seabras-1 – risk and insurance

Introduction

This document is based on discussions with officers of Seaborn Networks LLC and upon review of the ASN Supply Contract. Its purpose is to describe the general nature of physical, insurable, risk to which the Project may be exposed. As such this document will be of interest both to Seaborn Networks internally and also to their advisors and proposed financiers, but cannot be relied upon by any reader other than Seaborn Networks LLC to which our duty is solely due in accordance with our terms of appointment dated October 2012.

Background

The Project: Seabras-1 is a four fiber pair 32 Tbps submarine fiber optic cable system to be built between Wall Township, New Jersey and Santos, Brazil, with a branching unit landing in Fortaleza, Brazil. Physical completion is currently planned for July 2014, with operational activation in Quarter 1 2015.

The project is currently sponsored and managed by Seaborn Networks, LLC with offices at 100 Cummings Center, Suite 435-P, Beverly, MA 01915. As of October 2012 this space is utilised primarily as meeting space, with desks occupied by the CEO and COO, but by July 2013 it may be the office base for a total of 11 general and administration staff and will grow to 19 by June 2014. [is either CEO / COO employed by Seaborn Networks? when will the first staff arrive?]

The Engineering and Network Operations heads will be based at the network operations center (NOC), but as of October 2012 the specific location of the NOC remains to be determined. For planning purposes, it is intended that the primary NOC will be in South Florida (greater Miami area) and that the CTO and General Counsel will have offices there. By end 2013 there will be 2 Engineers at the NOC, growing to 5 with 8 operations staff by end 2014, but will grow by December 2015 to 8 engineering and 27 operations plus the CTO and GC.

The corporate structure of Project ownership and management once the system is operational is currently un-finalised, but planning assumes that the structure will include local Brazilian and US entities, respectively referenced as Seaborn Networks Brazil and Seaborn Networks International.

It is the Project’s intention that the Seabras-1 cable landing stations will be located at (a) the Wall Cable Landing Station, Wall Township, New Jersey, USA (b) Telefonica’s cable station in Fortaleza, Brazil (“Fortaleza Landing”) and (c) Telefonica’s cable station in Santos, Brazil (“Santos Landing”). It is planned that while the Project will retain ownership of the land cables and the system-specific equipment within the landing stations, via SN Brazil and SN International, engineering maintenance and insurance will be contracted-out to the bailee landing station parties, which for these purposes will act as agents to the owners (reporting to the NOC engineering staff for system administration purposes).

The Project timetable is already underway, with the signature in September 2012 of a turn-key supply contract with Alcatel-Lucent Submarine Networks (ASN) and the issuance to them 26^th September 2012 of a Notice to Proceed relating to pre-lay planning to result in a desk-top study and detailed routing proposals by end December 2012. Detailed surveys are planned to be finished by April 2013; Cables ready to load August 2013 and the marine lays finished by end May 2014. Land cables and equipment should be installed in each landing station, New Jersey Fortaleza and at Santos contemporaneously from December 2013 and should be complete by end March 2014, to be ready for the respective submarine cable.

Retained and allocated risk exposures during installation

Design of physical systems and routes is allocated to ASN under the turn-key Master Supply Contract, under which the configuration and performance specifications (against which ASN is to build or procure) are set out.

Procurement, lay and installation of all components is allocated to ASN under the Master Supply Contract, under which ASN retains full title and responsibility for its security, upkeep and maintenance until Provisional Acceptance.

Some permits are the responsibility of Seaborn to procure, while most are allocated to ASN to procure. During the survey period prior to commencement of the ocean lay the existence of submarine utilities and their identities will be discovered. Seaborn will then decide upon to appropriateness of negotiations with that utility for crossing rights and, if appropriate, will proceed to obtain a Crossing Agreement in the standard trade format.

After completion and testing, when Provisional Acceptance is agreed title to the Seabras-1 system will transfer to Seaborn Networks companies (subject, of course, to proper payments) and with it all risk related to the system will also transfer to Seaborn.

Under the Supply Contract, ASN is obliged to insure (as described in Schedule 7):

– Comprehensive General Liability in an amount of USD10,000,000 any one accident and in the aggregate (implicitly in respect of ASN’s operations other than are shipboard, which will be covered by the P&I insurance)

– “All Risks” insurance in the replacement amount of the cable system

– Charterers’ Liability insurance in an amount “appropriate” to ASN’s exposure related to a chartered vessel

– P&I on the vessel used by ASN, including all third party liability arising out of its Specialist Operation

– “Hull & Machinery” insurance (implicitly covering damage to the vessel) in the amount of the full value of the vessel.

Accordingly, during installation, from Notice to Proceed until Provisional Acceptance, full risks of damage (fortuitous or otherwise) to the system and liabilities to third parties incurred by ASN arising out of the works would in theory be protected by these insurances.

These insurances do not cover the consequences of delay caused by any of the covered fortuities. Most fortuities would fall under one or other of the “force majeure” risks (per clause 15.1).

Under clause 10.1, each party indemnifies the other for all losses or liabilities for death, personal injury or property damage arising out of any breach or negligent or otherwise wrongful act or omission by them.

In order to avoid subrogation, Seaborn has or will requested that ASN procures the addition of Seaborn as jointly insured on all property insurances and as insured principal on all liability insurances.

For their part, as office occupiers, Seaborn has or will procure an annual “office insurance package” in respect of each of their offices (currently only at Cummings Centre, Beverly) covering their property (of which they currently have none) and their public liability, together with WCA and Employer’s Liability in respect of their staff (of which they currently have none).

As marine ASN operations commence, Seaborn will additionally procure maritime Third Party Liability for the Project in an amount of USD25,000,000 any one accident or occurrence (unlimited in number of occurrences) for the period until Provisional Acceptance.

Seaborn will also procure Maritime Employer’s Liability in an amount of USD10,000,000 any one accident or occurrence (unlimited in number of occurrences) from the time their first representative goes onboard the layship.

With respect to any Crossing Agreement calling for insurance of strict liability accepted by Seaborn (as the crossing party), Seaborn will also procure Liability insurance in an amount of the agreed cap (typically for any one accident or occurrence but unlimited in number of occurrences) from the time of commencement of lay, or of later signature of the respective Agreement.

Retained and allocated risk exposures after Provisional Acceptance

After transfer of title and risk to Seaborn, it is intended that an Area Maintenance Agreement (AMAs) is signed, whereby all fortuitous damage (whether of internal / defect or external cause) will be repaired by the service company. AMAs are typically arranged as a form of mutual benefit structure whereby members contribute to the overall costs of procuring and maintaining ships and engineering expertise capable of regular visits and surveys of the members’ cables. The AMAs also provide response services triggered by fortuitous damage, which accrue additional contributions from that cable’s member.

The appropriate AMA for Seabras-1 would be ACMA (the Atlantic Cable Maintenance and Repair Agreement).

As part of the desktop study undertaken by ASN will be an expert technical estimation of the frequency of damage by shipping or fishing activities along the cable route, as mitigated by recommended burial or other defensive strategies.

It is currently estimated that the range of repair costs would be between USD130,500 for a 2.5 day shallow water outage, to USD450,000 for a 9 day deep water outage (including 6 days mobilisation / transit). Seaborn currently plan to absorb this exposure without insurance, but await review of the desktop study.

Meanwhile, as owner and operator of an international submarine cable, even though their exposure to directly incurred personal injury is insignificant, Seaborn recognises that it has an exposure to ship or fishing vessel sacrifices under the local enactments of the Submarine Telegraphs Convention 1884. Accordingly Seaborn plans to procure annual Third Party Liability Insurance in respect of the submarine cable (between beach manholes) for an amount of USD25,000,000 any one accident or occurrence (unlimited in number of occurrences)

As office occupiers, Seaborn has or will procure an annual “office insurance package” in respect of each of their offices (at Cummings Centre, Beverly and for the NOC and for one or both of Santos and Fortaliza, Brazil) covering their office property and their public liability, together with WCA and Employer’s Liability in respect of their staff (of which they currently have none).

With respect to any Crossing Agreement calling for insurance of strict liability accepted by Seaborn (as the crossing party), Seaborn will also procure Liability insurance in an amount of the agreed cap (typically for any one accident or occurrence but unlimited in number of occurrences) annually from the provisional acceptance.

Meanwhile, under the Supply Contract (Clause 8. Warranty) ASN has continuing responsibility to complete “punch-list” items and to correct defects if and as they appear at their cost and expense. Their obligations with regard to the litany of insurances in Schedule 7 are not interrupted by the provisional acceptance and risk transfer, with the implication that there will be such insurance available to protect each incidence of repairs.

It is anticipated that within the sales strategy currently adopted by Seaborn, of selling long-term indefeasible rights of use (IRUs), the protection of interruption to the ongoing (operating and maintenance) revenue stream by insurance of fortuitous incidents would be uneconomical if available (which is uncertain). [would a 9 day interruption be reflected in reduced O&M payments anyway?]