GeoEye-2 Price Tag Rises on Ground System Upgrades

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PARIS — Earth imaging company GeoEye now expects its GeoEye-2 high-resolution optical satellite will cost as much as $850 million when investment in an improved ground network ordered by its U.S. government customer is included in the bill, GeoEye officials said Nov. 9.

The cost of GeoEye-2, under construction by Lockheed Martin Space Systems and scheduled for launch on a Lockheed Martin Atlas 5 rocket, is indicative of the inflation that has swept through the entire aerospace sector in the past few years, GeoEye officials said.

Launch prices in particular, they said, have escalated substantially since the company contracted for the launch of the GeoEye-1 satellite, which was placed into orbit in September 2008 and entered operations in February 2009. GeoEye-1 cost about $480 million.

The new GeoEye-2 cost estimate is $50 million higher than previous forecasts and reflects an investment the company will make in ground infrastructure that will operate with GeoEye-2.

In a conference call with investors, GeoEye Chief Financial Officer Joseph F. Greeves said the ground-infrastructure investment will be financed by the U.S. National Geospatial-Intelligence Agency (NGA), which in August contracted with GeoEye to purchase $2.8 billion in goods and services over 10 years under a program called EnhancedView.

GeoEye Chief Executive Matthew O’Connell said NGA will continue to pay the equivalent of $150 million per year — the same amount under EnhancedView’s predecessor program — until GeoEye is launched in 2013. Once the new satellite is in service, and the ground infrastructure enhancements are complete, NGA payments will increase by $174 million per year for the seven remaining years of the contract.

A second piece of the EnhancedView contract, valued at up to $702 million, is for value-added products and services. GeoEye’s competitor, DigitalGlobe of Longmont, Colo., which received a similar EnhancedView award, has said the value-added piece of the contract may be affected by the severe budget pressure on U.S. government agencies.

The third slice of GeoEye’s EnhancedView contract, valued at $337 million, will be NGA’s contribution to the cost of the GeoEye-2 program. About a third of this payment is due in 2012, when GeoEye-2 is delivered for testing, with the remaining amount due once the satellite enters service in 2013, Dulles, Va.-based GeoEye said in a Nov. 9 filing with the U.S. Securities and Exchange Commission (SEC).

GeoEye said its three satellites — GeoEye-1, the main breadwinner, scheduled to operate through 2017; Ikonos, launched in 1997 and expected to be retired in late 2011; and OrbView-2, launched in 1997 and now of marginal value — are operating well.

But the company also said it is monitoring a picture quality issue on GeoEye-1 that was first detected in May 2009 and now appears to have spread. The issue, which restricts certain GeoEye-1 images to black-and-white mode within what the company called “a narrow band of pixels within an image,” was overcome by changing the way the satellite is operated.

More recently, the company said in its SEC filing, “an adjacent band of pixels experienced the same anomaly.” As with the original incident, the problem does not affect black-and-white image quality, and GeoEye believes a similar change in the way it operates the satellite will take care of the problem. But any further anomalies, especially if they require separate operational modifications, could affect imagery collection, the company said.

GeoEye also is weighing whether the cost of maintaining OrbView-2 in operational status is still worth the effort. The satellite, which is past its designed retirement date, has had several malfunctions that have forced ground teams to place it into safe mode, resolve the issue and then return OrbView-2 to operations.

The most recent episode occurred in September following a component malfunction. “The impact to our revenue of discontinuing the satellite would be nominal,” GeoEye said in its SEC filing.

Ikonos, which continues to generate less than $25 million in annual revenue, could be retired, and its customer traffic moved to GeoEye-1, without much trouble, Greeves said during the conference call.

GeoEye reported that revenue for the nine months ending Sept. 30 totaled $247.8 million, up 25.2 percent over the same period last year. The company said full-year 2010 revenue should be between $325 million and $330 million. EBITDA, or earnings before interest, taxes, depreciation and amortization, will be between 50 percent and 55 percent of revenue, with an operating-profit margin of 30 percent.