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Rocketplane Kistler protest NASA's COTS decision

Published by Sigurd De Keyser on Thu Oct 4, 2007 5:07 pm
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It was announced that NASA had informed Congress it was terminating its Commercial Orbital Transportation Services (COTS) agreement with Rocketplane Kistler (RpK) because the company had failed to meet financial milestones. RpK sent a letter to NASA to protest the decision.

On September 7th, 2007 NASA issued a default letter warning that it would terminate the COTS agreement with RpK in 30 days as the firm had failed to raise private funding to complete the K-1 launch vehicle by the July 31, 2007 deadline.

The Oklahoma City-based firm was one of two companies NASA selected in August 2006 to split $500 million in public funds to help build and demonstrate competing launch systems capable of delivering cargo to the International Space Station.

RpK however are protesting the decision, having sent a seven page letter to Horowitz in the latter part of last month. The letter cites actions made by NASA during Phase 1 of COTS as detrimental to RpK’s efforts to secure investor revenue, ultimately leading to their failure to complete two COTS milestones.

In the letter RpK cite that they felt the decision not to include any ISS servicing in Phase 1 of COTS was a major omission from a financing standpoint.

“Input from potential investors, our investment bankers and strategic partners strongly confirms that failure to include a servicing component creates significant risks for any investor”

The letter goes on to suggest that detrimental subsequent decisions by NASA “turned investor concerns into reality, and those concerns ultimately led to the withdrawal of $300 million in financing commitments obtained by RpK for the K-1 Program”

Furthermore the letter then goes on to question whether NASA really has got real commitment to COTS and even commercial space in general.

“Put otherwise, NASA’s actions during the past several months have not only highlighted the deficiencies in Phase 1 of the COTS Program, but have confirmed investor concerns about NASA’s commitment to commercial space and the COTS Program”.

Two events, in particular generated these concerns, the letter states these two as:

“First, in May 2007 (and the period leading up to May), NASA made firm commitments for Russian Progress and Soyuz launches during the original scheduled Phase 2 of COTS. That action significantly reduced the potential cargo volume and revenue available to COTS participants in the critical 2010-2011 timeframe”

“Second, on August 7, as RpK was seeking to complete its financing (having at the time already obtained in excess of $200 million in financing commitments), NASA’s Operations Directorate released the Request for Information (RFI) for COTS Phase 2. The RFI is certainly inconsistent with the original COTS announcement and the basis for RpK’s Space Act Agreement, so much so that NASA has apparently dropped the requirement of COTS Phase 1 for demonstration of capabilities prior to award.”

The letter goes on to explain in depth how RpK sees NASA decisions (NASA’s release of the RFI) as being “a primary catalyst for a series of events that caused the loss of $300 million in financing commitments to RpK.”

RpK then stresses actions and efforts taken since they signed the COTS SAA to complete its funding. Then further describes the obstacles tackled.

“To be sure there were other problems, including very difficult issues with contractors and strategic partners. Despite those hurdles, including the ones created by NASA, RpK engaged in an extensive effort to obtain private funding for the K-1 Program without a contract from NASA to use the K-1 to provide cargo service to the ISS. The letter documents in depth the efforts the RpK went to, adding:

NASA’s requirements, as outlined in the original COTS program materials, changed significantly. NASA’s decision to procure additional launches of the Russian Progress and Soyuz vehicles significantly reduced near term cargo requirements, and therefore potential revenues during the critical early years of operations. While one can appreciate NASA’s desire to “hedge” its bets, RpK needed to provide investors with information with which to assess NASA’s real requirements, and that information needed to project economic returns that justify the risk of investment.

After major changes to business plans RpK started building their investment portfolio, RpK already had $40 million in their pockets from November 2006. The remaining $460 million investment was offered out to various interested parties on a ‘pre-marketing road show’ in April.

‘As part of that process, we made 11 presentations to potential investors between April 10 and April 13, and Jefferies Quarterdeck solicited input from the participants on the proposed financing,’ RpK noted. ‘While many investors provided feedback and several investors expressed interest in investing in RpK, the consensus was that RpK would have to find a ‘lead’ investor that would be in a position to assess the technical and programmatic risks and lead the overall financing effort.’

With the support of MacDonald Detwiler and Associates, in early June RpK received an expression of interest from a large Canadian investment fund. This would fund a significant portion or all of the $500 million external financing requirement and to be the lead investor, the letter adds “Its participation was limited, in part, by the fact that it is a Canadian fund and NASA’s view that a Canadian fund could not have a controlling position in RpK without violating the Commercial Space Act (ironic in light of NASA’s continuing purchase of Progress and Soyuz vehicles).”

RpK further add that “The Canadian fund’s investment was conditioned on RpK raising the balance of the $500 million required from other investors – based on the Commercial Space Act, a substantial portion of those investors would need to come from the U.S. RpK modified its Confidential Information Memorandum accordingly and conducted a series of 26 presentations to U.S. investors between June 21 and July 19. On July 19, RpK and Jeffries Quarterdeck hosted an “Investor Day” in New York, which was attended by NASA, major RpK contractors, and the Canadian investment fund.”

The letter goes on describe that “Following completion of the road shows and the investor day presentation, RpK and Jefferies Quarterdeck continued to work with potential investors throughout July and August. In addition, MDA and the Canadian investment fund pursued other contacts in the U.S. investment community.”

With all going well for RpK the events surrounding this period came at a time that ultimately let to the withdrawal by both the Canadian investment fund and MDA from the financing effort:

“Simply put, MDA, the Canadian fund, and other potential investors were immediately concerned that the assumption underlying RpK’s financing – that NASA will use the K-1 if it flies – may not be as reasonable as originally thought. Once understood, the RFI confirmed to investors the risks associated with investing in RpK without a firm commitment by NASA to an ISS servicing contract. Again, investor feedback to RpK and to the NASA COTS Program Office emphasized the market reality that no financial investor is going to pay to build hardware for NASA (including RpK’s pressurized and unpressurized cargo modules) if NASA is not committed to using them once they are built”

Furthermore RpK suggest that this led to investors being cautious and they adjusted the risk profiles of acceptable investments. Again the concern for RpK was that NASA did not have a firm commitment and several firms sadly discontinued discussions with RpK, MDA and the Canadian investment fund.

The Canadian investment fund however did speak with RpK. They explained their reasons for withdrawing their commitment to RpK for the near term.

“The primary reason, highlighted by discussions with potential U.S. investors, was the uncertain revenue stream from ISS servicing. In their view, the current conditions, particularly the lack of a servicing commitment from NASA, makes any COTS participant not financeable”

Further adding to the seeming lack of commitment from NASA the lead investor emphasized their “strong continuing interest and that they would reconsider their position if NASA could commit to a defined revenue stream post COTS demonstration”

After defending RpK and highlighting how there have been many NASA choices that have ultimately lead to the situation being as it is for RpK. The letter contends the decision and emphasises that “there is no significant benefit to NASA in doing so based on the market realities driven by those same NASA decisions. Given the structure of Phase 1 of COTS and NASA’s subsequent decisions, it is unlikely that any provider will be able to obtain near term funding from the capital markets.”

It is also highlighted that RpK do continue to make steady technical progress. Including in August where there was completion of the Preliminary Design Review for the Pressurized Cargo Module.

With regards to not completing the Critical Design Review for the Pressurized Cargo Module in August the letter states that there has been an understanding for several months, again it highlights NASA’s recent decisions regarding COTS.

“RpK and the NASA COTS Program Office have had an understanding for several months that the date for completion of Milestone 5 would be moved based on the timing of completion of Milestone 4. As discussed above, NASA’s own decisions and actions have significantly impacted our ability to complete Milestone 4 on the original schedule.”

Ending the letter RpK emphasises that it does not feel it is at fault for the current situation, RpK adds “the difficulty with completing its financing is not for lack of effort on RpK’s part, or the lack of technical or programmatic progress. Rather, it is the result of the lack of commitment by NASA in Phase 1 of the COTS Program, exacerbated by the inconsistent and sometimes contradictory decisions and public messages put out by NASA, that have led to the current situation”

The letter ends with RpK suggesting that they believe that they can still “develop and demonstrate the vehicles, systems, and operations needed to resupply, return cargo from, and transport crew to and from a human space facility, with the International Space Station,” as contemplated in the original COTS announcement and which formed the basis for the Space Act Agreement.” A further statement suggests their feelings on the RFI “We further believe that the current RFI is inconsistent with the original COTS announcement and that NASA issuance of such a defective document adversely impacted RpK’s near term financing efforts as discussed above.”

RpK therefore asks NASA to reconsider the decision in both the interests of RpK and NASA. They ask that there meaningful discussions be held to resolve the situation.

“If NASA declines to do so, we must reserve all of our rights under the Space Act Agreement and applicable law, including without limitation the right to treat NASA’s actions as either a breach by NASA of the agreement or a unilateral termination by NASA without cause.”

The letter leaves on a note that suggests that negotiations would be by far the best resolution for both parties. RpK do not see the situation as one they have caused, the letter seems to highlight how they feel NASA has lead to a lot of the problems especially regarding funding. The letter also questions NASA’s commitment to COTS and commercial spaceflight.

With regards to NASA trying to show it has got an interest in public space flight, this could be an opportunity for them to reconsider their decision. The NASA Space Shuttle is earmarked to retire in 2010 and with current timescales the Orion (Manned Space craft) will not be flying until approximately 2015.

The decision will not be an easy one to make for NASA, they have to think about not only the 2010 to 1015 gap but perhaps prove to people that they can plan ahead, see through long-term commitments and support commercial space flight.

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