UPDATED June 29 at 5:02 pm EDT
PARIS — Faced with budget cuts that could be distributed between two commercial Earth observation imagery providers or used to push one close to the edge, the U.S. government on June 22 told imagery provider GeoEye that it will be canceling key elements of a 10-year, $3.8 billion contract with the company.
The exact size of the funding gap between what GeoEye expected and what it ultimately will receive remains unclear. Much depends on whether the U.S. Congress agrees to the apparent policy shift reducing the role of commercial suppliers in meeting U.S. government demand for satellite imagery.
Key U.S. Senate and House committees have protested the move after viewing the classified section of U.S. President Barack Obama’s proposed fiscal year 2013 spending plan relating to satellite imagery purchases.
Two June 22 letters to Herndon, Va.-based GeoEye Inc. from the U.S. National Geospatial-Intelligence Agency (NGA) appear to reflect the Obama administration’s conclusion that it does not need to rely on commercial providers GeoEye and competitor DigitalGlobe as much as had been foreseen under the 10-year EnhancedView contract.
Longmont, Colo.-based DigitalGlobe recently announced that it has received NGA notification that the agency will make no changes to next year’s payments to the company under its share of the $7.3 billion EnhancedView program. GeoEye and DigitalGlobe are supposed to be dividing that sum in about equal portions.
EnhancedView, which began in September 2010, is a one-year commitment with nine annual renewals.
GeoEye had been awaiting word on whether its portion of EnhancedView would likewise be spared pending a resolution of the overall federal budget for the fiscal year beginning Oct. 1.
The NGA letters make clear that this is not the government’s intention.
The two letters deal with two funding streams that GeoEye had been relying on under |EnhancedView.
The more important of the two is the Service-Level Agreement (SLA), which provides for monthly payments in exchange for delivery of certain quantities of imagery and other services.
Under GeoEye’s EnhancedView SLA, the company was to receive $150 million per year until its next high-resolution Earth imaging satellite, GeoEye-2, is fully functional in orbit. The satellite is under construction and scheduled for launch in mid-2013, with operations to start around September of that year. At that point, NGA’s payments to GeoEye were scheduled increase to $333.6 million per year for the remainder of the EnhancedView contract.
NGA’s proposed changes would affect this part of the contract for a one-year payment period that begins in September. The agency says it will pay GeoEye $12.5 million per month from September through November — the same as the original contract terms.
A separate section of the contract would result in payments of $750,000 per month over the same three-month period, assuming GeoEye establishes Web-hosting platforms to deliver satellite data to the U.S. Defense Department’s classified Internet router network by Aug. 15. GeoEye officials, in a June 25 conference call with investors, said the Web-hosting requirements are not new and that the company sees no problem in satisfying them.
For the remaining nine months — December 2012 through August 2013 — NGA proposes a payment of $13.25 million per month, again assuming the classified Web-hosting platform is achieved, but only if “funding becomes available in FY13,” according to the letter.
If the milestones are met and the funding is available, the total NGA payments to GeoEye for the year beginning in September would be $159 million, or $9 million more than the company had expected to receive.
But by raising the possibility that funding could be cut or cease altogether starting this coming December, NGA is placing GeoEye in a fragile position relative to DigitalGlobe.
The second NGA letter deals with reimbursing part of the cost of building GeoEye-2.
GeoEye has said the satellite, under construction by Lockheed Martin Space Systems, will cost $835 million including launch and insurance.
NGA had agreed to reimburse GeoEye up to $337 million of that figure, with payments timed to milestones in the satellite’s progress to launch and in-orbit operations.
GeoEye on June 28 said it passed a key milestone in June and has now received $111 million of that total. In its conference call and in a June 25 submission to the U.S. Securities and Exchange Commission, GeoEye said the NGA had already obligated another $70 million that would be due later in GeoEye-2’s development.
GeoEye had said there were “continued uncertainties” about whether the remaining $156 million in GeoEye-2 cost reimbursements would be forthcoming.
The NGA letter puts those uncertainties to rest: There will be no payments following the monies already set aside.
In its letter, NGA reminds GeoEye of a letter the agency had sent April 30 saying that “the government did not have additional funding” for GeoEye-2 beyond what had been committed.
Four days after it received this letter, whose text it has not disclosed, GeoEye made public its offer to acquire DigitalGlobe. DigitalGlobe has rejected the offer.
NGA says the remaining obligated funds will be subject to four milestones in GeoEye-2 development. The agency also asks GeoEye to submit proof that it has the resources to complete GeoEye-2 development.
GeoEye said it “intends to provide the requested information in a timely manner and engage in negotiations with NGA on these proposals.”
The Senate Armed Services Committee on June 4 recommended that the proposed EnhancedView cuts be suspended pending a full study of the costs and benefits of having two commercial Earth observation imagery providers to the U.S. government in addition to the government’s own observation satellites.
The committee called the proposed cuts “drastic” and said they “would result in the elimination of one of the two competing commercial data provider companies from government procurement, and result in the collapse of one of the companies or a merger or acquisition.”
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