Intelsat Cutting More Expenses, Including Insurance

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Intelsat Ltd. reported only a marginal increase in video contracts in 2004 despite the billion-dollar purchase of Loral’s Atlantic satellite fleet early in the year, but company officials said their government-services business was thriving and total backlog, at $4 billion, is stable.

Company officials declined to forecast revenues for 2005 and also refused to comment on a possible initial public stock offering (IPO). Bermuda-headquartered, Washington-based Intelsat is owned by a consortium of private-equity investors.

Two Intelsat competitors have announced their intent to conduct IPOs in 2005, and others are considering whether to do likewise.

Like its competitors, Intelsat is at the low end of its capital-expenditure cycle. Its 27 fully-owned and two partially owned satellites average 11 years in age, and beyond a satellite launch scheduled for this year, Intelsat sees no further launches until 2008. It has one satellite on order.

In the meantime, Intelsat is keeping costs down, reducing staff and trimming expenses where it can.

In a March 3 conference call with financial analysts to outline its year-2004 performance, Intelsat said satellite insurance is the latest cost item it is shedding in favor of cash flow. Starting this month, Intelsat will no longer insure its in-orbit fleet beyond the first 6-12 months in orbit.

Intelsat Chief Financial Officer William J. Atkins said Intelsat expects to pocket a savings of $10 million to $15 million per year in premium payments, which for in-orbit satellites typically are 2-3 percent of insured value per year.

Intelsat up to now has declined to insure its satellites in orbit if their book value is less than $150 million, and has insured the remaining satellites only for their value in excess of $150 million.

That policy will end the week of March 14, when Intelsat will not renew an insurance policy covering most of its insured fleet.

Citing the increase in satellite insurance rates and the stricter policy terms covering satellites with suspect components, Atkins said it makes more sense for Intelsat to save the money and to use its in-orbit flexibility in the event of a satellite failure.

“Insurance is not something we wish to continue,” Atkins said. He said Intelsat, through the use of replacement capacity, has recovered more than 75 percent of the business on the IA-7 satellite that failed for a week in December, and more than 50 percent of the business on the Intelsat 804 spacecraft that was declared a total loss in January.

He said Intelsat’s debt obligations do not require the company to carry extra cash on its books to account for the lack of insurance.

Intelsat will continue to insure the launch and early operations of its satellites, whose policies cover the launch itself plus up to a year of operations. Intelsat is paying $65 million to cover the launch and six months’ operations of its IA-8 satellite, scheduled for launch on a Sea Launch vehicle this year, Atkins said.

The launch had been scheduled for December but was postponed pending a review of a failure of the IA-7 satellite in December. IA-7 and IA-8 are similar Space Systems/Loral-built spacecraft.

Intelsat said an investigation into the IA-7 failure has concluded that it was the result of a design flaw in the satellite that also appears in the IA-6 satellite but not in the IA-8. With the IA-8 launch coming up in a few months, Intelsat officials said they are not concerned about a business disruption even if IA-7 or IA-6 encounter problems in orbit.

Intelsat took a charge of $84.4 million in December to account for the IA-7 failure and expects to record a $73 million charge in the first quarter of 2005 to account for the total loss of the Intelsat 804 satellite.

It was the December charge that weighed on Intelsat’s 2004 performance. The company, which is the world’s second-largest commercial satellite-fleet operator, said sales were $1.04 billion, a 10 percent increase over 2003 in large measure due to the purchase of the Loral assets, a deal that closed in March 2004.

The net loss of $37 million for the year contrasts with net income of $181.1 million for 2003. In addition to the IA-7 satellite loss, Intelsat in 2004 wrote off its investment in a Hong Kong satellite-television venture.

Outgoing Chief Executive Conny L. Kullman, who has been named Intelsat chairman, said that despite the loss, “our business has stabilized and is pointed in the right direction.”

For Intelsat, pointing in the right direction means compensating the steady erosion of its legacy telephone-transmissions business by investing in higher-growth sectors, especially video distribution.

Intelsat purchased the Loral fleet in 2004 mainly on the strength of those satellites’ potential to permit Intelsat to grab video-transmission market share from PanAmSat Corp. of Wilton, Conn., and SES Global’s SES Americom subsidiary.

In the conference call, Intelsat officials did not specifically address market-share issues. But in the March 3 earnings release, the company said its video business, which accounted for 16 percent of sales in the fourth quarter of 2003, totaled 18 percent for the fourth quarter of 2004.

The company’s government-services business, which includes the Comsat General Corp. business the company purchased from Lockheed Martin in 2004 and merged with Intelsat’s ongoing government business, reported sharp growth in 2004. Government and military customers represented 19 percent of Intelsat’s sales in the fourth quarter of 2004, compared to 11 percent in the same period the previous year.

Ramu V. Potarazu, Intelsat chief operating officer, said the company “was already the top [satellite services] provider to NATO and the U.S. government, and the Comsat General purchase has broadened our reach.”