Reduced Debt Allows Intelsat to Scale Back Lease Discounts

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PARIS — Satellite fleet operator Intelsat on Aug. 1 said progress on its debt reduction program is allowing the company to reduce its reliance on customer prepayments, a practice in which Intelsat offers discounts in return for receiving cash years before the satellite bandwidth is provided.

In a conference call with investors, Intelsat also said that while its revenue has suffered from declining U.S. government business, its profitability has not seen similar declines because the cuts have mainly targeted third-party capacity that Intelsat sells on behalf of other satellite operators.

Luxembourg- and Washington-based Intelsat, which is the world’s largest satellite fleet operator by revenue, has been offering discounts to major customers that agree to pay for part of their satellite capacity early in the satellite’s construction phase, which is often two to three years before launch. Intelsat can use these payments to offset the capital expense of building the satellite, or for other purposes. Intelsat Chief Financial Officer Michael McDonnell said the discount from Intelsat’s usual lease rates is usually less than 10 percent.

The down side to the prepayments, in addition to the discounted pricing, is that Intelsat forgoes the revenue jump that typically occurs when a new satellite is placed into service. 

Intelsat had planned to collect a combined $300 million in prepayments in 2013 and 2014. McDonnell said during the call that the company would limit its prepayments to no more than $200 million over the same two years, and would cap its 2015 prepayments at between $25 million and $50 million.

“We won’t rule it out in the future, but we’re going to take a more selective prepayment approach,” McDonnell said. “Given our free cash flow, we don’t feel it’s necessary.”

Intelsat has been refinancing its debt to take advantage of lower interest rates. While still high — $15.35 billion as of June 30 — the long-term debt has been coming down and has dropped by nearly $500 million since Dec. 31.

Intelsat’s U.S. government business has been declining in recent months because of U.S. troop drawdowns, mandatory federal government budget cuts and the prospect of specific reductions in future U.S. military spending.

For the three months ending June 30, revenue from government customers was down 2 percent, to $122 million, compared with a year ago. But the reductions have disproportionately hit contracts in which Intelsat bundles its own satellite capacity and that of others for sale to government customers.

Intelsat’s core business of selling bandwidth on its own fleet generates gross profit margins, measured in earnings before interest, taxes, depreciation and amortization, of nearly 80 percent. Intelsat’s margin for sales of third-party capacity is “in the teens,” McDonnell said, depending on whether the contract includes hardware or just satellite bandwidth.

Intelsat’s government revenue was 55 percent from its own network and 45 percent from other parties a year ago. Now it’s 60 percent Intelsat capacity and 40 percent from others.

Intelsat and other commercial operators selling to the U.S. government have been trying for years to persuade U.S. authorities to make it easier for defense managers to purchase satellite bandwidth for periods of more than a year.

Longer-term contracts cost less per delivered megahertz than short-term leases, but commercial operators nonetheless prefer the stability and predictability of multiyear commitments.

The private sector has not had much success in this effort. Intelsat Chief Executive David McGlade said during the call that the most recent attempt was defeated when the U.S. Office of Management and Budget and the U.S. Congressional Budget Office (CBO) marshaled arguments against it.

Dianne J. VanBeber, Intelsat vice president for investor relations, said in an Aug. 1 email that the CBO “has to score any budget submissions, and the way to get a passing score is to show that you have dollars identified today to cover the present value of the multi-year commitment.  If you do not have the means to fund up front, then they do not recommend inclusion in the budget.”

“It’s not easy to get there given the political environment,” McGlade said during the call. “But there is an appetite [in the government] to procure longer term for better pricing. We’ll continue to fight the fight.”