellites."

The problems with the company's two orbiting satellites, nicknamed "Rock" and "Roll," mean the company must launch its spare satellite, XM 3, in the fourth quarter of 2004, Panero said. XM 3 is also a Boeing 702 satellite, but the design flaw impairing its solar panels has been fixed.

The launch of XM 3 will cost approximately $190 million and its cost will be absorbed in the second half of 2004, according to Joseph J. Euteneuer, XM's chief financial officer. That bill includes $35 million in payments for work on XM's first two satellites.

XM Radio said that it raised $180 million to fund the launch of the spare satellite in case of a delay in receiving an insurance settlement. That sum, combined with $475 million that XM raised earlier this year, should allow the company to break even at the end of 2004, executives said.

But the launch of XM 3, which the company had expected to remain in storage for many years, means the company has to buy a fourth satellite, to be used as a spare. Executives said yesterday that they have hired Boeing to build a replacement that will cost $130 million and is scheduled to be completed in 2005.



XM said yesterday that it had planned to pay for that satellite with the insurance settlement from its claim related to its first two satellites. "We have every expectation that we will fully recover our insured loss," Euteneuer said.

[Jeff Cobner]

Watch for falling satellites !!! I guess the folks at xm are going to have to suck it up and launch a new satellite or reduce their channels to 50 instead of 100. All the more reason to subscribe to sirius.