DBRS Confirms EchoStar’s Ratings at BB and BB (low)

Dominion Bond Rating Service (DBRS) has today confirmed the ratings of EchoStar Communications Corporation (EchoStar or the Company) and EchoStar DBS Corporation at BB (low) and BB, respectively. The trend is Stable. EchoStar’s ratings reflect ongoing subscriber growth and scale benefits despite operating in an increasingly competitive market; and higher debt levels and the expectation that free cash flow should improve and be roughly breakeven in 2006.

Despite subscriber growth expected to continue over the next 18 months driven by EchoStar’s value proposition; competitive advantages such as its high-definition (HD) channel line-up (including serving more local markets with HD channels) and ethnic programming; and a renewed distribution agreement with AT&T Inc., the Company continues to subsidize this growth through higher subscriber acquisition costs (SAC). Acquisition costs are increasing – currently over $650 per subscriber – as higher-value set-top boxes and more multiple-room boxes are deployed. However, DBRS believes that with churn levels remaining reasonable at slightly above 1.5% per month, this investment in subscriber growth continues to be practical for EchoStar for the time being despite ARPU growth not keeping pace. This strategy could be a concern and become uneconomic for the Company should churn levels increase above the 2% level.

While cash flow from operations continues to improve as a result of this growth, subscribers are increasingly leasing equipment (treated as capex), which is driving capex levels higher. With capital intensity increasing, DBRS believes this somewhat reduces EchoStar’s competitive advantage as it places it more on-par with its terrestrial cable and telco competitors. DBRS expects the competitive intensity to increase for EchoStar and its stand-alone video service as cable operators are having success in bundling their services, which has, after many years of modest erosion, led to growth in video subscribers; and the telcos are beginning to deploy a terrestrial video service as a new product.

While DBRS notes that gross debt levels have increased by $1 billion in Q1 2006, DBRS believes that this remains consistent with its current ratings as cash flow from operations continues to improve. However, DBRS does note that EchoStar continues to operate with greater leverage than its DTH peers. As free cash flow is expected to be roughly breakeven in 2006 as the Company continues to increase its leased equipment strategy and sizably invests in its satellite fleet (six are currently being constructed), DBRS expects gross debt levels to remain stable for the next 18 months. Additionally, DBRS expects the Company to direct some of its $2.6 billion in cash for potential acquisitions, additional investments in new technologies and, should these not materialize, further returns to shareholders (likely through share repurchases).

While DBRS expects that EchoStar can maintain its current ratings in an increasingly competitive environment, it will need to generate meaningful levels of recurring free cash flow before any rating improvement would be considered.

Notes:
These ratings are based on public information.
All figures in U.S. dollars unless otherwise noted.