GeoEye Expects Near-term Resolution on EnhancedView Cuts

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PARIS — Satellite Earth imagery provider GeoEye Inc. on Aug. 7 said it expects to complete negotiations with the U.S. National Geospatial-Intelligence Agency (NGA) within the next couple of weeks to determine the extent of cuts to GeoEye’s principal government contract.

The company also expects these negotiations to fix the conditions of NGA’s remaining $70 million in cost-share payments related to the GeoEye-2 satellite scheduled for launch in early 2013.

In a conference call with investors and an Aug. 7 filing with the U.S. Securities and Exchange Commission, GeoEye said its planned merger with competitor DigitalGlobe late this year or early in 2013 will not affect the company’s near-term talks with NGA or its progress toward the launch of Geoeye-2.

Herndon, Va.-based GeoEye and DigitalGlobe of Longmont, Colo., have proposed a merger that will create a single company operating a fleet of three high-resolution optical satellites instead of the four or five the companies would be operating separately.

DigitalGlobe has the upper hand in the merger mainly because NGA elected to cut GeoEye’s piece of a 10-year contract vehicle called EnhancedView, and not DigitalGlobe’s, as part of the 2013 budget submitted to Congress by the administration of U.S. President Barack Obama.

GeoEye Chief Executive Matt O’Connell said the company had tried to lobby Congress to restore EnhancedView to its originally planned funding levels for the 2013 budget year, which begins Oct. 1. Even as that effort was being mounted, NGA in late June told the company that its EnhancedView payments for the 12-month period beginning Sept. 1 likely would be cut, and perhaps cut dramatically.

That set in motion the talks that led the boards of directors of DigitalGlobe and GeoEye to agree to a merger, which still must win approval of the two companies’ shareholders and U.S. government regulatory agencies.

In the conference call, O’Connell conceded that the merger decision “has probably affected the appetite [in the U.S. Congress] for full restoration of funding” for EnhancedView. “But if funding is available, we do think NGA will exercise the option to renew for nine months.”

As described in NGA’s letters to GeoEye, the U.S. agency has proposed to renew EnhancedView for just three months starting in September, with a nine-month option to be exercised subject to the availability of funds.

Under this scenario, NGA would pay GeoEye a total of $39.75 million over the three months beginning Sept. 1, and an additional $119.25 million over the following nine months if funds are available.

Under the EnhancedView contract as originally foreseen, GeoEye would have received $12.5 million per month from NGA until GeoEye-2 got certified as fully operational around September 2013, at which point payments would rise to $27.8 million per month.

A second NGA letter proposed that $70 million in co-payments for GeoEye-2’s construction be attached to a new series of milestones that GeoEye has said pose no problem for the company. NGA already has paid $111.2 million in GeoEye-2 co-payments.

GeoEye Chief Financial Officer Joseph F. Greeves said during the call that GeoEye-2, under construction by Lockheed Martin Space Systems of Sunnyvale, Calif., is still expected to cost between $820 million and $850 million including launch and insurance. Greeves said that as of June 30, the company had spent $718 million on GeoEye-2.

NGA had previously told GeoEye that the agency’s earlier indication that it would pay $337 million in GeoEye-2 costs was no longer viable, and that the $181.2 million already approved would probably be the final total.

O’Connell said it likely would be months before the final 2013 budget emerges from Congress. Before leaving Washington for a five-week summer recess, House and Senate leaders agreed to take up in September a temporary spending measure, called a Continuing Resolution, that would fund the U.S. government at 2012 levels through March. O’Connell said a six-month Continuing Resolution would have unknown consequences on the EnhancedView budget.

Also unclear are the effects of the EnhancedView budget’s evolution, and the progress of the DigitalGlobe-GeoEye merger, on the launch of GeoEye-2.

O’Connell said a go/no-go decision on the launch of GeoEye-2 would need to be made in the first three months of 2013. The two companies have said their merger should close by then, leaving the merged company with the option of keeping GeoEye-2 on the ground as a spare.

In the meantime, GeoEye is continuing to compete with DigitalGlobe, notably on NGA’s GeoInt Data Services business, a five-year contract vehicle for which GeoEye is bidding as part of a team of other contractors. A decision is expected in January, O’Connell said.

GeoEye’s contract with Google, an exclusive relationship that gives Google “all GeoEye-1 imagery in the Internet search engine space for the next several years,” will continue after the merger along with all other GeoEye contracts, O’Connell said.

For GeoEye-1, GeoEye has recently adopted an imagery-processing technology called Enhanced Line Rate, which increases by 20 percent the speed of imagery collection and distribution. The technology had already been foreseen for GeoEye-2.

For the three months ending June 30, the U.S. government accounted for 68.5 percent of GeoEye’s revenue of $88.4 million.

 

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