Rocketplane Kistler (RpK) has written a letter to NASA’s Scott Horowitz, asking him to reconsider the decision to issue the company with a 30 day notice of termination of their COTS contract.
The seven page letter – sent to Horowitz in the latter part of last month – 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.
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The notice of termination, from Horowitz, cited the failure of RpK to meet the required second financing round milestone 4 in May. It also cited the failure to fully complete Milestone 5, a Critical Design Review of the Pressurized Cargo Module design due to an apparent lack of funding to complete the work. This led to the formal pre-requisite to terminate NASA’s $207 million contract with RpK, with 30 days notice.
Rocketplane Kistler was awarded the COTS contract by NASA last year to develop their K-1 launch vehicle to resupply the ISS (International Space Station). The contract was worth $207 million, but required RpK to raise approximately $500 million in private matching funds. The company successfully raised an initial $40 million of private financing last year, but then fell behind, leading to the notice of termination from NASA.
‘RpK strongly disagrees with the implied conclusion that RpK is at fault for failing to meet the milestones on the dates specified, or that the failure to meet the date for either milestone is solely as a result of actions or perceived lack of actions by RpK,’ noted the letter.
‘As has been publicly articulated by NASA on numerous occasions, one major purpose of RpK’s Space Act Agreement with NASA was to enable RpK to demonstrate the capability of the K-1 Reusable Space Transportation Vehicle to provide cargo service to and from the International Space Station.
‘The original COTS announcement stated that Phase 1 participants would demonstrate capabilities, and that in Phase 2, NASA would award servicing contracts based on demonstrated capabilities.
‘From the beginning, both RpK and NASA knew that long term financing for the K-1 Program or any other commercial provider depended on a firm commitment by NASA to use commercial providers to service the ISS. In other words, no one is going to invest the capital required to build a vehicle to service the ISS if NASA isn’t committed to use the capabilities after successfully demonstrating the ability to safely provide cargo resupply to the ISS.
RpK claim that NASA’s initial 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 – including risks that NASA may change its mind, not use commercial providers, or as indicated by the recent RFI (Request for Information) for ISS servicing,’ added the letter.
Citing ‘very detrimental subsequent decisions by NASA,’ RpK claim they may have otherwise overcome the funding issues during Phase 1 of COTS, claiming NASA is responsible for ‘turning investor concerns into reality.’
‘Those concerns ultimately led to the withdrawal of $300 million in financing commitments obtained by RpK for the K-1 Program,’ RpK claim, before listing those concerns noted.
‘Two events, in particular generated these concerns. 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. Senior NASA officials were widely quoted in the press at the time suggesting that NASA does not see COTS as the preferred alternative for resupply of the ISS. In this regard, you may well recall my stated concerns to you regarding the potential impact to RpK financing efforts.
‘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 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.’
Again citing NASA’s decision to extend the contract for Russian cargo and crew services to 2011 as detrimental to their investment drive, RpK claim they were misinformed by original COTS outlines as to how much impact the final years of the deal with Roscosmos would have on potential COTS related business.
‘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,’ RpK added.
‘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.
‘Public comments by certain senior NASA personnel surrounding the Progress/Soyuz transaction and otherwise during this period heightened the concerns being raised by Jefferies Quarterdeck about the basis of our original projections. Those issues had to be resolved before Jefferies Quarterdeck – RpK’s investment banker – would solicit investment from third parties.
‘RpK was required to make significant changes to its business plan and projections to accommodate NASA’s reduced requirements.’
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.’
That lead investor came in the form of a Canadian investor, offering to pump $200 million into RpK. It’s not clear if they would have been willing to invest yet more monies, although this was automatically restricted – by way of total investment – by COTS rules, which demand a sizeable level of investment has to come from an American source.
‘RpK immediately adjusted its near-term focus to identify such a lead investor. We pursued a number of avenues – interestingly, none of the major U.S. aerospace companies was interested, including several who were or are contractors to RpK.
‘Instead, with the support of MacDonald Detwiler and Associates, in early June we received an expression of interest from a large Canadian investment fund to finance a significant portion or all of our $500 million external financing requirement and to be our lead investor. Ultimately, that investor committed to fund at least $200 million.
‘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).’
Approval for the transaction from the regulatory authorities was requested in July, and completed in August. However, the Canadian investment was conditioned on RpK raising the balance of the $500 million – leaving around $250 million of available investment – from other interested parties.
RpK conducted a series of 26 presentations to US investors between June 21 and July 19 – the latter in New York, which ‘was attended by NASA, major RpK contractors, and the Canadian investment fund. Potential investors attending included large investment funds with investments in aerospace and defense.’
RpK claim that as of August, they had commitments for $300 million – topped up by other Canadian investment – out of the $500 million, required to fully fund the K-1 Program.
However, this major Canadian investment fell through, partly because of – as RpK claim – the US credit markets suffering significant reversals, leading to many investors put a hold on further transactions, and also because of NASA decisions relating to COTS.
‘NASA’s ISS Program office issued the RFI for Phase 2 of the COTS Program on August 7. The RFI is certainly inconsistent with what NASA defined in the COTS Announcement in a number of respects and suggested to potential financial investors that NASA has abandoned or hedged its COTS commitment to commercial space,’ listed RpK.
‘Notably, the RFI abandons the COTS Announcement’s requirement for demonstration of capability in Phase 1, and opens the door for major contractors to propose traditional, non-commercial options and not based on any demonstrated capabilities.
‘The timing of the RFI, combined with the apparent abandonment of the original COTS announcement, could not have been worse for RpK’s financing efforts. 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.
‘The fact that major US aerospace companies (with all of their financial and political clout) immediately put together teams to bid on COTS Phase 2 contracts, led at least one investor to conclude that COTS will turn into just another cost-plus NASA program.’
Confirming their withdrawal from investing in RpK on September 6, the Canadian investors cited they felt the ISS servicing contract with NASA was an ‘uncertain’ revenue stream – thus an unfeasible investment.
‘The primary reason, highlighted by discussions with potential US investors, was the uncertain revenue stream from ISS servicing,’ RpK note. ‘In their view, the current conditions, particularly the lack of a servicing commitment from NASA, makes any COTS participant not financeable.
‘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. In the end, the conclusion of the Canadian investment fund was that, absent an ISS servicing commitment from NASA, they would not finance RpK and not any other potential COTS participant.’
With only a short amount of time remaining in NASA’s notice of termination, RpK noted in the letter that NASA should reconsider carrying through their threat to end the COTS contract, citing their is no benefit to NASA in doing so, and that they’ll be unlikely to find an alternative party to take up RpK’s role.
‘The implications of this for NASA and RpK are significant. NASA may well seek to terminate RpK’s Space Act Agreement based on the failure to obtain a near term commitment for full funding, and despite the impact its own actions have had on RpK’s efforts.
‘However, I would contend 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.’
In regards to NASA outlining that RpK had failed on fully completing Milestone #5, a Critical Design Review of the Pressurized Cargo Module design, the company also gave counter points to this decision.
‘Let me next address the issue of the technical default alleged in your letter. As indicated above and contrary to the suggestion in your letter, RpK continued to make technical progress through August, including completion of the Preliminary Design Review for the Pressurized Cargo Module,’ they wrote.
‘I do not agree that RpK can be faulted for not completing Critical Design Review for the Pressurized Cargo Module in August. 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.
‘The fact is that the RpK Program Manager, his technical team, and our subcontractors have made significant technical progress since restarting the K-1 Program last fall. Their accomplishments are outlined in the AIAA Presentation that I gave.’
Interestingly, RpK changed tact in closing their letter to Horowitz, suggesting a ‘proposed modification of Space Act Agreement,’ which directly requests NASA reverse their decision to give notice of contract termination.
‘RpK’s view is that 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.
‘We believe that RpK 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.
‘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.
‘We therefore request that NASA reconsider its position and engage in meaningful discussions with respect to additional efforts that are in the best interests of both parties, as required under Article 17 of the Space Act Agreement.’
Should RpK’s request fall on deaf ears, the threat of legal action is intimated in the final sentence of the letter.
‘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.’
As to what NASA could do to change the status of the pending termination is unclear, although some of the driving forces RpK themselves note as the cause of their problems include issues which are totally irreversible.
Such cited issues, for instance, with NASA contract extension with the Russians are unlikely to hold any water in the halls of power at NASA, especially as it’s widely known that the deal had to be extended, given it was due to expire in 2006.
It is also well known that the contract with the Russians cannot go further than 2011 due to the INA (Iran Non-proliferation Act) – or INSA (Iran Syria Non-proliferation Act) as it became, which prohibits NASA from purchasing those services from Russia after that point – thus ensuring that competition after 2011 from Russian vehicles is eliminated.
This, however, could change if COTS fails to provide a manned vehicle by the end of 2011. Orion – the next NASA manned vehicle – isn’t set to fly until 2015.
What is certain is NASA’s absolute need for COTS. With the retirement of the shuttle in 2010 looming large on the horizon, the US will become reliant on foreign launch services for their continued role on the ISS, which by then will be manned by six people two of which will be Americans.
Whether there’s a way for RpK to continue in a COTS role will depend a lot on NASA’s forward planning, which is bound to have undergone study in the event of a COTS partner failing to continue its contract.
The response NASA gives to this letter will be provide a level of status in that regard.