Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company
or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
If an emerging growth
company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.
¨
Indicate by check mark whether the registrant is a shell
company (as defined in Exchange Act Rule 12b-2 of the Act). Yes
¨
No
þ
At March 9, 2018, 21,427,078
shares of the registrant’s voting common stock and 9,505,673 shares of the registrant’s non-voting common stock were
outstanding.
As of June 30, 2017,
the aggregate market value of the common stock, the only common equity of the registrant currently issued and outstanding, held
by non-affiliates of the registrant, was approximately $528,690,718
Indicate by a check mark whether the registrant has filed
all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to
the distribution of securities under a plan confirmed by a court. Yes
þ
No
¨
Portions of the Registrant’s
Proxy Statement for its 2018 Annual Meeting of Stockholders, which is to be filed subsequent to the date hereof, are incorporated
by reference into Part III of this Annual Report on Form 10-K.
L
ORAL SPACE AND COMMUNICATIONS INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 2017
PART I
Item 1.
Business
THE COMPANY
Overview
Loral Space & Communications
Inc., together with its subsidiaries (“Loral,” the “Company,” “we,” “our” and “us”),
is a leading satellite communications company engaged, through our ownership interests in affiliates, in satellite-based communications
services.
Satellite Services
Loral has one operating
segment consisting of satellite-based communications services.
Loral participates
in satellite services operations primarily through its 62.7% economic interest in Telesat Canada (“Telesat”), a leading
global satellite operator. Effective January 1, 2017, Telesat Holdings Inc. completed a corporate reorganization pursuant to which
Telesat Holdings Inc. amalgamated with Telesat Interco Inc., a wholly owned subsidiary, and immediately thereafter the newly amalgamated
company amalgamated with Telesat Canada. The continuing entity, existing under the laws of Canada, is named Telesat Canada.
Telesat owns and leases
a satellite fleet that operates in geostationary orbit approximately 22,000 miles above the equator. In this orbit, satellites
remain in a fixed position relative to points on the earth’s surface and provide reliable, high-bandwidth services anywhere
in their coverage areas, serving as the backbone for many forms of telecommunications. Telesat is also developing a global constellation
of low earth orbit (“LEO”) satellites. LEO satellites operate in a circular orbit around the earth with an altitude
typically between 500 and 870 miles. Unlike geostationary orbit satellites that operate in a fixed orbital location above the equator,
LEO satellites travel around the earth at high velocities requiring antennas on the ground to track their movement. LEO satellite
systems have the potential to offer a number of advantages over geostationary satellites to meet growing requirements for broadband
services, both consumer and commercial, by providing increased data speeds and capacity, global coverage, and latency on par with
or potentially better than terrestrial services.
At December 31, 2017,
Telesat, with approximately $3.0 billion of backlog, provided satellite services to customers from its fleet of 15 in-orbit geostationary
satellites. In addition, Telesat owns the Canadian Ka-band payload on the ViaSat-1 satellite and has two other geostationary satellites
under construction. In January 2018, an additional satellite was launched into low earth orbit as part of Telesat’s plan
to deploy an advanced, global LEO constellation. Telesat also manages the operations of additional satellites for third parties.
Telesat provides video
distribution and direct-to-home (“DTH”) video, as well as end-to-end communications services using both satellite and
hybrid satellite-ground networks.
Our economic interest
decreased from 62.8% to 62.7% in March 2016 when certain Telesat employees exercised share appreciation rights related to a total
of 178,642 stock options granted under Telesat’s share-based compensation plan and received 129,400 non-voting participating
preferred shares.
Telesat
Services
Telesat earns the majority
of its revenues by providing satellite-based services to customers, who use these services for their own communications requirements
or to provide services to customers further down the distribution chain for video and data services. Telesat also earns revenue
by providing ground-based transmit and receive services, selling equipment, installing, managing and maintaining satellite networks,
and providing consulting services in the field of satellite communications. Telesat categorizes its revenues into: Broadcast, Enterprise,
and Consulting and Other.
Broadcast
Telesat’s broadcast
services business provided approximately 51% of its revenue for the year ended December 31, 2017. These services include:
DTH:
Both
Canadian DTH service providers (Bell TV and Shaw Direct) use Telesat’s satellites as a distribution platform for their services,
delivering television programming, audio and information channels directly to customers’ homes. In addition, Telesat’s
satellites are used by EchoStar/DISH Network for DTH services in the United States.
Video distribution
and contribution:
Broadcasters, cable networks and DTH service providers use Telesat satellites for the full-time transmission
of television programming. Additionally, Telesat provides certain broadcasters and DTH service providers bundled value-added services
that include satellite capacity, digital encoding of video channels, authorization services and uplinking and downlinking services
to and from Telesat satellites and earth station facilities.
Occasional
use services:
Occasional use services consist of satellite transmission services for the timely broadcast of video news, sports
and live event coverage on a short-term basis enabling broadcasters to conduct on-the-scene transmissions using small, portable
antennas.
Enterprise
Telesat’s enterprise
services provided approximately 46% of its revenue for the year ended December 31, 2017. These services include:
Telecommunication
carrier and integrator services:
Telesat provides satellite capacity and end-to-end services for data and voice transmission
to telecommunications carriers and integrators located throughout the world. These services include space segment services and
terrestrial facilities for broadband, internet backhaul, cellular backhaul and services such as rural telephony to telecommunications
carriers and network services integrators around the world.
Government
services:
The United States government is the largest single consumer of fixed satellite services in the world and a user of
Telesat’s international satellites. Telesat provides services to the United States government through government service
integrators, rather than directly to United States government agencies. Telesat is also a significant provider of satellite services
to the Canadian government.
Consumer
broadband services:
Telesat provides Ka-band satellite capacity to customers in Canada, particularly to Xplornet Communications
Inc., which uses it to provide two-way broadband internet services, and to ViaSat, Inc. (“ViaSat”), which
uses it to provide similar services in the United States. Telesat also provides Ku-band satellite capacity to Hughes Network Systems
LLC (“HNS”), which uses it to provide two-way broadband internet services in South America. HNS has also contracted
for all of the Ka-band capacity serving South America on Telesat’s Telstar 19 VANTAGE satellite currently under construction.
Resource
services:
Telesat provides communications services to geographically diverse locations, both on and off shore, for the oil
and gas and mining industries.
Maritime
and aeronautical services:
Telesat is increasingly providing satellite capacity to customers serving the growing maritime and
aeronautical markets bringing broadband communications services to commercial airplanes and vessels.
Retail services:
Telesat operates VSAT and hybrid VSAT/terrestrial networks in Canada providing end-to-end services including installation and
maintenance of the end user terminal, maintenance of the VSAT hub and provision of satellite capacity. These networks include the
support of point-of-sale and other applications at thousands of retail petroleum sites.
Satellite
operator services:
Telesat provides services to other satellite operators in the form of partial channel satellite capacity,
full transponder satellite capacity and, on occasion, the relocation and use of an entire satellite at a designated orbital location
to preserve their spectrum rights.
Consulting and Other
Telesat’s consulting
and other category provided approximately 3% of its revenues for the year ended December 31, 2017. Telesat’s consulting operations
allow it to realize operating efficiencies by leveraging Telesat’s existing employees and the facility base dedicated to
its core satellite communication business. With over 45 years of engineering and technical experience, Telesat is a leading consultant
in establishing, operating and upgrading satellite systems worldwide.
Competitive Strengths
Telesat’s business
is characterized by the following key competitive strengths:
Leading Global
FSS Operator
Telesat is one of the
world’s leading fixed satellite services (“FSS”) operators and the largest in Canada. It has a leading position
as a provider of satellite services in the North American video distribution market. Telesat provides services to both of the major
DTH providers in Canada, Bell TV and Shaw Direct, which together have approximately 2.1 million subscribers, as well as to EchoStar
(DISH Network) in the United States, which has approximately 13.2 million subscribers. Its international satellites are well positioned
to serve a number of growing markets and serve a range of important customers in those markets.
Blue Chip Customer
Base
Telesat offers its
broad suite of satellite services to more than 400 customers worldwide, which include some of the world’s leading DTH service
providers, ISPs, network services integrators, telecommunications carriers, corporations and government agencies. Over 45 years
of operation, Telesat has established long-term, collaborative relationships with its customers and has developed a reputation
for creating innovative solutions and providing services essential for its customers to reach their end users. Telesat’s
customers represent some of the strongest and most financially stable companies in their respective industries. A number of these
customers have historically committed to long-term contracts for Telesat’s services, which enhances the predictability of
its future revenues and cash flows and supports its future growth.
Large Contracted
Backlog and Young Satellite Fleet Underpin Anticipated Growth and High Revenue Visibility
Historically, Telesat
has been able to generate strong cash flows from its operating activities due to the high operating margins in the satellite industry
and its disciplined control of expenses. The stability of Telesat’s cash flows is underpinned by its large revenue backlog.
Telesat has been able to generate significant backlog by entering into long-term contracts with its customers, in some cases for
all or substantially all of a satellite’s orbital maneuver life. In addition to this backlog, Telesat has historically experienced
a high proportion of contract renewals. Together, these two factors have produced ongoing, stable cash flows.
Many of Telesat’s
satellites are relatively new and will not need to be replaced for a significant period of time which defers replacement capital
expenditures.
Portfolio of Orbital
Real Estate
Telesat’s satellites
occupy highly attractive orbital locations that provide it with an advantageous position in the markets in which it operates due
to the scarcity of available satellite spectrum and the strong neighborhoods Telesat has developed at these locations. Access to
these orbital locations, coupled with the high capital intensity of the satellite industry, creates barriers to entry in those
markets. Telesat is licensed by the Department of Innovation, Science and Economic Development Canada (“ISED”) to occupy
a number of key orbital locations that are well-suited to serve the Americas and support its leading position in North America.
Telesat’s international satellites also occupy highly desirable orbital locations that enable broad pan-regional service
with interconnectivity between regions, making them attractive for both intra- and inter-regional services. Telesat has rights
to additional spectrum, including at certain existing orbital locations.
Telesat also has rights
to use Ka-band and V-band to operate a global LEO satellite constellation. LEO satellite systems have the potential to offer a
number of advantages over geostationary satellites to meet growing requirements for broadband services by providing increased data
speeds and capacity, global coverage, and latency on par with or potentially better than terrestrial services. In January 2018,
Telesat announced the successful launch of its first LEO satellite which will demonstrate certain features of Telesat’s LEO
system design.
Global Operations
Provide Revenue Diversification and Economies of Scale
The combination of
Telesat’s North American broadcast and enterprise services businesses and Telesat’s international business offers diversity
in terms of both the customers and regions served as well as the services provided.
Moreover, as the operator
of a fleet of 15 satellites plus multiple other satellites for third parties, Telesat has attained meaningful scale to allow it
to leverage its relatively fixed cost base to achieve substantial operating margins.
Business Strategy
Telesat’s commitment
to providing strong customer service and its focus on innovation and technical expertise has allowed it to successfully build its
business to date. Building on its existing contractual revenue backlog, Telesat will continue to focus on increasing the utilization
of its existing satellite capacity, maintaining its operating efficiency and, in a disciplined manner, using its strong cash flow
to grow in-orbit satellite capacity and strengthen its business.
Telesat believes its
satellite fleet offers a strong combination of existing backlog and additional capacity on its existing satellites and planned
satellites that provide a solid foundation upon which it will seek to continue to grow its revenue and cash flows. To achieve this
growth, Telesat will seek to capture the anticipated increased demand for satellite services and capacity particularly in the enterprise
services market, from requirements such as maritime and aeronautical, government services and supporting carrier and enterprise
networks.
Telesat will continue
to focus on capturing the anticipated increase in worldwide demand for satellite services through a disciplined satellite expansion
program that should drive incremental contracted backlog and cash flows, and further leverage its fixed cost structure.
Telstar 18 VANTAGE,
a powerful, state-of-the-art, multi-mission satellite currently under construction, and which Telesat anticipates will be launched
in mid-2018, will replace Telstar 18 at 138° EL. This new satellite will bring replacement and expansion capacity to this orbital
location utilizing high throughput and broad beam capacity. The satellite will offer a high degree of flexibility with coverage
of China, Mongolia, Indochina, Indonesia, Australia, New Zealand and the Pacific Ocean. Telesat’s long-standing partner at
the 138° EL location, APT, will use 57.5% of the satellite’s capacity in exchange for providing 57.5% of the capital
for the satellite program.
Telstar 19 VANTAGE,
a powerful, multi-mission, high throughput Ku-band and Ka-band satellite currently under construction, and which Telesat anticipates
will be launched in mid-2018, will bring additional capacity to the 63° WL orbital location where Telesat operates its
Telstar 14R/Estrela do Sul 2 satellite. The satellite will offer a high degree of flexibility with coverage of Brazil, the Andean
region, the Caribbean, the North Atlantic Ocean and Northern Canada. HNS has entered into a long-term contract for all of the high
throughput Ka-band capacity on Telstar 19 VANTAGE serving South America and Bell Canada has signed a 15-year contract for substantially
all of the high throughput spot beam capacity over northern Canada.
In January 2018, Telesat
announced the successful launch of its first LEO satellite, an important milestone in its plan to develop a state-of-the-art, high
capacity LEO constellation that will deliver transformative, low latency, fiber-like broadband to commercial and government users
worldwide. Telesat anticipates that this Phase 1 LEO satellite will demonstrate certain features of its LEO system design, in particular
the capability of the satellite and customer terminals to deliver a low-latency broadband experience. Telesat has installed ground
infrastructure at its teleport in Allan Park in Canada to support testing, and Telesat has customers in growing enterprise segments
who it expects will participate in trials during 2018.
The satellite industry
is characterized by a relatively fixed cost base that allows significant revenue growth with relatively minimal increases in operating
costs, particularly for the provision of services using only satellite capacity. Thus, Telesat anticipates that the relatively
fixed cost nature of its business, combined with increasing demand for satellite services, will over time produce growth in its
operating cash flows. To further enhance liquidity, Telesat has a $200 million revolving credit facility in place that can be used
for general corporate purposes including working capital and capital expenditures of which, other than $0.2 million of outstanding
letters of credit, no amount was drawn as of December 31, 2017.
Competition
Telesat is a leading
global FSS operator in a highly competitive industry, and Telesat competes against other global, regional and national satellite
operators and with providers of terrestrial-based communications services.
Fixed
Satellite Operators
Other global satellite
operators are Intelsat S.A. (“Intelsat”), SES S.A. (“SES”), Eutelsat S.A. (“Eutelsat”) and
Inmarsat. Telesat also competes with a number of nationally or regionally focused FSS operators around the world.
Intelsat, SES and Eutelsat
are each substantially larger than Telesat in terms of both the number of satellites they have in-orbit as well as their revenues.
Telesat believes that Intelsat and its subsidiaries and SES and its subsidiaries each have global fleets of over 50 satellites,
and that Eutelsat and its subsidiaries have a fleet of almost 40 satellites. Due to their larger sizes, these operators may be
able to take advantage of greater economies of scale, may be more attractive to customers, and may (depending on the specific satellite
and orbital location in question) have greater flexibility to restore service to their customers in the event of a partial or total
satellite failure. In addition, their larger sizes may enable them to devote more resources, both human and financial, to sales,
operations, product development and strategic alliances and acquisitions.
Regional and domestic
providers:
Telesat also competes against regional FSS operators, including:
|
•
|
in North America: Ciel, ViaSat, HNS/EchoStar, Hispasat
and Arsat;
|
|
•
|
in Europe, Middle East, Africa: Avanti, Arabsat, Es’hailsat,
Nilesat, Gazprom, Hellas Sat, RSCC, Yahsat, Turksat and Spacecom;
|
|
•
|
in Asia: AsiaSat, Measat, Thaicom, APT, PT Telkom, Optus,
SKY Perfect JSAT and Asia Broadcast Satellite; and
|
|
•
|
in Latin America: Star One, Arsat and Hispamar.
|
A number of other countries
have domestic satellite systems against which Telesat competes in those markets.
The Canadian government
opened Canadian satellite markets to foreign satellite operators as part of its 1998 World Trade Organization commitments to liberalize
trade in basic telecommunications services. As of January 2018, approximately 90 non-Canadian licensed geostationary satellites
and non-geostationary satellite constellations are listed as having been approved for use in Canada. Four of these geostationary
satellites are Telesat satellites licensed by other administrations and one is a satellite on which Telesat owns the Canadian-coverage
capacity.
In addition, the FSS
and the mobile satellite services (“MSS”) sectors, which have historically served distinct customer requirements, are
converging. As a result, Telesat faces competition from MSS operators that include Inmarsat, which offers a high throughput Ka-band
service using a global constellation of four geostationary satellites. The growth in satellite service providers using or planning
to use Ka-band, including Avanti Communications, SES/O3b, ViaSat, Eutelsat, HNS/Echostar, Inmarsat, SES, Yahsat and others, will
result in increased competition.
Many of the new and
replacement satellites expected to be deployed in the near term will be high throughput satellites (“HTS”) or will
include high throughput payloads. In addition, second generation HTS systems recently launched and in development purport to be
capable of throughput that substantially exceeds the throughput of first generation HTS. This is expected to result in a significant
increase in satellite capacity which may further increase competition.
Over the past two years,
a number of non-geostationary orbit (“NGSO”) satellite systems have been announced and are now in various stages of
development. These include proposed systems from One Web, SpaceX, Boeing, SES/O3b and LeoSat, among others. In addition, a number
of other non-terrestrial systems using drones or balloons have also been announced. As these new systems are deployed they may
significantly increase the supply of services that will compete with Telesat’s LEO constellation as well as traditional satellite
services.
Terrestrial
Service Providers
Providers of terrestrial-based
communications services compete with satellite operators. Increasingly, in developed and developing countries alike, governments
are providing funding and other incentives to encourage the expansion of terrestrial networks resulting in increased competition
for satellite operators.
Consulting
Services
The market for satellite
consulting services is generally comprised of a few companies qualified to provide advice to governments, satellite operators,
spacecraft manufacturers and other industry participants on a range of technical and commercial matters related to satellite communications
and earth observation. Telesat’s competitors are primarily United States and European-based companies.
Satellite Fleet & Ground Resources
As of December 31,
2017, Telesat had 15 in-orbit satellites. In addition, Telesat owns the Canadian Ka-band payload on the ViaSat-1 satellite.
Telesat operates an
extensive ground infrastructure including a satellite control center (“SCC”) in Ottawa, Ontario, its main earth station
and backup SCC at Allan Park, Ontario, nine earth stations throughout Canada, one teleport located in the United States and one
in Brazil and its telemetry tracking and control facility in Perth, Australia. These ground facilities are used for controlling
Telesat’s satellites and for the provision of end-to-end services to Telesat’s customers.
Telesat’s North
American focused fleet is comprised of eight satellites (Anik F1R, Anik F2, Anik F3, Nimiq 1, Nimiq 2, Nimiq 4, Nimiq 5 and Nimiq
6), plus the Canadian beams on ViaSat-1. Telesat’s international fleet is comprised of six satellites (Anik F1, Telstar 11N,
Telstar 12, Telstar 12 VANTAGE, Telstar 14R/Estrela do Sul 2 and Telstar 18). Telesat’s Anik G1 satellite provides service
for both North and South America.
The table below summarizes
selected data relating to Telesat’s owned in-orbit satellite capacity as of December 31, 2017
:
|
|
Orbital Location
|
|
Launch
|
|
Manufacturer’s
End-of-Service
|
|
Expected
End-of-
Orbital
|
|
|
|
|
Regions
Covered
|
|
Date
|
|
Life
|
|
Maneuver
Life
(1)
|
|
Model
|
Anik F1
|
|
107.3°WL South America
|
|
November 2000
|
|
2016
|
|
2022
|
|
BSS702 (Boeing)
|
Anik F1R
|
|
107.3° WL North America
|
|
September 2005
|
|
2020
|
|
2022
|
|
E3000 (EADS Astrium)
|
Anik F2
|
|
111.1° WL Canada, Continental United States
|
|
July 2004
|
|
2019
|
|
2027
|
|
BSS702 (Boeing)
|
Anik F3
|
|
118.7° WL Canada, Continental United States
|
|
April 2007
|
|
2022
|
|
2026
|
|
E3000 (EADS Astrium)
|
Anik G1
|
|
107.3° WL Canada, South America
|
|
April 2013
|
|
2028
|
|
2039
|
|
SSL 1300
|
Nimiq 1
|
|
Not Applicable
(2)
|
|
May 1999
|
|
2011
|
|
2021
(4)
|
|
A2100 AX (Lockheed Martin)
|
Nimiq 2
|
|
Not Applicable
(2)
|
|
December 2002
|
|
2015
|
|
2024
(5)
|
|
A2100 AX (Lockheed Martin)
|
Nimiq 4
|
|
82° WL Canada
|
|
September 2008
|
|
2023
|
|
2027
|
|
E3000 (EADS Astrium)
|
Nimiq 5
|
|
72.7° WL Canada, Continental United States
|
|
September 2009
|
|
2024
|
|
2035
|
|
SSL 1300
|
Nimiq 6
|
|
91.1º WL Canada
|
|
May 2012
|
|
2027
|
|
2048
|
|
SSL 1300
|
Telstar 11N
|
|
37.55° WL North and Central America, Europe, Africa and the
maritime Atlantic Ocean region
|
|
February 2009
|
|
2024
|
|
2026
|
|
SSL 1300
|
Telstar 12
|
|
109.2°WL Southern United States, South and Central America
|
|
October 1999
|
|
2012
|
|
2027
(5)
|
|
SSL 1300
|
Telstar 12 VANTAGE
|
|
15°WL Eastern United States, SE Canada, Europe, Russia, Middle
East, South Africa, portions of South and Central America
|
|
November 2015
|
|
2030
|
|
2032
|
|
E3000 (Airbus)
|
Telstar 14R/Estrela do Sul 2
|
|
63°WL Brazil and portions of Latin America, North America, Atlantic
Ocean
|
|
May 2011
|
|
2026
|
|
2024
|
|
SSL 1300
|
Telstar 18
(3)
|
|
138° EL India, South East Asia, China, Australia and Hawaii
|
|
June 2004
|
|
2017
|
|
2018
(6)
|
|
SSL 1300
|
|
(1)
|
Telesat’s current estimate of when each satellite
will be decommissioned, taking account of anomalies and malfunctions the satellites have experienced to date and other factors
such as remaining fuel levels, consumption rates and other available engineering data. These estimates are subject to change and
it is possible that the actual orbital maneuver life of any of these satellites will be shorter than Telesat currently anticipates.
Further, it is anticipated that the payload capacity of each satellite may be reduced prior to the estimated end of orbital maneuver
life. For example, Telesat currently anticipates that it will need to commence the turndown of transponders on Anik F1 prior to
the end of orbital maneuver life, as a result of further degradation in available power.
|
|
(2)
|
Nimiq 1 and Nimiq 2 are currently located in non-Telesat
orbital slots.
|
|
(3)
|
54% of the transponders on the satellite are leased to
APT (the “APT transponders”), through the end of life of the satellite in consideration for APT’s funding a
portion of the satellite’s cost. This transaction was accounted for as a sales-type lease, because substantially all of
the benefits and risks incident to the ownership of the leased transponders were transferred to APT. Telesat has agreed with APT
among other things that if Telesat is able to obtain the necessary approvals and licenses from the U.S. government under U.S.
export laws, it would transfer title to the APT transponders on Telstar 18 to APT, as well as a corresponding interest in the
elements on the satellite that are common to or shared by the APT transponders and the Telesat transponders. Telesat acquired
two transponders from APT for an additional payment in August 2009.
|
|
(4)
|
Inclined orbit operations may be utilized to reach the
projected End of Orbital Maneuver Life for Nimiq 1 in the event the satellite is relocated. The start of inclined orbit operations
will be selected accordingly.
|
|
(5)
|
End of Orbital Maneuver Life for these satellites has been
extended through inclined orbit operations which reduces fuel consumption through the elimination of north-south stationkeeping.
|
|
(6)
|
The End of Orbital Maneuver Life for Telstar 18 is expected
to be extended through inclined orbit operations to 2028.
|
In addition, Telesat
has rights to satellite capacity on other satellites including the Ka-band Canadian payload consisting of nine user beams on ViaSat-1.
Telesat is currently
evaluating mission extension services that have the potential to prolong the orbital maneuver lives of certain of its satellites.
However, there can be no assurance that Telesat will contract for the use of these mission extension services or that, if it does
so, the services will be successful.
In November 2015, Telesat
entered into contractual arrangements with Space Systems/Loral, LLC (formerly known as Space Systems/Loral, Inc.) (“SSL”)
for the construction of Telstar 19 VANTAGE, which it anticipates will be launched in mid-2018. This new state-of-the-art satellite
will utilize high throughput capabilities to offer superior performance in Ku-band and in Ka-band and will be co-located with Telesat’s
Telstar 14R/Estrela do Sul 2 satellite at 63˚ WL, a prime orbital slot for coverage of the Americas. The satellite will
have high throughput Ka-band capacity in South America, over Northern Canada, the Caribbean and the North Atlantic Ocean. It will
also provide high throughput Ku-band capacity over Brazil, the Andean region and the North Atlantic.
In December 2015, Telesat
entered into contractual arrangements with SSL for the construction of Telstar 18 VANTAGE, which it anticipates will be launched
in mid-2018. The new satellite will operate from 138˚ EL. Telstar 18 VANTAGE will expand Telesat’s coverage of growing
satellite service markets in China, Mongolia, Southeast Asia, and the Pacific Ocean region. This satellite will utilize a combination
of broad regional beams and high throughput spot beams in Ku-band to maximize throughput and spectral efficiency. It will also
provide extensive C-band coverage of Asia that reaches from India and Pakistan in the West all the way to Hawaii in the East, enabling
direct connectivity from any point in Asia to the Americas.
In April 2016, Telesat
announced the procurement of two Phase 1 Ka-band satellites for operation in low earth orbit. In November 2017, the first Phase
1 satellite was launched on a Soyuz launch vehicle. The launch was a failure due to an anomaly with the launch vehicle and resulted
in the loss of the satellite. The second Phase 1 satellite was successfully launched in January 2018.
Satellite Services Performance
(1)
Loral holds a 62.7%
economic interest and a 32.7% voting interest in Telesat. We use the equity method of accounting for our investment in Telesat,
and its results are not consolidated in our financial statements. Our share of the operating results from our investment in this
company is included in equity in net income (loss) of affiliates in our consolidated statements of operations and our investment
is included in investments in affiliates in our consolidated balance sheets (see Note 5 to the Loral consolidated financial statements).
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Total segment revenues
|
|
$
|
712,390
|
|
|
$
|
703,131
|
|
|
$
|
751,684
|
|
Affiliate eliminations
(2)
|
|
|
(712,390
|
)
|
|
|
(703,131
|
)
|
|
|
(751,684
|
)
|
Revenues from satellite services as reported
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
$
|
371,847
|
|
|
$
|
366,272
|
|
|
$
|
419,969
|
|
Affiliate eliminations
(2)
|
|
|
(371,847
|
)
|
|
|
(366,272
|
)
|
|
|
(419,969
|
)
|
Operating income from satellite services after eliminations
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
(1)
|
See Consolidated Operating Results in Management’s
Discussion and Analysis of Financial Condition and Results of Operations for significant items that affect comparability between
the periods presented.
|
|
(2)
|
Affiliate eliminations represent the elimination of amounts
attributable to Telesat which is reflected in our consolidated financial statements under the equity method of accounting.
|
Total Telesat assets
were $4.1 billion, $4.2 billion and $4.0 billion as of December 31, 2017, 2016 and 2015, respectively. The change in total assets
from December 31, 2016 to December 31, 2017 is primarily the result of a distribution to Telesat’s shareholders and option
holders in the aggregate of approximately $400 million, partially offset by the change in foreign exchange rates. The change in
total assets from December 31, 2015 to December 31, 2016 is primarily the result of the change in foreign exchange rates. Backlog
was approximately $3.0 billion and $3.2 billion as of December 31, 2017 and 2016, respectively. The decrease in backlog is due
to revenues recognized, partially offset by new orders and exchange rate changes. It is expected that approximately 18.8% of the
backlog at December 31, 2017 will be recognized as revenue by Telesat in 2018.
Sale of SSL
On November 2, 2012,
Loral completed the sale (the “Sale”) of its wholly-owned subsidiary, SSL, to MDA Communications Holdings, Inc. (“MDA
Holdings”), a subsidiary of MacDonald, Dettwiler and Associates Ltd. (“MDA”). Pursuant to the purchase agreement
(the “Purchase Agreement”), dated as of June 26, 2012, as amended on October 30, 2012 and March 28, 2013, by and among
Loral, SSL, MDA and MDA Holdings, Loral agreed to indemnify MDA and its affiliates from certain damages in a lawsuit (the “ViaSat
Suit”) brought in 2012 by ViaSat against Loral and SSL. In September 2014, Loral, SSL and ViaSat entered into a settlement
agreement (the “Settlement Agreement”) pursuant to which the ViaSat Suit and an additional patent infringement and
breach of contract lawsuit brought by ViaSat against SSL in September 2013 were settled. Loral was also released by MDA, MDA Holdings
and SSL from indemnification claims relating to the ViaSat lawsuits under the Purchase Agreement. The terms of the Settlement Agreement
provided, among other things, for payment by Loral and SSL to ViaSat on a joint and several basis of $100 million, $40 million
of which was paid in September 2014 in connection with entering into the Settlement Agreement, with the remaining $60 million payable
with interest in ten equal quarterly installments of $6.9 million from October 15, 2014 through January 15, 2017.
Following a mediation
session held on December 1, 2014, Loral and MDA entered into an agreement titled “MDA/Loral Dispute Resolution” dated
December 1, 2014 (the “Allocation Agreement”), pursuant to which Loral and MDA agreed that Loral was responsible for
$45 million, and MDA and SSL were responsible for $55 million, of the $100 million litigation settlement with ViaSat. Culminating
with the final installment payment of $2.8 million in January 2017, Loral paid a total of $46.1 million, including interest, as
its share of the ViaSat settlement (see Note 13 to the Loral consolidated financial statements).
Other
We also own 56% of
XTAR, LLC (“XTAR”), a joint venture between Loral and Hisdesat Servicios Estrategicos S.A. (“Hisdesat”).
We account for our ownership interest in XTAR under the equity method of accounting because we do not control certain of its significant
operating decisions. XTAR owns and operates an X-band satellite, XTAR-EUR located at 29˚ EL, which entered service in March
2005. The satellite is designed to provide X-band communications services exclusively to United States, Spanish and allied government
users throughout the satellite’s coverage area, including Europe, the Middle East and Asia. The government of Spain granted
XTAR rights to an X-band license, normally reserved for government and military use, to develop a commercial business model for
supplying X-band capacity in support of military, diplomatic and security communications requirements. XTAR also leases 7.2 72
MHz X-band transponders (subject to certain temporary reductions for 2017) on the Spainsat satellite located at 30˚ WL owned
by Hisdesat, which entered commercial service in April 2006. These transponders, designated as XTAR-LANT, allow XTAR to provide
its customers in the U.S. and abroad with additional X-band services and greater flexibility. XTAR currently has contracts to provide
satellite telecommunication services to various agencies of the United States, Spanish and other European governments. For more
information on XTAR see Note 5 to the Loral consolidated financial statements.
REGULATION
Telesat is subject
to regulation by government authorities in Canada, the United States and other countries in which it operates and is subject to
the frequency coordination process of the International Telecommunication Union (“ITU”). Telesat’s ability to
provide satellite services in a particular country or region is subject also to the technical constraints of its satellites, international
coordination, local regulation including as it applies to securing landing rights and licensing requirements.
Canadian Regulatory Environment
Telesat was originally
established by the government of Canada in 1969 under the Telesat Canada Act. As part of the Canadian government’s divestiture
of its shares in Telesat, pursuant to the Telesat Canada Reorganization and Divestiture Act (1991), or the Telesat Divestiture
Act, Telesat was continued on March 27, 1992 as a business corporation under the Canada Business Corporations Act, the Telesat
Canada Act was repealed and the Canadian government sold its shares in Telesat. The Telesat Divestiture Act provides that no legislation
relating to the solvency or winding-up of a corporation applies to Telesat and that its affairs cannot be wound up unless authorized
by an Act of Parliament. In addition, Telesat and its shareholders and directors cannot apply for Telesat’s continuation
in another jurisdiction or dissolution unless authorized by an Act of Parliament.
Telesat is a Canadian
carrier under the Telecommunications Act (Canada), or the Telecom Act. The Telecom Act authorizes the Canadian Radio-Television
and Telecommunications Commission (“CRTC”) to regulate various aspects of the provision of telecommunications services
by Telesat and other telecommunications service providers. Telesat is currently not subject to detailed rate regulation; the CRTC
has, however, retained its powers under the Telecom Act to impose price regulation or other regulatory measures on Telesat in the
future, as necessary. In addition, Section 28(2) of the Telecom Act provides that the CRTC may allocate satellite capacity to particular
broadcasting undertakings if it is satisfied that the allocation will further the implementation of the broadcasting policy for
Canada. The exercise by the CRTC of its rights under section 28(2) of the Telecommunications Act could affect Telesat’s relationship
with existing customers, which could have a material adverse effect on Telesat’s results of operations, business prospects
and financial condition.
Telesat’s operations
are also subject to regulation and licensing by ISED (formerly Industry Canada) pursuant to the Radiocommunication Act (Canada).
ISED has the authority to issue spectrum and earth station licenses and establish policies and standards related to the radio frequencies
upon which Telesat’s satellites and earth stations depend. The Minister responsible for ISED has broad discretion in exercising
this authority to issue licenses, fix and amend conditions of licenses and to suspend or even revoke them. Some of the spectrum
licenses under which Telesat operates the Anik and Nimiq satellites require Telesat to comply with research and development and
other industrial and public benefit commitments, to pay annual spectrum license fees and to provide all-Canada satellite coverage.
ISED traditionally
licensed satellite radio spectrum using a competitive licensing process. In 2012, ISED conducted a public consultation on the licensing
framework for FSS and broadcast satellite services (“BSS”) in Canada. As a result of the consultation, changes in policy
were announced in November 2013. Effective January 6, 2014, all FSS and BSS licenses are awarded to qualified applicants on a first-come,
first-served basis and spectrum licenses have replaced radio licenses. The term of spectrum licenses is 20 years, with a high expectation
of renewal. ISED may, however, issue licenses with a shorter term. Satellite and terrestrial operators are seeking additional spectrum
to accommodate the expected growth in demand for broadband services and 5G networks. ISED is considering and may adopt new spectrum
allocations for terrestrial services that require satellite operators to vacate or share spectrum and may limit the spectrum that
is available for satellite services.
The Canadian government
opened Canadian satellite markets to foreign satellite operators as part of its 1998 World Trade Organization (“WTO”)
commitments to liberalize trade in basic telecommunications services, with the exception of DTH television services provided through
FSS or DBS facilities. Satellite digital audio radio service markets were also closed to foreign entry until 2005. In September
2005, the Canadian government revised its satellite-use policy to permit the use of foreign-licensed satellites for digital audio
radio services in Canada. Further liberalization of the policy may occur and could result in increased competition in Canadian
satellite markets.
Since November 2000,
pursuant to the CRTC’s Decision CRTC 2000-745, virtually all telecommunications service providers are required to pay contribution
charges based on their Canadian telecommunications service revenues, minus certain deductions (e.g., terminal equipment sales and
inter-carrier payments). The contribution rate varies from year to year. It was initially set at 4.5% of eligible revenues but
was significantly reduced in subsequent years. The rate for 2017 was 0.60%, and an interim rate of 0.54% has been established by
the CRTC for 2018.
United States Regulatory Environment
The Federal Communications
Commission (“FCC”) regulates the provision of satellite services to, from, or within the United States.
Telesat has chosen
to operate its U.S. licensed satellites, Telstar 11N, Telstar 12 and Telstar 12 VANTAGE, on a non-common carrier basis. Consequently,
it is not subject to rate regulation or other common carrier regulations enacted under the Communications Act of 1934. Telesat
pays FCC filing fees in connection with its space station and earth station applications and annual fees to defray the FCC’s
regulatory expenses. Annual and quarterly status reports must be filed with the Universal Service Administrative Company (“USAC”)
covering interstate/international telecommunications revenues. Based on these reports, USAC assesses Telesat for contribution to
the FCC’s Universal Service Fund (“USF”). Payments to the USF are made on a quarterly and annual basis. The USF
contribution rate is adjusted quarterly and is proposed to be set at 19.5% for the first quarter of 2018. At the present time,
the FCC does not assess USF contributions with respect to bare transponder capacity (i.e. agreements for space segment only). Telesat’s
United States telecom revenues that are subject to USF contribution requirements are currently small and its USF payments are not
material.
Telesat also owns and
operates the portion of the ViaSat-1 satellite (115
o
WL) payload that is capable of providing service within Canada.
The ViaSat-1 satellite is licensed by the United States.
The FCC currently grants
geostationary-like satellite authorizations on a first-come, first-served basis to applicants which demonstrate that they are legally
and technically qualified and that the public interest will be served by the grant. Under licensing rules, a bond must be posted
starting at $1 million when a geostationary satellite or non-geostationary satellite constellation authorization is granted and
escalating to up to $3 million in the case of a geostationary satellite and $5 million in the case of a non-geostationary satellite
constellation. The entire amount of the bond may be forfeited if there is a failure to meet the FCC’s milestones for the
launch and commencement of operations of the geostationary satellite or the milestones for the deployment and operation of 50%
and 100% of the satellites in a non-geostationary satellite constellation. According to current licensing rules, the FCC will issue
new satellite licenses for an initial 15-year term and will provide a licensee with an “expectancy” that a subsequent
license will be granted for the replacement of an authorized satellite using the same frequencies. At the end of the 15-year term,
a satellite that has not been replaced, or that has been relocated to another orbital location following its replacement, may be
allowed to continue operations for a limited period of time subject to certain restrictions. As in other jurisdictions, the FCC
is considering and may adopt new spectrum allocations for terrestrial mobile broadband and 5G, including in bands that are currently
allocated to satellite services. New spectrum allocations may require satellite operators to vacate or share spectrum and may limit
the spectrum that is available for satellite services.
To facilitate the provision
of FSS in C-, Ku- and Ka-band frequencies in the United States market, foreign licensed operators may apply to have their satellites
placed on the FCC’s Permitted Space Station List (for certain frequencies) or be granted a declaratory ruling (for other
frequencies). The bond and milestone requirements for U.S.-licensed satellites apply equally to authorized foreign-licensed satellites.
Telesat’s Anik Fl, Anik FlR, Anik F2, Anik F3, Telstar 14R/Estrela do Sul 2 satellites, the Telstar 19 VANTAGE satellite
under construction and the Ka-band LEO constellation being developed are currently authorized to serve the U.S. market in accordance
with these procedures.
The United States made
no WTO commitment to open its DTH, DBS or digital audio radio services to foreign competition, and instead indicated that provision
of these services by foreign operators would be considered on a case-by-case basis, based on an evaluation of the effective competitive
opportunities open to United States operators in the country in which the foreign satellite was licensed (i.e., an ECO-sat test)
as well as other public interest criteria. While Canada currently does not satisfy the ECO-sat test in the case of DTH and DBS
service, the FCC has found, in a number of cases, that provision of these services into the United States using Canadian-licensed
satellites would provide significant public interest benefits and would therefore be allowed. In cases involving Telesat, United
States service providers, Digital Broadband Applications Corp., DIRECTV and EchoStar, have all received FCC approval to access
Canadian-authorized satellites under Telesat’s direction and control in Canadian-licensed orbital locations to provide DTH-FSS
or DBS service into the United States.
The approval of the
FCC for the acquisition of our ownership interest in Telesat was conditioned upon compliance by Telesat with commitments made to
the Department of Justice, the Federal Bureau of Investigation and the Department of Homeland Security relating to the availability
of certain records and communications in the United States in response to lawful United States law enforcement requests for such
access.
The export of United
States-manufactured satellites and technical information related to satellites, earth station equipment and provision of services
to certain countries are subject to State Department, Commerce Department and Treasury Department regulations.
In 1999, the United
States State Department published amendments to the International Traffic in Arms Regulations (“ITAR”) which included
satellites on the list of items requiring export licenses. Effective November 2014, further amendments to the ITAR transferred
jurisdiction of certain satellites and related technology to the Export Administration Regulations administered by the Commerce
Department, which also impose license requirements in specified circumstances. These ITAR provisions may limit Telesat’s
access to certain technical information and may have a negative impact on Telesat’s international consulting revenues.
If Telesat does not
maintain its existing authorizations or obtain necessary future authorizations under the export control laws and regulations of
the United States, Telesat may be unable to export technical information or equipment to non-U.S. persons and companies, including
to its own non-U.S. employees, as required to fulfill existing contracts. If Telesat does not maintain its existing authorizations
or obtain necessary future authorizations under the trade sanctions laws and regulations of the United States, Telesat may not
be able to provide satellite capacity and related administrative services to certain countries subject to U.S. sanctions. Telesat’s
ability to acquire new United States-manufactured satellites, procure launch services and launch new satellites, operate existing
satellites, obtain insurance and pursue its rights under insurance policies or conduct its satellite-related operations and consulting
activities could also be negatively affected if Telesat and its suppliers are not able to obtain and maintain required U.S. export
authorizations.
Regulation Outside Canada and the
United States
The Brazilian national
telecommunications agency, ANATEL, grants exploitation rights for Brazilian satellites to companies incorporated and existing in
Brazil which participate in specific auctions conducted by ANATEL and which demonstrate that they are legally, technically and
financially qualified and that the public interest will be served by the grant. ANATEL may also grant exploitation and landing
rights for foreign satellites when the public interest is evidenced, provided that the applicant company provides certain specific
technical information on the relevant satellite and appoints a legal representative in Brazil (i.e., a company incorporated and
existing in Brazil). The landing rights of foreign satellites are granted to the owner of the space segment or the company which
holds the right to operate it, in whole or in part, but the satellite capacity may only be sold or negotiated in Brazil through
the local legal representative. In exploitation and landing rights of Brazilian and foreign satellites, the rights are granted
on an onerous basis and are valid for 15 years for Brazilian satellites (renewable once for an additional 15 years) and up to 15
years for foreign satellites (renewable once for an additional equal period).
ANATEL has authorized
Telesat, through its subsidiary, Telesat Brasil Capacidade de Satélites Ltda. (“TBCS”), to operate a Ku-band
FSS satellite at the 63° WL orbital location. In December 2008, TBCS entered into a new 15-year Concession Agreement with ANATEL
which obligates TBCS to operate the satellite in accordance with Brazilian telecommunications law and contains provisions to enable
ANATEL to levy fines for failure to perform according to the Concession Agreement terms.
In May 2015, TBCS was
the successful bidder in an ANATEL auction for Ka-Band and Planned Ku-band frequency rights at the 63° WL orbital location,
and the associated 15-year Concession Agreements were signed in March 2016 for Telstar 19 VANTAGE.
In addition, ANATEL
has accredited TBCS as legal representative in Brazil of three non-Brazilian satellites; Telstar 12 VANTAGE, Anik F1 and Anik G1.
Telesat owns Telstar
18, which currently operates at the 138° EL orbital location under an agreement with APT. Telstar 18 VANTAGE will replace Telstar
18 at the same orbital location, also under an agreement with APT. APT has been granted the right to use the 138° EL orbital
location by The Kingdom of Tonga. APT is the direct interface with the Tonga regulatory bodies. Because Telesat gained access to
this orbital location through APT, there is uncertainty with respect to its ability to maintain access to this orbital location
and the frequencies.
Telesat owns and operates
the portion of the ViaSat-1 satellite (115˚ WL) payload that is capable of providing service within Canada. ViaSat-1 operates
in accordance with a license granted by the FCC in the United States. However, by virtue of an intergovernmental arrangement between
the United States and the United Kingdom, ViaSat-1 operates in accordance with ITU networks filed by the United Kingdom regulatory
agency, OFCOM, on behalf of the Isle of Man. The Isle of Man is a British Crown Dependency and Isle of Man satellite frequency
filings are filed with the ITU by OFCOM. ManSat Ltd. has been granted rights by the Isle of Man government to manage all aspects
of Isle of Man satellite frequency filings. Both Telesat and ViaSat have a commercial relationship with ManSat. ViaSat and Telesat
have agreed to cooperate in their dealings with ManSat with respect to the ViaSat-1 satellite for OFCOM and ITU purposes. The Ka-band
and portions of the Ku-band frequencies on Telstar 12 VANTAGE, and portions of the Ka-band frequencies on Telstar 18 VANTAGE and
the Ka-band frequencies on Telstar 19 VANTAGE, are also filed with the ITU by ManSat on behalf of Telesat.
Landing Rights and Other Regulatory
Requirements
Many countries regulate
satellite transmission signals to, and for uplink signals from, their territory. Telesat has landing rights in major market countries
worldwide. In many jurisdictions, landing rights are granted on a per satellite basis and applications must be made to secure landing
rights on replacement satellites.
International Regulatory Environment
— International Telecommunication Union
The ITU, a specialized
agency of the United Nations, is responsible for administering access by member states to frequencies in the radio portion of the
electromagnetic spectrum. The ITU Radio Regulations set forth the process that member states must follow to secure rights for satellites
to use frequencies and the obligations and restrictions that govern such use. The process includes, for example, a “first-come,
first-served” system for gaining access to certain frequencies and time limits for bringing the frequencies into use. Other
frequencies at specified orbital locations have been reserved in perpetuity for individual administrations’ use.
Canada, the United
States and other member states have rights to use certain frequencies. Telesat has been authorized by its ITU filing administrators
(Canada, USA, Brazil and United Kingdom) to use certain frequencies. In addition, through commercial arrangements, Telesat has
the right to use certain frequencies for which the Kingdom of Tonga has the rights. Authorized frequencies include those already
used by its current satellites, and additional frequencies at various geostationary orbital locations or in non-geostationary constellations
that must be brought into use within specified time limits.
The ITU Radio Regulations
govern the process used by satellite operators to coordinate their operations with other satellite operators to avoid harmful interference.
Each member state is required to give notice of, coordinate, and register its proposed use of radio frequency assignments with
the ITU. The filing and registration process is administered by the ITU Radiocommunications Bureau (the “ITU-BR”).
Once a member state
has filed with the ITU its proposed use of frequencies, other member states inform that member state and the ITU-BR of any intended
use that has the potential to cause interference to either existing operations, or operations that may occur in accordance with
priority rights. The member states are then obligated to negotiate with each other in an effort to coordinate the proposed uses
and resolve interference concerns. If all outstanding issues are resolved in accordance with the various procedures of the ITU
Radio Regulations, the frequencies are entered into the ITU’s Master Register (“MIFR”). Registered frequencies
are entitled under international law to interference protection from subsequent or nonconforming uses.
Under the ITU Radio
Regulations, a member state that places a satellite or any ground station into operation without completing coordination could
be vulnerable to interference from other systems and may have to alter the operating parameters of its satellite or ground station
if harmful interference occurs to other users already entered in the MIFR or that have priority rights.
The process of ITU
filing and notification in the MIFR of frequencies spans a period of seven to eight years, or longer, depending upon the frequency
band and the various provisions of the ITU Radio Regulations that may be invoked. Telesat’s authorized frequencies are in
various stages of the coordination and notification process. Many frequencies have completed the process and have been registered
in the MIFR. In other cases, coordination is on-going so that entry into the MIFR is pending. This is typical for satellite operators.
Depending upon the outcome of coordination discussions with other satellite operators Telesat may need to make concessions in terms
of how a frequency may be used. This, in turn, could have a material adverse impact on Telesat’s financial condition, as
well as on the value of its business. The failure to reach an appropriate arrangement with such satellite operators may render
it impossible to secure entry into the MIFR and result in substantial restrictions on the use and operations of Telesat’s
existing satellites. In the event disputes arise during the coordination process or thereafter, the ITU Radio Regulations set forth
procedures for resolving disputes but do not contain a mandatory dispute resolution mechanism or an enforcement mechanism. Rather,
the rules invite a consensual dispute resolution process for parties to reach a mutually acceptable agreement. Neither the rules
nor international law provide a clear remedy for a party where this voluntary process fails.
The ITU is considering
and may adopt at the World Radio Conference in November 2019, new international spectrum allocations to terrestrial mobile, satellite
and other services. New international spectrum allocations may require satellite operators to vacate or share spectrum and may
limit the spectrum that is available for satellite services. Although non-governmental entities, including Telesat, participate
at the ITU, only national administrations have full standing as ITU members. Consequently, Telesat must ultimately rely on the
administrations of Canada, the United States, Brazil, the United Kingdom and the Kingdom of Tonga to represent its interests, including
submitting and coordinating the ITU satellite networks that provide frequency information within the ITU process described above.
Some of the international
and domestic regulations governing NGSO
satellites
are
undergoing revision or have yet to be established. Both Canada and the U.S. have recently adopted new deployment milestones
for NGSO systems and the ITU is expected to adopt new deployment milestones for the maintenance of international NGSO filings at
the World Radio Conference in November 2019. New international milestones could limit Telesat’s ability to maintain international
priority rights for its planned LEO constellation. In addition, while the international rules governing coordination between
Ka-band NGSO satellite systems are established and rely on international filing date priority, the US has adopted a different approach
to NGSO-NGSO coordination that requires band splitting if NGSO operators are unable to reach a coordination agreement. As
a result, the amount of spectrum that may be available to Telesat’s planned LEO constellation in the U.S. is uncertain.
It is possible that other jurisdictions may adopt the U.S. approach to coordination between NGSO systems. Some of the spectrum
utilized by Telesat’s planned LEO constellation is also allocated to terrestrial fixed and mobile services and geostationary
satellite services. While jurisdictions such as the U.S. have established rules for sharing the spectrum, many jurisdictions
have yet to address this issue. Telesat’s ability to use shared spectrum for its planned LEO constellation may be impacted
by new rules or the absence of rules for spectrum sharing.
PATENTS AND PROPRIETARY RIGHTS
As of December 31,
2017, Telesat owned eleven issued patents, seven of which are in the United States. These patents expire between 2018 and 2030.
Telesat also has several pending domestic and international patent applications.
There can be no assurance
that any of the foregoing pending patent applications will be issued. Moreover, there can be no assurance that infringement of
existing third party patents has not occurred or will not occur. Additionally, because the patent application process is confidential,
there can be no assurance that third parties, including competitors, do not have patents pending that could result in issued patents
which Telesat may infringe. In such event, Telesat may be restricted from continuing the infringing activities, which could adversely
affect its business, or Telesat may be required to obtain a license from a patent holder and pay royalties, which would increase
the cost of doing business.
RESEARCH AND DEVELOPMENT
Telesat’s research
and development expenditures are incurred for the studies associated with advanced satellite system designs and experimentation
and development of space, satellite and ground communications products. This includes the development of Telesat’s planned
LEO constellation.
FOREIGN OPERATIONS
Telesat’s revenues
from customers in Canada, the U.S. and other geographical regions, primarily Europe, Middle East and Africa and Latin America and
Caribbean, for the years ended December 31, 2017, 2016 and 2015 are tabulated below:
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Canada
|
|
$
|
319,379
|
|
|
$
|
322,030
|
|
|
$
|
338,955
|
|
United States
|
|
|
238,924
|
|
|
|
241,254
|
|
|
|
254,206
|
|
Others
|
|
|
154,087
|
|
|
|
139,847
|
|
|
|
158,523
|
|
|
|
$
|
712,390
|
|
|
$
|
703,131
|
|
|
$
|
751,684
|
|
At December 31, 2017,
2016 and 2015, substantially all of Telesat’s long-lived assets were located outside of the United States, primarily in Canada,
with the exception of in-orbit satellites. (see Item 1A –
“Risk Factors –
Telesat is subject to risks
associated with doing business internationally.”)
EMPLOYEES
As of December 31,
2017, Loral had 21 full-time employees.
As of December 31,
2017, Telesat and its subsidiaries had approximately 386 full-time and part-time employees, approximately 3.4% of whom are subject
to collective bargaining agreements. Telesat’s employee body is primarily comprised of professional engineering, sales and
marketing staff, administrative staff and skilled technical workers. Telesat considers its employee relations to be good.
AVAILABLE INFORMATION
Our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are available without charge
on our web site, www.loral.com, as soon as reasonably practicable after they are electronically filed with or furnished to the
Securities and Exchange Commission. Copies of these documents also are available in print, without charge, from Loral’s Investor
Relations Department, 600 Fifth Avenue, New York, NY 10020. Loral’s web site is an inactive textual reference only, meaning
that the information contained on the web site is not part of this report and is not incorporated in this report by reference.
Item 1A.
Risk Factors
I. Financial
and Telesat Investment Risk Factors
Telesat’s profitability may be
adversely affected by swings in the global financial markets, which may have a material adverse effect on Telesat’s customers
and suppliers.
Swings in the global
financial markets that include illiquidity, market volatility, changes in interest rates and currency exchange fluctuations can
be difficult to predict and negatively affect the ability of certain customers to make payments when due. Such swings may materially
and adversely affect us due to the potential insolvency of Telesat’s suppliers and customers, inability of customers to obtain
financing for their transponder leases, decreased customer demand, delays in supplier performance and contract terminations. Telesat’s
customers may not have access to capital or a willingness to spend capital on transponder leases, or their levels of cash liquidity
with which to pay for transponder leases may be adversely affected. Access of Telesat’s suppliers to capital and liquidity
with which to maintain their inventories, production levels or product quality may be adversely affected, which could cause them
to raise prices or cease operations. As a result, we may experience a material adverse effect on our business, results of operations
and financial condition. These potential effects of swings in the global financial markets are difficult to forecast and mitigate.
Our equity investment in Telesat may
be at risk because of Telesat’s leverage.
At December 31, 2017,
Telesat had outstanding indebtedness of $2.9 billion, which matures in 2023 and 2024, and additional borrowing capacity of $200
million under its revolving facility which matures in 2021. Approximately $2.6 billion of this total borrowing capacity is secured
by substantially all of the assets of Telesat. This indebtedness represents a significant amount of indebtedness for a company
the size of Telesat. The agreements governing this indebtedness impose operating and financial restrictions on Telesat’s
activities. These restrictions on Telesat’s ability to operate its business could seriously harm its business by, among other
things, limiting its ability to take advantage of financing, merger and acquisition and other corporate opportunities, which could
in time adversely affect the value of our investment in Telesat. Borrowings under Telesat’s senior secured credit facilities
are at variable rates of interest and expose Telesat to interest rate risk. Assuming all revolving loans are fully drawn, each
quarter point change in interest rates would result in a $4.8 million change in annual interest expense on indebtedness under the
senior secured credit facilities. Telesat has entered into, and in the future it may enter into, interest rate swaps that involve
the exchange of floating for fixed rate interest payments in order to reduce interest rate volatility. Telesat may not, however,
maintain interest rate swaps with respect to all or any of its variable rate indebtedness, and any swaps Telesat enters into may
not fully mitigate its interest rate risk, may prove disadvantageous or may create additional risks.
As of December 31,
2017, all of Telesat’s outstanding debt was denominated in U.S. dollars.
Changes
in exchange rates impact the amount that Telesat pays in interest and may significantly increase the amount that Telesat is required
to pay in Canadian dollar terms to redeem the
indebtedness
either
at maturity, or earlier if redemption rights are exercised or other events occur which require Telesat to offer to purchase the
indebtedness
prior to maturity, and to repay funds
drawn under its U.S. dollar denominated facility.
Unfavorable exchange rate changes could affect Telesat’s ability
to repay or refinance this debt.
A breach of the covenants
contained in any of Telesat’s loan agreements, including without limitation, a failure to maintain the financial ratios required
under such agreements, could result in an event of default. If an event of default were to occur, Telesat’s lenders would
be able to accelerate repayment of the related indebtedness, and it may also trigger a cross default under other Telesat indebtedness.
If Telesat is unable
to repay or refinance its secured indebtedness when due (whether at the maturity date or upon acceleration as a result of a default),
the lenders will have the right to proceed against the collateral granted to them to secure such indebtedness, which consists of
substantially all of the assets of Telesat and its subsidiaries. Telesat’s ability to make payments on, or repay or refinance,
its debt, will depend largely upon its future operating performance and market conditions. Disruptions in the financial markets
could make it more difficult to renew or extend Telesat’s facilities at current commitment levels on similar terms or at
all. In the event that Telesat is not able to service or refinance its indebtedness, there would be a material adverse effect on
the fair value of our equity investment in Telesat.
Telesat’s financial results and
our U.S. dollar reporting of Telesat’s financial results will be affected by volatility in the Canadian/U.S. dollar exchange
rate.
Portions of Telesat’s
revenue and expenses and all of its debt are denominated in U.S. dollars and changes in the U.S. dollar/Canadian dollar exchange
rate may have a negative impact on Telesat’s financial results and affect the ability of Telesat to repay or refinance its
borrowings. Telesat’s main currency exposures as of December 31, 2017 lie in its U.S. dollar denominated cash and cash
equivalents, trade and other receivables, trade and other payables and indebtedness, with the most significant impact being on
the U.S. dollar denominated indebtedness. In addition, approximately 52% of Telesat’s revenues, 42% of its operating expenses,
100% of its interest expense and a majority of its capital expenditures for 2017 were denominated in U.S. dollars. As of December
31, 2017, a five percent increase (decrease) in the Canadian dollar against the U.S. dollar would have increased (decreased) Telesat’s
net income by approximately $129 million. This analysis assumes all other variables remain constant.
Loral reports its investment
in Telesat using the equity method of accounting. Loral reports its investment in Telesat in U.S. dollars while Telesat reports
its financial results in Canadian dollars. As a result, Telesat’s results of operations are subject to conversion from Canadian
dollars to U.S. dollars. Changes in the U.S. dollar relationship to the Canadian dollar affect how Telesat’s financial results
are reported in our consolidated financial statements. During 2017, the exchange rate moved from U.S. $1.00/CAD 1.3441 at December
31, 2016 to U.S. $1.00/CAD 1.2571 at December 31, 2017.
While we own 62.7% of Telesat on an
economic basis, we own only 32.7% of its voting stock and therefore do not have the right to elect or appoint a majority of the
members of its Board of Directors and our interests and those of the other Telesat shareholders may diverge or conflict.
While we own 62.7%
of the economic interests in Telesat, we hold only 32.7% of its voting interests. Although the restrictions on foreign ownership
of Canadian satellites have been removed by the government of Canada, we are still subject to our shareholders agreement with the
Public Sector Pension Investment Board (“PSP”) and the articles of incorporation of Telesat, which do not allow us
to own more voting stock of Telesat than we currently own. Also, under our shareholders agreement, the governance and management
of Telesat is vested in its 10-member Board of Directors, comprised of three Loral-appointed directors, three PSP-appointed directors
and four independent directors, two of whom also own Telesat shares with nominal economic value and 31.1% and 6.8% of the voting
interests for Telesat directors, respectively. While we own a greater voting interest in Telesat than any other single stockholder
with respect to election of directors and we and PSP, which owns 29.4% of the voting interests for directors and 67.3% of the voting
interests for all other matters, together own a majority of Telesat’s voting power, circumstances may occur where our interests
and those of PSP diverge or are in conflict. For example, it is likely that any strategic transaction involving our ownership interests
in Telesat that we wish to pursue will require the cooperation of PSP, and PSP may not share our objectives or wish to pursue transactions
in which we are interested or any transaction at all. In the event that our interests differ from those of PSP, PSP, with the agreement
of at least three of the four independent directors, may, subject to veto rights that we have under Telesat’s shareholders
agreement, cause Telesat to take actions contrary to our wishes. These veto rights are, however, limited to certain extraordinary
actions — for example, the incurrence of more than $100 million of indebtedness or the purchase of assets at a cost in excess
of $100 million. Moreover, our right to block these actions under the shareholders agreement falls away if, subject to certain
exceptions, either (i) ownership or control, directly or indirectly by Dr. Mark H. Rachesky (President of MHR Fund Management LLC,
or MHR, which, through its affiliated funds is our largest stockholder) of our voting stock falls below certain levels other than
in certain specified circumstances or (ii) there is a change in the composition of a majority of the members of Loral’s board
of directors over a consecutive two-year period without the approval of the incumbent directors.
We may face indemnification claims for
pre-closing taxes from our sale of SSL.
In the fourth quarter
of 2012, we completed the sale of our subsidiary, SSL, to MDA. Under the terms of the purchase agreement related to the SSL sale,
we are obligated to indemnify MDA and its affiliates for certain pre-closing taxes. The final amounts of certain indemnification
claims relating to pre-closing taxes have not yet been determined. Where appropriate, we intend vigorously to contest the underlying
tax assessments, but there can be no assurance that we will be successful. We may not be able to settle indemnification claims
at or below the value recorded in our financial statements, and indemnification claims under the Purchase Agreement, whether pending
now or made in the future, could have a material adverse effect on our financial condition, including liquidity, and results of
operations.
Loral Space & Communications Inc.
is a holding company with no current operations; we are dependent upon, and may not receive, sufficient cash flow from our affiliates
or be able to incur sufficient borrowings to meet our financial obligations.
Loral is a holding
company with ownership interests in Telesat and XTAR and, as such, Loral has no independent operations or operating assets and
has ongoing cash requirements. We are dependent upon, and may not receive, sufficient cash flow from our affiliates or be able
to incur sufficient borrowings to meet our financial obligations.
The ability of Telesat
and XTAR to make payments or distributions to Loral, whether as dividends or as payments under applicable management and consulting
agreements or otherwise, will depend on their operating results, including their ability to satisfy their own cash flow requirements,
and obligations including, without limitation, their debt service obligations. Moreover, covenants contained in the debt agreements
of Telesat impose limitations on its ability to dividend or distribute funds to Loral. Even if the applicable debt covenants would
permit Telesat to pay dividends or make distributions, Loral will not have the ability to cause Telesat to do so. See above “While
we own 62.7% of Telesat on an economic basis, we own only 32.7% of its voting stock and therefore do not have the right to elect
or appoint a majority of the members of its Board of Directors and our interests and those of the other Telesat shareholders may
diverge or conflict.” Likewise, any dividends or distributions by XTAR would require the prior consent of our Spanish partner
in the joint venture.
Although our equity
in Telesat has substantial value, our shareholders agreement with PSP regarding Telesat limits our ability to pledge our shares
in Telesat as collateral for borrowing. For so long as the shareholders agreement is in place in its current form (see below “The
initial public offering of Telesat and related governance changes that we have requested may not occur or may proceed in a manner
contrary to our requests”), we may not be able to borrow or access the debt markets on a secured basis to fund our financial
obligations, and our ability to borrow or access the debt markets on an unsecured basis may be limited or not available at all.
XTAR has not generated sufficient revenues
to meet all of its substantial contractual obligations, and XTAR may be unable to pay these obligations when due, which could ultimately
result in a restructuring of XTAR.
XTAR has not been successful
in leasing a significant portion of its available capacity, and, in fact, in recent years revenues have been declining. For example,
XTAR’s revenues declined by approximately 10% from 2016 to 2017 and 28% from 2015 to 2016. As a result, XTAR has deferred
certain payments owed to us, Hisdesat and Telesat, including payments due under an agreement with Hisdesat to lease certain transponders
on the Spainsat satellite (the “Spainsat Lease Agreement”). These lease obligations require payment by XTAR up to a
maximum of $28 million per year through the end of the useful life of the satellite which is estimated to be in 2021. In September
2016, XTAR and Hisdesat amended the Spainsat Lease Agreement to, among other things, reduce for 2016 and 2017 the minimum capacity
required to be leased by XTAR, and accordingly lease payments by XTAR for 2016 and 2017 were reduced from $26 million to $18.2
million. The 2016 reduction was retroactive to January 1, 2016. In January 2017, XTAR and Hisdesat amended the Spainsat Lease Agreement
to, among other things, reduce the minimum capacity required to be leased by XTAR for 2017, and accordingly lease payments by XTAR
for 2017 were reduced to $9.5 million. In January 2018, XTAR and Hisdesat again amended the Spainsat Lease Agreement to, among
other things, reduce the minimum capacity required to be leased by XTAR for 2018, and accordingly lease payments by XTAR for 2018
were reduced from $26 million to $10.0 million. In addition, XTAR has entered into an agreement with Hisdesat whereby the past
due balance on the Spainsat transponders of $32.3 million as of December 31, 2008, together with a deferral of $6.7 million in
payments due in 2009, became payable to Hisdesat over 12 years through annual payments of $5 million. As of December 31, 2017 and
2016, XTAR has deferred payment of liabilities of $32.7 million and $28.8 million, respectively, for its lease obligation and Catch-Up
Payments to Hisdesat. XTAR’s lease and other obligations to Hisdesat, which will aggregate in excess of $70 million over
the remaining life of the satellite as of December 31, 2017, are substantial, especially in light of XTAR’s limited revenues
to date. XTAR has agreed that most of its excess cash balance would be applied towards making limited payments on these obligations,
as well as payments of other amounts owed to us, Hisdesat and Telesat in respect of services provided by them to XTAR. Unless XTAR
is able to generate a substantial increase in its revenues, these obligations will continue to accrue and grow, and, absent agreement
to further defer all or some these obligations, XTAR may be unable to pay them when due, which ultimately could result in a restructuring
of XTAR. As of December 31, 2017, $6.8 million was due to Loral from XTAR and we had an allowance of $6.6 million against these
receivables.
The soundness of financial institutions
and counterparties could adversely affect Telesat or us.
We and Telesat have
exposure to many different financial institutions and counterparties (including those under credit, financing and insurance arrangements),
including brokers and dealers, commercial banks, investment banks, insurance providers and other institutions and industry participants.
We and Telesat are exposed to risk, including credit risk resulting from many of the transactions executed in connection with hedging
activities, in the event that any lenders or counterparties, including insurance providers, are unable to honor their commitments
or otherwise default under an agreement with Telesat or us.
We have explored, are exploring and
expect in the future to explore various strategic transactions; this process may have an adverse effect on our financial condition
and results of operations whether or not a transaction is ultimately consummated.
We have previously
explored, and are exploring, potential strategic transactions involving Telesat. In the future, we expect to continue to pursue
strategic alternatives involving Telesat with the goal of maximizing shareholder value. The process of pursuing a strategic transaction
will result in transaction costs and may result in the diversion of the attention of operating management of Telesat from business
operations, the disclosure of confidential information to competitors or potential customers as part of a due diligence process
and an adverse perception of Telesat in the marketplace which could, among other things, adversely affect Telesat’s ability
to win new business. Any of such results could have a material adverse effect on our financial condition and results of operations
whether or not a strategic transaction is consummated. There can be no assurance whether or when any transaction involving Loral
or Telesat will occur, and, even if a transaction is consummated, there can be no assurance as to whether or to what degree such
a transaction will be successful in maximizing value to our shareholders.
We may explore and evaluate possible
strategic transactions and alliances other than those involving Telesat which require financing which may not be available at all
or on favorable terms.
Loral may, in addition
to exploring strategic transactions involving Telesat, from time to time, explore and evaluate possible strategic transactions
and alliances which may include joint ventures and strategic relationships as well as business combinations or the acquisition
or disposition of assets. In order to pursue certain of these opportunities, additional funds are likely to be required. There
can be no assurance that we will enter into additional strategic transactions or alliances, nor do we know if we will be able to
obtain the necessary financing for transactions that require additional funds on favorable terms, if at all.
As part of our business strategy, we
or Telesat may complete acquisitions or dispositions, undertake restructuring efforts or engage in other strategic transactions.
These actions could adversely affect our or Telesat’s business, results of operations and financial condition.
As part of our business
strategy, we or Telesat may engage in discussions with third parties regarding, or enter into agreements relating to, acquisitions,
dispositions, restructuring efforts or other strategic transactions in order to manage our or Telesat’s product and technology
portfolios or further our strategic objectives. In order to pursue this strategy successfully, we or Telesat must identify suitable
acquisition or alliance candidates and complete these transactions, some of which may be large and complex. Any of these activities
may result in disruptions to our or Telesat’s business and may not produce the full efficiency and cost reduction benefits
anticipated.
Instability in financial markets could
adversely affect our ability to access additional capital.
In past years, the
volatility and disruption in the capital and credit markets reached unprecedented levels. If these conditions reoccur, there can
be no assurance that we will not experience a material adverse effect on our ability to borrow money or have access to capital,
if needed. Lenders may be unable or unwilling to lend money. In addition, if we determine that it is appropriate or necessary to
raise capital in the future, the future cost of raising funds through the debt or equity markets may be expensive or those markets
may be unavailable. If we were unable to raise funds through debt or equity markets, it could have a material adverse effect on
our business, results of operations and financial condition.
The Telesat information in this report
other than the information included in the audited financial statements is based solely on information provided to us by Telesat.
Because we do not control
Telesat, we do not have the same control and certification processes with respect to the information contained in this report on
Telesat that we would have if we controlled Telesat. We are also not involved in managing Telesat’s day-to-day operations.
Accordingly, the Telesat information contained in this report other than the information included in the audited financial statements
is based solely on information provided to us by Telesat and has not been separately verified by us.
II.
Risk Factors Associated With Satellite Services
Telesat’s in-orbit satellites
may fail to operate as expected due to operational anomalies resulting in lost revenues, increased costs and/or termination of
contracts.
Satellites utilize
highly complex technology and operate in the harsh environment of space and therefore are subject to significant operational risks
while in orbit. The risks include in-orbit equipment failures, malfunctions and other kinds of problems commonly referred to as
anomalies. Satellite anomalies include, for example, circuit failures, transponder failures, solar array failures, telemetry transmitter
failures, battery cell and other power system failures, satellite control system failures and propulsion system failures. Some
of Telesat’s satellites have had malfunctions and other anomalies in the past. Acts of war, terrorism, magnetic, electrostatic
or solar storms, space debris, satellite conjunctions or micrometeoroids could also damage Telesat’s satellites.
Despite working closely
with satellite manufacturers to determine the causes of anomalies and mitigate them in new satellites and to provide for intrasatellite
redundancies for certain critical components to minimize or eliminate service disruptions in the event of failure, anomalies are
likely to be experienced in the future, whether due to the types of anomalies described above or arising from the failure of other
systems or components, and intrasatellite redundancy may not be available upon the occurrence of such anomalies. There can be no
assurance that, in these cases, it will be possible to restore normal operations. Where service cannot be restored, the failure
could cause the satellite to have less capacity available for sale, to suffer performance degradation, or to cease operating prematurely,
either in whole or in part.
Any single anomaly
or series of anomalies or other failure (whether full or partial) of any of Telesat’s satellites could cause Telesat’s
revenues, cash flows and backlog to decline materially, could require Telesat to repay prepayments made by customers of the affected
satellite and could have a material adverse effect on Telesat’s relationships with current customers and its ability to attract
new customers for satellite services. A failure could result in a customer terminating its contract for service on the affected
satellite. If Telesat is unable to provide alternate capacity to an affected customer, the customer may decide to procure all or
a portion of its future satellite services from an alternate supplier or the customer’s business may be so adversely affected
by the satellite failure that it may not have the financial ability to procure future satellite services. It may also require Telesat
to expedite its planned replacement program, adversely affecting its profitability, increasing its financing needs and limiting
the availability of funds for other business purposes. Finally, the occurrence of anomalies may adversely affect Telesat’s
ability to insure satellites at commercially reasonable premiums, if at all, and may cause insurers to demand additional exclusions
in policies they issue.
Telesat’s satellite launches may
be delayed, it may suffer launch failures or its satellites may fail to reach their planned orbital locations. Any such issue could
result in the loss of a satellite or cause significant delays in the deployment of the satellite which could have a material adverse
effect on Telesat’s results of operations, business prospects and financial condition.
Delays in launching
satellites and in the deployment of satellites are not uncommon and result from construction delays, the unavailability of reliable
launch opportunities with suppliers, delays in obtaining required regulatory approvals and launch failures. If satellite construction
schedules are not met, a launch opportunity may not be available at the time the satellite is ready to be launched. Satellites
are also subject to certain risks related to failed launches. Launch failures result in significant delays in the deployment of
satellites because of the need to construct replacement satellites, which typically takes up to 30 months or longer, and to obtain
another launch vehicle. A delay or perceived delay in launching a satellite, or replacing a satellite, may cause Telesat’s
current customers to move to another satellite provider if they determine that the delay may cause an interruption in continuous
service. In addition, Telesat’s contracts with customers who purchase or reserve satellite capacity may allow the customers
to terminate their contracts in the event of a delay. Any such termination would require Telesat to refund any prepayment it may
have received, and would result in a reduction in Telesat’s contracted backlog and would delay or prevent Telesat from securing
the commercial benefits of the new satellite. Launch vehicles may also underperform, in which case the satellite may be lost or,
if it can be placed into service by using its onboard propulsion systems to reach the desired orbital location, will have a shorter
useful life. Any launch failure, underperformance, delay or perceived delay could have a material adverse effect on Telesat’s
results of operations, business prospects and financial condition.
Changes in consumer demand for traditional
television services and expansion of terrestrial networks have adversely impacted the growth in subscribers to DTH television services
in North America which may adversely impact Telesat’s future revenues.
A substantial amount
of Telesat’s revenue is earned from customers who use Telesat’s services to provide DTH television services to the
public in North America. For various reasons, the number of DTH subscribers to whom Telesat’s customers provide services
has been decreasing. In many regions of the world, including North America, the terrestrial networks with which Telesat competes
continue to expand. Terrestrial networks have advantages over traditional DTH services for the delivery of two-way services, such
as on demand video services. Moreover, one of Telesat’s largest DTH customers also has a substantial fiber terrestrial broadcast
distribution network that it is continuing to expand, which has led to certain of its own DTH customers migrating to its terrestrial
network. The migration of DTH customers to terrestrial networks in order to access improved two-way services or for other reasons
could decrease the demand for Telesat’s services, adversely impacting its revenue and financial performance.
The growth of “over
the top” (“OTT”) video distribution (e.g., Netflix) may also have an adverse impact on Telesat’s business.
OTT distribution is an on-demand (i.e. non-linear) platform that provides delivery of broadcasting services to consumers through
an internet service provider that may not be involved in the control or distribution of the content itself. The growth of OTT distribution
may have a negative impact on the demand for the services of some of Telesat’s large DTH customers which could result in
lower demand for its satellite capacity.
In Canada, the CRTC
has mandated that broadcast distributors, including DTH operators, provide consumers with the option of ‘‘skinny basic’’
or ‘‘pick and pay’’ packages. These packages will allow consumers to choose both the number and the specific
channels they wish to receive beyond the entry level service offering as compared to the traditional subscription model which required
consumers to sign up and pay for a large basic service and encouraged them to subscribe for up to several hundred channels. If
consumers only subscribe to an entry level package or significantly reduce their subscriptions it could reduce the revenue Telesat’s
customers receive for their DTH offerings. In turn, Telesat’s customers may choose to reduce the number of channels they
deliver to consumers which would reduce the amount of satellite capacity they consume, adversely impacting Telesat’s revenue.
Fluctuations in available satellite
capacity could adversely affect Telesat’s results.
The availability of
satellite capacity has fluctuated over time, characterized by periods of undersupply of capacity, followed by periods of substantial
new satellite construction which is, in turn, followed by an oversupply of available capacity. The industry appears to be currently
experiencing a period of oversupply. Given the number of new satellites launched over the past year and the number presently under
construction, many of which contain high throughput payloads, unless Telesat experiences a corresponding increase in demand, the
next several years are likely to continue to be characterized by an oversupply of capacity. In addition, changes in technology
could introduce a substantial amount of new capacity into the market, further exacerbating the oversupply problem. An oversupply
of capacity may lead to a decrease in rates charged for satellite services which could adversely affect Telesat’s results.
Developments that
Telesat expects to support the growth in demand for satellite services, such as continued growth in corporate data and internet
traffic, may fail to materialize or may not occur in the manner or to the extent Telesat anticipates.
Telesat is subject to significant and
intensifying competition within the satellite industry and from other providers of communications capacity. Telesat’s failure
to compete effectively would result in a loss of revenues and a decline in profitability, which would adversely affect Telesat’s
results of operations, business prospects and financial condition.
Telesat provides point-to-point
and point-to-multipoint services for voice, data and video communications and for high-speed internet access. Telesat competes
against global competitors who are substantially larger than Telesat in terms of both the number of satellites they have in orbit
as well as in terms of their revenues. Due to their larger sizes, these operators are able to take advantage of greater economies
of scale, may be more attractive to customers, may (depending on the specific satellite and orbital location in question) have
greater flexibility to restore service to their customers in the event of a partial or total satellite failure and may be able
to offer expansion capacity for future requirements. Telesat also competes against regional satellite operators who may enjoy competitive
advantages in their local markets. As a result of the availability of export credit agency financing for projects that would not
otherwise obtain financing from commercial lenders, new entrants, including governments that have traditionally purchased satellite
capacity from established satellite operators, are acquiring their own satellites, which increases the amount of available satellite
capacity in the marketplace and decreases the demand for Telesat’s services.
Telesat expects a
substantial portion of its ongoing business will continue to be in the Canadian domestic market. This market is characterized by
increasing competition among satellite providers and rapid technological development. Historically, the Canadian regulatory framework
has required the use of Canadian-licensed satellites for the delivery of DTH video programming in Canada. It is possible that this
framework could change and allow non-Canadian satellite operators that have adequate service coverage in Canadian territory to
compete for future business from Telesat’s DTH customers.
Telesat’s business
is also subject to competition from ground based forms of communications technology. For many point-to-point and other services,
the offerings provided by terrestrial companies can be more competitive than the services offered via satellite. A number of companies
are increasing their ability to transmit signals on existing terrestrial infrastructures, such as fiber optic cable, DSL (digital
subscriber line) and terrestrial wireless transmitters often with funding and other incentives provided by government. The ability
of any of these companies to significantly increase their capacity and/or the reach of their network likely would result in a decrease
in the demand for Telesat’s services. Increasing availability of capacity from other forms of communications technology can
create an excess supply of telecommunications capacity, decreasing the prices Telesat would be able to charge for its services
under new service contracts and thereby negatively affecting Telesat’s profitability. New technology could render satellite-based
services less competitive by satisfying consumer demand in other ways. Telesat also competes for local regulatory approval in places
where more than one provider may want to operate and with other satellite operators for scarce frequency assignments and a limited
supply of orbital locations.
Telesat’s failure
to compete effectively could result in a loss of revenues and a decline in profitability, a decrease in the value of its business
and a downgrade of its credit rating, which would restrict its access to the capital markets.
Changes in technology could have a material
adverse effect on Telesat’s results of operations, business prospects and financial condition.
The implementation of
new technologies that can provide increased capacity to end users at lower cost may reduce demand for Telesat’s services.
The introduction of first generation high throughput satellites (“HTS”), such as ViaSat-1, Jupiter 1 and Intelsat’s
“Epic” line of HTS, all of which are able to transmit substantially more data than preexisting satellites, may decrease
demand and/or prices for traditional satellite capacity. Many of the new and replacement satellites to be deployed in the near
term will be HTS or include high throughput payloads. In addition, second generation HTS systems recently launched and in development
purport to be capable of throughput that substantially exceeds the throughput of first generation HTS. While Telesat owns the high
throughput Canadian payload on ViaSat-1 and has incorporated high throughput payloads on its Telstar 12 VANTAGE satellite and the
Telstar 18 VANTAGE and Telstar 19 VANTAGE satellites currently under construction, the introduction of more, and more capable,
HTS by other operators into the markets in which Telesat participates could have a material adverse effect on Telesat’s results
of operations, business prospects and financial condition.
A number of NGSO satellite
projects are in development which, if implemented successfully, could have significant advantages over geostationary satellite
systems, in particular for latency sensitive applications. These projects have the potential to substantially increase the amount
of available capacity in the marketplace, decreasing demand for geostationary satellite services. In addition to new satellite
technologies, new projects which could compete with traditional satellite services have recently been announced, including for
the provision of telecommunications services using balloons or drones.
Improvements in existing
technologies could also adversely impact the demand for satellite services. For example, improvements in signal compression could
allow Telesat’s customers to transmit the same amount of data using a reduced amount of capacity, which could decrease demand
for Telesat’s services.
There are numerous risks and uncertainties
associated with Telesat’s planned LEO constellation, and Telesat may ultimately choose not to proceed with the project, it
may proceed with the project and the project may not be successful or, irrespective of the foregoing, Telesat’s pursuit of
a LEO constellation may negatively impact its existing business, all of which could have a material adverse effect on Telesat’s
operations, business prospects, financial condition and its ability to repay its debt.
Telesat is currently
developing an advanced, global LEO constellation consisting of over one hundred, and potentially several hundred, satellites in
non-geostationary orbit. There are numerous risks and uncertainties associated with NGSO constellations generally and with Telesat’s
LEO constellation specifically.
NGSO constellations
are complex. In order to operate successfully, all components of the system, both on the ground and in space, must be integrated
seamlessly and efficiently. Unlike most traditional geostationary satellites currently in use which rely on legacy, space-tested
hardware and established ground equipment infrastructures, much of the technology necessary for the successful operation of a LEO
constellation, in particular the Telesat LEO constellation, is still in development. Telesat’s LEO constellation design
incorporates leading-edge satellite technologies, including on-board data processing, multi-beam phased array antennas, and optical
inter-satellite links, that have not been fully developed for space application at the scale, levels of performance and price points
that Telesat requires. In addition, in order to provide a competitive service in certain of the customer segments Telesat plans
to serve, Telesat requires advances in ground terminal design and manufacture, particularly electronic flat panel antennas capable
of acquiring and tracking LEO satellites. If Telesat’s LEO constellation does not deliver a high quality of service at prices
that are competitive relative to other satellite providers and alternative products, Telesat may not be able to acquire customers
and establish a successful business. It is possible that despite Telesat’s concerted effort to do so, Telesat may not be
able to sufficiently overcome the technological hurdles required to complete its planned LEO constellation or Telesat may implement
its LEO constellation and, due to technological issues that Telesat did not foresee or which Telesat did not effectively address,
Telesat’s LEO constellation may not operate as planned.
In order to operate
Telesat’s LEO constellation efficiently and in a commercially viable manner, Telesat will require access to a sufficient
amount of spectrum. Telesat currently holds an authorization from Canada for an NGSO network in Ka-band which has global ITU priority.
However, the regulatory framework relating to NGSO spectrum rights remains uncertain. Some of the international and domestic regulations
governing NGSO satellites are undergoing revision or have yet to be established. Both Canada and the U.S. have recently adopted
new deployment milestones for NGSO systems and the ITU is expected to adopt new deployment milestones for the bringing-into use
and maintenance of international NGSO filings at the World Radio Conference in November 2019. New milestones could adversely impact
Telesat’s ability to maintain priority rights for its planned LEO constellation. Irrespective of any change in regulations,
under current ITU rules, Telesat must successfully bring into use its Ka-band rights by placing a satellite in its low earth orbit
by the current deadline, failing which, Telesat may lose its ITU priority which could impair or preclude the deployment of its
LEO constellation. In addition, while the international rules governing coordination between NGSO satellite systems are well established
and rely on international filing date priority, the U.S. has adopted a different approach to NGSO-NGSO coordination that requires
band splitting if NGSO operators are unable to reach a coordination agreement. As a result, the amount of spectrum that may
be available to Telesat for its LEO constellation in the U.S. is uncertain. It is possible that other jurisdictions may adopt
the U.S. approach. Some of the spectrum utilized by Telesat’s LEO constellation is also allocated to terrestrial fixed
and mobile services and geostationary satellite services. Other portions of the spectrum Telesat plans to use are under consideration
for being designed for terrestrial fixed and mobile services. While some jurisdictions have established rules for sharing the spectrum,
many jurisdictions have yet to address this issue. Telesat’s ability to use shared spectrum for its LEO constellation
may be adversely impacted by new rules or the absence of rules for spectrum sharing. In addition, in order to successfully sell
services on Telesat’s LEO constellation, Telesat will require market access to each country in which its customers are located.
It is uncertain if Telesat will be successful in obtaining market access to all of the countries needed to make its LEO constellation
commercially successful.
The implementation
of Telesat’s planned LEO constellation will require a substantial outlay of capital. Telesat may not be able to raise
sufficient capital for any number of reasons. If Telesat is unable to raise sufficient capital, Telesat will not be able to build
and deploy its LEO constellation. In addition, if Telesat is successful in raising sufficient capital to fund the LEO constellation
and the constellation does not operate as expected or is otherwise commercially unsuccessful, Telesat may not be able to repay
all or a substantial part of its debt.
Although Telesat believes
there is a significant market for its LEO constellation, Telesat may not be able to attract enough customers to make the project
successful and earn a sufficient return on its investment, which could have a material adverse effect on Telesat’s business
prospects and financial condition and its ability to pay its debt.
The development and
deployment of Telesat’s LEO constellation may place a significant burden on its management and other internal resources.
The diversion of management’s attention and internal resources to Telesat’s LEO constellation and away from its existing
operations could harm Telesat’s business and operating results.
If successfully implemented,
Telesat’s LEO constellation may decrease demand for its other satellite services.
The actual orbital maneuver lives of
Telesat’s satellites may be shorter than Telesat anticipates and Telesat may be required to reduce available capacity on
its satellites prior to the end of their orbital maneuver lives.
Telesat anticipates
that its satellites will have the end-of-orbital maneuver life dates described above in Item1-Business. For all but one of Telesat’s
satellites, the expected end-of-orbital maneuver life date goes beyond the manufacturer’s end-of-service life date. A number
of factors will affect the actual commercial service lives of Telesat’s satellites, including:
the
amount of propellant used in maintaining the satellite’s orbital location or relocating the satellite to a new orbital location
(and, for newly-launched satellites, the amount of propellant used during orbit raising following launch); the durability and quality
of their construction; the performance of their components; conditions in space such as solar flares and space debris; operational
considerations, including operational failures and other anomalies; and changes in technology which may make all or a portion of
Telesat’s satellite fleet obsolete.
Telesat has been forced
to remove satellites from service prematurely in the past due to an unexpected reduction in their previously anticipated end-of-orbital
maneuver life. It is possible that the actual orbital maneuver lives of one or more of Telesat’s existing satellites may
also be shorter than originally anticipated. Further, on some of Telesat’s satellites it is anticipated that the total available
payload capacity may need to be reduced prior to the satellite reaching its end-of-orbital maneuver life.
Telesat periodically
reviews the expected orbital maneuver life of each of its satellites using current engineering data. A reduction in the orbital
maneuver life of any of Telesat’s satellites could result in a reduction of the revenues generated by that satellite, the
recognition of an impairment loss and an acceleration of capital expenditures. To the extent Telesat is required to reduce the
available payload capacity prior to the end of a satellite’s orbital maneuver life, its revenues from the satellite would
be reduced.
Telesat’s insurance will not protect
it against all satellite-related losses. Further, Telesat may not be able to renew insurance on its existing satellites or obtain
insurance on future satellites on acceptable terms or at all, and, for certain of Telesat’s existing satellites, Telesat
has elected to forego obtaining insurance.
Telesat’s current
satellite insurance does not protect it against all satellite-related losses that it may experience, and it does not have in-orbit
insurance coverage for all of the satellites in its fleet. As of December 31, 2017, the total net book value of Telesat’s
six in-orbit satellites for which it does not have insurance (Nimiq 1, Nimiq 2, Anik F1, Telstar 12, Telstar 18 and ViaSat-1)
was approximately CAD 35 million. Telesat’s insurance does not protect it against business interruption, loss of revenues
or delay of revenues. In addition, Telesat does not insure the net book value of performance incentives that may be payable to
a satellite’s manufacturer as these are payable only to the extent that the satellite operates in accordance with contracted
technical specifications. Telesat’s existing launch and in-orbit insurance policies include, and any future policies that
Telesat obtains can be expected to include, specified exclusions, deductibles and material change limitations. Typically, these
insurance policies exclude coverage for damage or losses arising from acts of war, anti-satellite devices, electromagnetic or radio
frequency interference and other similar potential risks for which exclusions are customary in the industry at the time the policy
is written. In addition, they typically exclude coverage for satellite health-related problems affecting Telesat’s satellites
that are known at the time the policy is written or renewed. Any claims under existing policies are subject to settlement with
the insurers and may, in some instances, be payable to Telesat’s customers.
The price, terms and
availability of satellite insurance has fluctuated significantly in recent years. These fluctuations may be affected by recent
satellite launch or in-orbit failures and general conditions in the insurance industry. Launch and in-orbit policies on satellites
may not continue to be available on commercially reasonable terms or at all. To the extent Telesat experiences a launch or in-orbit
failure that is not fully insured, or for which insurance proceeds are delayed or disputed, it may not have sufficient resources
to replace the affected satellite. In addition, higher premiums on insurance policies increase Telesat’s costs, thereby reducing
its profitability. In addition to higher premiums, insurance policies may provide for higher deductibles, shorter coverage periods,
higher loss percentages required for constructive total loss claims and additional satellite health-related policy exclusions.
There can be no assurance that, upon the expiration of an in-orbit insurance policy, which typically has a term of one year, Telesat
will be able to renew the policy on terms acceptable to it.
Subject to the requirements
of Telesat’s senior credit facilities and the indenture governing Telesat’s 8.875% senior notes, Telesat may elect
to reduce or eliminate insurance coverage for certain of its existing satellites, or elect not to obtain insurance policies for
its future satellites, especially if exclusions make such policies ineffective, the costs of coverage make such insurance impractical
or if self-insurance is deemed more cost effective.
Telesat derives a substantial amount
of its revenues from only a few of its customers. A loss of, or default by, one or more of these major customers, or a material
adverse change in any such customer’s business or financial condition, could materially reduce Telesat’s future revenues
and contracted backlog.
For the year ended
December 31, 2017, Telesat’s top five customers together accounted for approximately 55% of its revenues. At December 31,
2017, Telesat’s top five backlog customers together accounted for approximately 87% of its backlog. If any of Telesat’s
major customers chooses not to renew its contract or contracts at the expiration of the existing terms or seeks to negotiate concessions,
particularly on price, it could have a material adverse effect on Telesat’s results of operations, business prospects and
financial condition. Telesat’s customers could experience a downturn in their business or find themselves in financial difficulties,
which could result in their ceasing or reducing their use of Telesat’s services or becoming unable to pay for services they
had contracted to buy. In addition, some of Telesat’s customers’ industries are undergoing significant consolidation,
and Telesat’s customers may be acquired by each other or other companies, including by Telesat’s competitors. Such
acquisitions could adversely affect Telesat’s ability to sell services to such customers and to any end-users whom they serve.
Some customers have in the past defaulted, and Telesat’s customers may in the future default, on their obligations to Telesat
due to bankruptcy, lack of liquidity, operational failure or other reasons. Such defaults could adversely affect Telesat’s
revenues, operating margins and cash flows. If Telesat’s contracted revenue backlog is reduced due to the financial difficulties
of its customers, Telesat’s revenues, operating margins and cash flows would be further negatively impacted.
Telesat’s business is capital
intensive, and Telesat may not be able to raise adequate capital to finance its business strategies, or Telesat may be able to
do so only on terms that significantly restrict its ability to operate its business.
Implementation of
Telesat’s business strategy requires a substantial outlay of capital. As Telesat pursues its business strategies and seeks
to respond to developments in its business and opportunities and trends in its industry, its actual capital expenditures may differ
from its expected capital expenditures. There can be no assurance that Telesat will be able to satisfy its capital requirements
in the future. In addition, if one of Telesat’s satellites failed unexpectedly, there can be no assurance of insurance recovery
or the timing thereof and Telesat may need to exhaust or significantly draw upon its revolving credit facility or obtain additional
financing to replace the satellite. If Telesat determines that it needs to obtain additional funds through external financing and
is unable to do so, Telesat may be prevented from fully implementing its business strategy.
The availability and
cost to Telesat of external financing depends on a number of factors, including its credit rating and financial performance and
general market conditions. Telesat’s ability to obtain financing generally may be influenced by the supply and demand characteristics
of the telecommunications sector in general and of the satellite services sector in particular. Declines in Telesat’s expected
future revenues under contracts with customers and challenging business conditions faced by its customers are among the other factors
that may adversely affect Telesat’s credit and access to the capital markets. Other factors that could impact Telesat’s
credit rating include the amount of debt in its current or future capital structure, activities associated with strategic initiatives,
the health of its satellites, the success or failure of its planned launches, its expected future cash flows and the capital expenditures
required to execute its business strategy. The overall impact on Telesat’s financial condition of any transaction that it
pursues may be negative or may be negatively perceived by the financial markets and rating agencies and may result in adverse rating
agency actions with respect to its credit rating and access to the capital markets. Long-term disruptions in the capital or credit
markets as a result of uncertainty or recession, changing or increased regulation or failures of significant financial institutions
could adversely affect Telesat’s access to capital. A credit rating downgrade or deterioration in Telesat’s financial
performance or general market conditions could limit its ability to obtain financing or could result in any such financing being
available only at greater cost or on more restrictive terms than might otherwise be available and, in either case, could result
in Telesat deferring or reducing capital expenditures including on new or replacement satellites.
In certain circumstances,
Telesat is required to obtain the approval of its shareholders to incur additional indebtedness. There can be no assurances that
Telesat will receive such approval, if required.
Telesat operates in a highly regulated
industry and government regulations may adversely affect its ability to sell its services, or increase the expense of such services
or otherwise limit Telesat’s ability to operate or grow its business.
As an operator of
a global satellite system, Telesat is regulated by government authorities in Canada, the United States, Brazil and other countries
in which it operates.
In Canada, Telesat’s
operations are subject to regulation and licensing by ISED pursuant to the Radiocommunication Act (Canada) and by the CRTC, under
the Telecommunications Act (Canada). ISED has the authority to issue licenses, establish standards, assign Canadian orbital locations,
and plan the allocation and use of the radio frequency spectrum, including the radio frequencies upon which Telesat’s satellites
and earth stations depend. The Minister responsible for ISED has broad discretion in exercising this authority to issue licenses,
fix and amend conditions of licenses, and to suspend or even revoke them. The CRTC has authority over the allocation (and reallocation)
of satellite capacity to particular broadcasting undertakings. Some of Telesat’s service agreements are subject to CRTC approval.
Telesat is required to pay different forms of “universal service” charges in Canada and have certain research and development
obligations that do not apply to other satellite operators with which it competes. These rates and obligations could change at
any time.
In the United States,
the FCC regulates the provision of satellite services to, from, or within the United States. Certain of Telesat’s satellites
are owned and operated through a U.S. subsidiary and are regulated by the FCC. In addition, to facilitate the provision of FSS
satellite services in C-, Ku- and Ka-band frequencies in the United States market, foreign licensed operators can apply to have
their satellites either placed on the FCC’s Permitted Space Station List (for certain frequencies) or be granted a declaratory
ruling (for other frequencies). Telesat’s Anik Fl, Anik FlR, Anik F2, Anik F3 and Telstar 14R/Estrela do Sul 2 and its upcoming
Telstar 19 VANTAGE satellites are currently authorized to serve the U.S. market in accordance with these procedures. The export
from the United States of satellites and technical information related to satellites, earth station equipment and provision of
services to certain countries are subject to State Department, Commerce Department and Treasury Department regulations, in particular
the ITAR which currently includes satellites on the list of items requiring export permits. These ITAR provisions have constrained
Telesat’s access to technical information and have had a negative impact on its international consulting revenues. In addition,
Telesat and its satellite manufacturers may not be able to obtain and maintain necessary export authorizations which could adversely
affect Telesat’s ability to procure new United States-manufactured satellites; control its existing satellites; acquire launch
services; obtain insurance and pursue its rights under insurance policies; or conduct its satellite-related operations and consulting
activities.
Telesat also operates
satellites through licenses granted by, and are subject to regulations in, countries other than Canada and the United States. For
example, the Brazilian national telecommunications agency, ANATEL, regulates the granting of exploitation and landing rights to
the operation of Brazilian and foreign satellites and their use to transport telecommunication signals. ANATEL has authorized Telesat,
through its subsidiary, TBCS, to operate Telstar 14R/Estrela do Sul 2, a Ku-band FSS satellite at 63° WL pursuant to a Concession
Agreement and Telstar 19 VANTAGE, which is currently under construction. ANATEL has also accredited Telesat as the legal representative
in Brazil for Telstar 12 VANTAGE, Anik F1 and Anik G1. Telstar 18 operates at the 138° EL orbital location under an agreement
with APT, which has been granted the right to use the 138° EL orbital location by The Kingdom of Tonga.
In a number of countries,
including Canada and the United States, regulators are considering and may adopt new spectrum allocations for terrestrial mobile
broadband and 5G, including in bands that are currently allocated to satellite services. New spectrum allocations may require satellite
operators to vacate or share spectrum and may limit the spectrum that is available for satellite services, which could adversely
impact Telesat’s business.
In addition to regulatory
requirements governing the use of orbital locations, most countries regulate transmission of signals to and from their territory,
and Telesat is required to obtain and maintain authorizations to carry on business in the countries in which Telesat operates.
If Telesat fails to
obtain or maintain particular authorizations on acceptable terms, such failure could delay or prevent Telesat from offering some
or all of its services and adversely affect its results of operations, business prospects and financial condition. In particular,
Telesat may not be able to obtain all of the required regulatory authorizations for the construction, launch and operation of any
of its future satellites, for the orbital locations and spectrum for these satellites and for its ground infrastructure, on acceptable
terms or at all. Even if Telesat were able to obtain the necessary authorizations and orbital locations, the licenses Telesat obtains
may impose significant operational restrictions, or not protect Telesat from interference that could affect the use of its satellites.
Countries or their regulatory authorities may adopt new laws, policies or regulations, or change their interpretation of existing
laws, policies or regulations, that could cause Telesat’s existing authorizations to be changed or cancelled, require Telesat
to incur additional costs, impose or change existing pricing, or otherwise adversely affect its operations or revenues. As a result,
any currently held regulatory authorizations are subject to rescission and renewal and may not remain sufficient or additional
authorizations may be necessary that Telesat may not be able to obtain on a timely basis or on terms that are not unduly costly
or burdensome. Further, because the regulatory schemes vary by country, Telesat may be subject to regulations in foreign countries
of which Telesat is not presently aware that it is not in compliance with, and as a result could be subject to sanctions by a foreign
government.
Telesat’s operations may be limited
or precluded by ITU rules or processes, and Telesat is required to coordinate its operations with those of other satellite operators.
The ITU, a specialized
United Nations agency, regulates the global allocation of radio frequency spectrum and the registration of radio frequency assignments
and any associated satellite orbit. Telesat participates in the activities of the ITU. Only national administrations, however,
have full standing as ITU members. Consequently, Telesat must rely on the relevant government administrations to represent its
interests.
The ITU establishes
the Radio Regulations, an international treaty which contains the rules concerning frequency allocations and the priority to, coordination
of, and use of, radio frequency assignments. The ITU Radio Regulations define the allocation of radio frequencies to specific uses.
The ITU Radio Regulations are periodically reviewed and revised at World Radiocommunication Conferences (each, a “WRC”),
which take place typically every three to four years. Terrestrial operators are increasingly seeking additional radio frequency
assignments, including frequencies currently designated for exclusive or shared use by satellite systems, to support the increasing
demand for terrestrial services. The ITU is currently reviewing and may adopt at the WRC in November 2019 new international spectrum
allocations for terrestrial mobile and other services. As a result, Telesat cannot guarantee that the ITU will not change its allocation
decisions and rules in the future in a way that could limit or preclude Telesat’s use of some or all of its existing or future
orbital locations or spectrum.
The ITU Radio Regulations
also establish operating procedures for satellite networks and prescribe detailed coordination, notification and recording procedures.
With respect to the frequencies used by commercial satellites, the ITU Radio Regulations set forth a process for protecting earlier-registered
satellite systems from interference from later-registered satellite systems. In order to comply with these rules, Telesat must
coordinate the operation of its satellites, including any replacement satellite that has performance characteristics that are different
from those of the satellite it replaces, with other satellites. This process requires potentially lengthy and costly negotiations
with parties who operate or intend to operate satellites that could affect or be affected by Telesat’s satellites. For example,
in the third quarter of 2015, the Russian Satellite Communications Company (“RSCC”) launched a satellite to operate
at 14° WL, adjacent to Telesat’s Telstar 12 when located at 15° WL. Pursuant to its coordination agreement with RSCC,
Telesat was required to cease using certain frequencies on its Telstar 12 satellite as soon as RSCC’s new satellite commenced
service, which required Telesat to relocate some of its customers to alternate frequencies and reduced the available capacity on
the satellite from which Telesat is able to earn revenue. The coordination agreement with RSCC also limited the frequencies Telesat
was able to incorporate into its Telstar 12 VANTAGE satellite that was launched and entered service in the fourth quarter of 2015,
which may adversely affect Telesat’s ability to attract customers for Telstar 12 VANTAGE.
In certain countries,
a failure to resolve coordination issues is used by regulators as a justification to limit or condition market access by foreign
satellite operators. In addition, while the ITU Radio Regulations require later-in-time systems to coordinate their operations
with Telesat, Telesat cannot guarantee that other operators will conduct their operations so as to avoid transmitting any signals
that would cause harmful interference to the signals that Telesat, or its customers, transmit. This interference could require
Telesat to take steps, or pay or refund amounts to its customers, that could have a material adverse effect on Telesat’s
results of operations, business prospects and financial condition. The ITU’s Radio Regulations do not contain mandatory dispute
resolution or enforcement regulations and neither the ITU specifically, nor international law generally, provides clear remedies
if the ITU coordination process fails. Failure to coordinate Telesat’s satellites’ frequencies successfully or to obtain
or maintain other required regulatory approvals could have an adverse effect on Telesat’s business operations, prospects
and financial condition, as well as on the value of its business.
If Telesat does not make use of its
spectrum rights by specified deadlines, or does not continue to use the orbital spectrum rights it currently uses, those rights
may become available for other satellite operators to use.
Telesat’s in-orbit
satellites do not currently occupy all of the geostationary locations for which it has obtained regulatory authorizations. In some
cases, the Telesat satellite that occupies a geostationary location is not designed to use all of the frequency spectrum for which
Telesat has been authorized. Similarly, Telesat has been granted regulatory authorizations for certain spectrum in NGSO that are
not yet occupied.
In accordance with
the ITU Radio Regulations, governments have rights to use certain geostationary locations and NGSO orbits and the associated radio
frequencies. Certain of these governments have in turn authorized Telesat to use geostationary locations, NGSO orbits and associated
radio frequencies in addition to those used by its current satellites. Under the ITU Radio Regulations, Telesat must bring into
use these orbital locations, orbits and frequency assignments within a fixed period of time, or the governments in question would
lose their international priority rights and the geostationary location or NGSO orbits, and associated frequencies likely would
become available for use by another satellite operator. In addition to ITU requirements, the governments that have authorized Telesat
to use these orbital resources have generally conditioned such use on Telesat meeting certain milestones, including making use
of the orbital spectrum by a specified time.
If
Telesat is unable to place satellites into currently unused geostationary locations or NGSO orbits in a manner that satisfies the
ITU Radio Regulations and national regulatory requirements, or if the ITU or national regulatory requirements were to change, or
if Telesat is unable to maintain satellites or make use of all of the spectrum for which it has been authorized at the geostationary
locations that it currently uses, Telesat may lose its rights to use these orbital resources and they would become available for
other satellite operators to use. The loss of one or more of Telesat’s orbital resources could negatively affect its plans
and its ability to implement its business
strategy.
Replacing a satellite upon the end of
its service life will require Telesat to make significant expenditures and may require Telesat to obtain shareholder approval.
To ensure no disruption
in Telesat’s business and to prevent loss of its customers, Telesat will be required to commence construction of a replacement
satellite approximately five years prior to the expected end of service life of the satellite then in orbit. Typically, it costs
in the range of $250 million to $300 million to construct, launch and insure a satellite. There can be no assurance that Telesat
will have sufficient cash, cash flow or be able to obtain third party or shareholder financing to fund such expenditures on favorable
terms, if at all, or that Telesat will obtain shareholder approval to procure replacement satellites. Certain of Telesat’s
satellites are nearing their expected end-of-orbital maneuver lives. Should Telesat not have sufficient funds available to replace
those satellites or should Telesat not receive approval from its shareholders to purchase replacement satellites, it could have
a material adverse effect on Telesat’s results of operations, business prospects and financial condition.
Reductions in government spending could
reduce demand for Telesat’s services.
Governments, in particular
the U.S. government, purchase a substantial amount of satellite services from commercial satellite operators, including Telesat.
To the extent these governments reduce spending on satellite services, as a result of the need to reduce overall spending during
periods of fiscal restraint, to reduce budget deficits or otherwise, demand for Telesat’s services could decrease which could
adversely affect Telesat’s revenue, the prices it is able to charge for services and its results.
Telesat may experience a failure of
ground operations infrastructure or interference with its satellite signals that impairs the commercial performance of, or the
services delivered over, its satellites or the satellites of other operators for whom it provides ground services, which could
result in a material loss of revenues.
Telesat operates an
extensive ground infrastructure including a satellite control center in Ottawa, Ontario, its main earth station and back up satellite
control facility at Allan Park, Ontario, nine earth stations throughout Canada, one teleport located in the United States and one
in Brazil and its telemetry, tracking and control (“TT&C”) facility in Perth, Australia. These ground facilities
are used for controlling Telesat’s satellites and for the provision of end-to-end services to Telesat’s customers.
Telesat may experience
a partial or total loss of one or more of these facilities due to natural disasters (tornado, flood, hurricane or other such acts
of God), fire, acts of war or terrorism or other catastrophic events. A failure at any of these facilities would cause a significant
loss of service for Telesat customers. Additionally, Telesat may experience a failure in the necessary equipment at the satellite
control center, at the back-up facility, or in the communications links between these facilities and remote earth station facilities.
A failure or operator error affecting tracking, telemetry and control operations might lead to a breakdown in the ability to communicate
with one or more satellites or cause the transmission of incorrect instructions to the affected satellite(s), which could lead
to a temporary or permanent degradation in satellite performance or to the loss of one or more satellites. Intentional or non-intentional
electromagnetic or radio frequency interference could result in a failure of Telesat’s ability to deliver satellite services
to its customers. A failure at any of Telesat’s facilities or in the communications links between its facilities or interference
with its satellite signal could cause its revenues and backlog to decline materially and could adversely affect its ability to
market its services and generate future revenues and profit.
Telesat purchases
equipment from third party suppliers and depends on those suppliers to deliver, maintain and support these products to the contracted
specifications in order for Telesat to meet its service commitments to its customers. Telesat may experience difficulty if these
suppliers do not meet their obligations to deliver and support this equipment. Telesat may also experience difficulty or failure
when implementing, operating and maintaining this equipment or when providing services using this equipment. This difficulty or
failure may lead to delays in implementing services, service interruptions or degradations in service, which could cause Telesat’s
revenues and backlog to decline materially and could adversely affect Telesat’s ability to market its services and generate
future revenues and profit.
Telesat’s dependence on outside
contractors could result in delays related to the design, manufacture and launch of its new satellites, or could limit its ability
to sell its services to the U.S. Department of Defense, which could adversely affect Telesat’s operating results and prospects.
Any delays in the
design, construction or launch of Telesat’s satellites could have a material adverse effect on its business, financial condition
and results of operations. There are a limited number of manufacturers that are able to design and build satellites according to
the technical specifications and standards of quality Telesat requires, including Airbus Defense and Space, Thales Alenia Space,
Boeing, Lockheed Martin, MELCO, Orbital and SSL. There are also a limited number of suppliers able to launch such satellites, including
International Launch Services, Arianespace, Mitsubishi Heavy Industries, Space Exploration Technologies Corp. (“SpaceX”)
and Lockheed Martin. Should any of Telesat’s suppliers’ businesses fail, it would reduce competition and could increase
the cost of satellites and launch services. Adverse events with respect to any of Telesat’s manufacturers or launch suppliers
could also result in the delay of the design, construction or launch of its satellites. For example, many of Telesat’s past
launches were provided by International Launch Services, an entity owned by the Russian government. In response to the ongoing
situation involving the Russian Federation in the Ukraine, various governments have implemented economic and other sanctions against
Russia and its interests. U.S. law requires satellite manufacturers to obtain a license from the U.S. government for the export
of certain prescribed U.S. technologies, if the export of the technology is to a Russian counterparty. Virtually all satellites
manufactured outside of China contain prescribed U.S. technology. Should the U.S. implement sanctions having the effect of blocking
the export of satellites containing prescribed U.S. technologies to Russian-controlled launch providers, it would lead to a reduction
in launch alternatives and, as a result, could lead to increased launch costs or delays in the future, which could have an adverse
impact on Telesat’s business. In addition, in December 2017, the U.S. government adopted new legislation that prohibits the
U.S. Secretary of Defense from procuring satellite services using satellites that were launched on a Russian launch vehicle.
General economic conditions
may also affect the ability of Telesat’s manufacturers and launch suppliers to provide services on commercially reasonable
terms or to fulfill their obligations in terms of manufacturing schedules, launch dates, pricing or other items. Even where alternate
suppliers for such services are available, Telesat may have difficulty identifying them in a timely manner, or may incur significant
additional expense in changing suppliers, and this could result in difficulties or delays in the design, construction or launch
of Telesat’s satellites.
Telesat’s future reported net
income and asset values could be adversely affected by impairments of the value of goodwill and intangible assets.
The assets on Telesat’s
consolidated balance sheet as of December 31, 2017 include goodwill with a carrying value of approximately CAD 2.4 billion and
other intangible assets with a carrying value of approximately CAD 295 million. A valuation of goodwill and other intangible assets
(such as orbital locations) with indefinite useful lives is undertaken on an annual basis, or whenever events or changes in circumstances
indicate that the carrying amount is likely to exceed their recoverable amount. Telesat measures for impairment using a projected
discounted cash flow method and confirms the assessment using other valuation methods. If the asset’s carrying value is more
than its recoverable amount, the difference is recorded as a reduction in the amount of the asset on the balance sheet and an impairment
charge in the consolidated statement of income (loss). Testing for impairment requires significant judgment by management to determine
the assumptions used in the impairment analysis. Any changes in the assumptions used could have a material impact on the impairment
analysis and result in an impairment charge. Telesat cannot predict whether an event that triggers impairment will occur, when
it will occur or how it will affect the reported asset values. If Telesat’s goodwill or other intangible assets are deemed
to be impaired in whole or in part, it could be required to reduce or write off such assets, which could have a material adverse
effect on its financial condition.
Telesat is subject to risks associated
with doing business internationally.
Telesat’s operations
internationally are subject to risks that are inherent in conducting business globally. Telesat is subject to compliance with the
United States Foreign Corrupt Practices Act (“FCPA”) and other similar anti-corruption laws, which generally prohibit
companies and their intermediaries from making improper payments to foreign government officials for the purpose of obtaining or
retaining business. While Telesat’s employees and contractors are required to comply with these laws, Telesat cannot be sure
that its internal policies and procedures will always protect it from violations of these laws, despite Telesat’s commitment
to legal compliance and corporate ethics.
Violations of
these laws may result in severe criminal and civil sanctions as well as other penalties, and the SEC and U.S. Department of Justice
have increased their enforcement activities with respect to the FCPA. The occurrence or allegation of these types of risks may
adversely affect Telesat’s business, performance, financial condition and results of
operations.
Telesat’s failure to maintain
or obtain authorizations under and comply with the U.S. export control and trade sanctions laws and regulations could have a material
adverse effect on its results of operations, business prospects and financial condition.
The export of satellites
and technical data related to satellites, earth station equipment and provision of services are subject to U.S. export control
and economic sanctions laws, implemented by U.S. State Department, Commerce Department and Treasury Department regulations. If
Telesat does not maintain its existing authorizations or obtain necessary future authorizations under the export control laws and
regulations of the United States, it may be unable to export technical data or equipment to non-U.S. persons and companies, including
to Telesat’s own non-U.S. employees, as required to fulfill existing contracts. If Telesat does not maintain its existing
authorizations or obtain necessary future authorizations under and comply with the trade sanctions laws and regulations of the
United States, it may not be able to provide satellite capacity and related administrative services to certain of its customers.
Violations of these laws and regulations can also result in civil and criminal sanctions or penalties. Telesat’s ability
to acquire new satellites, launch new satellites or operate its satellites could also be negatively affected if its suppliers do
not obtain required U.S. export authorizations.
The content of third-party transmissions
over Telesat’s satellites may affect Telesat since Telesat could be subject to sanctions by various governmental entities
for the transmission of certain content.
Telesat provides satellite
capacity for transmissions by third parties. Telesat does not decide what content is transmitted over its satellites, although
its contracts generally provide it with rights to prohibit certain types of content or to cease transmission or permit Telesat
to require its customers to cease their transmissions under certain circumstances. A governmental body or other entity may object
to some of the content carried over Telesat’s satellites, such as “adult services” video channels or content
deemed political in nature. Issues arising from the content of transmissions by these third parties over Telesat’s satellites
could affect its future revenues, operations or relationship with certain governments or customers.
III.
Other Risks
We have been pursuing and will continue
to pursue a strategic transaction with respect to our interest in Telesat; there can be no assurance, however, as to when or whether
we will be able to conclude any such transaction.
Our principal asset
is our majority ownership interest in Telesat. In an effort to maximize shareholder value, we have been exploring, and are in discussions
with PSP regarding, potential strategic transactions to alter the status quo in our ownership of Telesat. Subject to market conditions
and the cooperation of PSP, we continue to explore the combination of Loral and Telesat into one public company and/or the sale
of Loral in connection with a sale of Telesat. Also, in 2015, we exercised our right under the Telesat Shareholders Agreement (the
“Shareholders Agreement”) to require that Telesat initiate a public offering, and we may further pursue this right
in the event a combination transaction or a sale of Telesat is not likely to be achievable in a timely manner or on satisfactory
terms. See “The initial public offering of Telesat and related governance changes that we have requested may not occur or
may proceed in a manner contrary to our requests” below. There can be no assurance as to whether or when we will be able
to conclude any strategic transaction or that any strategic initiatives or transaction involving Telesat or Loral may occur, or
that any particular economic, tax, structural or other objectives or benefits with respect to any initiative or transaction involving
Telesat or Loral’s interest therein will be achieved.
We received a cash distribution from
Telesat of $242.7 million; we intend to make a cash distribution to our stockholders from the proceeds of that distribution; there
can be no assurance, however, as to the amount and timing of any such distribution, and such distribution may be impacted by the
outcome of our discussions regarding, and the structure of, the strategic combination transaction with respect to our interest
in Telesat that we are pursuing.
In the first quarter
of 2017, we received $242.7 million in cash from Telesat, representing our share of an aggregate approximately $400 million distribution
from Telesat to its shareholders and stock option holders. We intend to use the proceeds of such distribution, net of reasonable
reserves for working capital and other liabilities, to make a distribution to our stockholders. There can be no assurance as to
the amount and timing of any such distribution, and such distribution may be impacted by the outcome of our discussions regarding,
and the structure of, the strategic combination transaction with respect to our interest in Telesat that we are pursuing.
The initial public offering of Telesat
and related governance changes that we have requested may not occur or may proceed in a manner contrary to our requests.
Our Shareholders Agreement
with PSP regarding Telesat provides for either PSP or Loral to initiate the process of conducting an initial public offering of
the equity shares of Telesat (a “Telesat IPO”). In connection with our exploration of strategic initiatives to alter
the status quo in our ownership of Telesat, in July 2015, we exercised our right under the Shareholders Agreement to require Telesat
to conduct a Telesat IPO. Specifically, we requested that Telesat issue not more than 25 million newly issued shares of Telesat
voting common stock. We also requested the termination of the Shareholders Agreement and the elimination of certain provisions
in Telesat’s Articles of Incorporation, both of which we believe are necessary to accommodate a successful public offering.
If those provisions are eliminated, an impediment to the conversion of our non-voting Telesat shares to voting shares would be
eliminated. Termination or modification of the Shareholders Agreement and conversion of our non-voting shares to voting shares
would enable us, after a Telesat IPO and subject to the receipt of any necessary regulatory approvals, to obtain majority voting
control of Telesat. Telesat selected two co-managing underwriters and informed us that it will work to implement a Telesat IPO
pending our agreement with PSP on governance matters following a Telesat IPO. To date, no such agreement has been reached. In the
event a combination transaction that we are pursuing or a sale of Telesat is not likely to be achievable in a timely manner or
on satisfactory terms (see “We have been pursuing and will continue to pursue a strategic transaction with respect to our
interest in Telesat; there can be no assurance, however, as to when or whether we will be able to conclude any such transaction,”
above), we may further pursue our right to a Telesat IPO. There can be no assurance as to whether, when or on what terms a Telesat
IPO, termination or modification of the Shareholders Agreement or any requested changes to Telesat’s Articles of Incorporation
may occur or that any particular economic, tax, structural or other objectives or benefits with respect to a Telesat IPO will be
achieved. If a Telesat IPO is expected to proceed under unfavorable terms or at an unfavorable price, we may withdraw our demand
for a Telesat IPO.
We and PSP may assert legal claims against
one another relating to Telesat; there can be no assurance, however, that our claims will be successful or that the relief we seek
will be granted or that PSP will not prevail on its claims.
Depending upon the
outcome of the strategic initiatives that we are pursuing (see “We have been pursuing and will continue to pursue a strategic
transaction with respect to our interest in Telesat; there can be no assurance, however, as to when or whether we will be able
to conclude any such transaction,” above), we may assert certain claims against PSP for actions we believe violated our rights
relating to the affairs of Telesat under the Telesat Shareholders Agreement and otherwise. In response to our claims, PSP has informed
us that it believes that it may have claims against us, although we are not aware of the legal or factual basis for any such claims.
We and PSP have agreed that, pending the outcome of our discussions relating to Telesat, it would be beneficial to delay the commencement
of any action relating to either party’s claims and have entered into an agreement (the “Tolling Agreement”)
which preserves the parties’ rights to assert against one another legal claims relating to Telesat. We also included Telesat
as a party to the Tolling Agreement because, as a technical matter of Canadian law and for purposes of potentially seeking equitable
relief, Telesat may be a necessary party. There can be no assurance that if the Tolling Agreement lapses that we and PSP will not
pursue legal claims against one another relating to Telesat. If we pursue claims against PSP, there can be no assurance that our
claims will be successful or that the relief we seek will be granted. If PSP pursues claims against us, there can be no assurance
that PSP will not prevail on its claims.
A public offering of stock in Telesat
could adversely affect the market for, and price of, our common stock and the value of our interest in Telesat.
If the Telesat IPO
that we have requested occurs, it is uncertain whether the offering would include a primary offering of shares by Telesat, a secondary
offering of shares by either or both of the Telesat shareholders or a combination of both types of offerings. It is also uncertain
what effect the Telesat IPO (and any corporate restructuring required in connection with such offering under the terms of the Telesat
shareholders agreement) would have on Loral’s governance rights in Telesat. Changes in our Telesat governance rights could
adversely affect the value of our interest in Telesat and the price at which our common stock trades. In addition, a public market
for Telesat equity would create a situation where there would be two separate public-market proxies for the value of Telesat –
our stock and the Telesat stock. Telesat stock would represent a direct interest in Telesat, whereas the value of the common shares
of Loral would also include other assets and liabilities, many of which are difficult to value. Having both Telesat stock and our
stock trading publicly could create confusion in the market and could adversely affect the liquidity and/or trading values of either
our or Telesat’s common stock.
Third parties have significant rights
with respect to our affiliates.
Third parties have
significant rights with respect to, and we do not have control over management of, our affiliates. For example, while we own 62.7%
of the participating shares of Telesat, we own only 32.7% of the voting power. Also, Hisdesat enjoys substantial approval rights
in regard to XTAR, our X-band joint venture. The rights of these third parties and fiduciary duties under applicable law could
result in others acting or failing to act in ways that are not in our best interest. For example, it is likely that any strategic
transaction involving Telesat or XTAR that we wish to pursue will require the cooperation of our joint venture partners, and our
partners may not share our objectives or wish to pursue a transaction in which we are interested or any transaction at all.
The loss of executive officers and our
inability to retain other key personnel could materially adversely affect our operations or ability to pursue strategic alternatives.
Loral and Telesat rely
on a number of key employees, including members of management and certain other employees possessing unique experience in technical
and commercial aspects of the satellite services business. If Loral or Telesat are unable to retain these employees, it could be
difficult to replace them. In addition, the business of Telesat, with its constant technological developments, must continue to
attract highly qualified and technically skilled employees. In the future, the inability to retain or replace these key employees,
or the inability to attract new highly qualified employees, could have a material adverse effect on the results of operations,
business prospects and financial condition of Loral or Telesat.
Also, we have retained
Michael B. Targoff, our former chief executive officer and president, as a consultant, in particular to provide assistance and
guidance in the oversight of strategic matters relating to Telesat and XTAR. The consulting agreement may be terminated by either
the Company or Mr. Targoff at any time for any reason or for no reason on ten days prior notice. There can be no assurance that
Mr. Targoff will not terminate the agreement, and, were he to do so, the ability of the Company to pursue strategic alternatives
with regard to Telesat and XTAR could be adversely affected.
Interruption or failure of, or cyber-attacks
on, Telesat’s or our information technology and communications systems could hurt Telesat’s or our ability to operate
our respective businesses effectively, which could harm Telesat’s or our business and operating results.
Telesat’s and
our ability to operate our respective businesses depends, in part, on the continuing operation of Telesat’s and our information
technology and communications systems, which are an integral part of Telesat’s and our businesses. We and Telesat rely on
our information and communication systems, as well as software applications developed internally and externally to, among other
things, effectively manage the accounting and financial functions, including maintaining internal controls, operate Telesat’s
satellites and satellites for third parties, provide consulting services by Telesat to customers and transmit customer proprietary
and/or confidential content and assist with other operations. Although we and Telesat take steps to secure information technology
and communications systems, including computer systems, intranet and internet sites, email and other telecommunications and data
networks, the security measures implemented have not always been effective.
While we and Telesat
continue to bolster systems with additional security measures, and, working with external experts, mitigate the risk of security
breaches, systems may be vulnerable to theft, loss, damage and interruption from a number of potential sources and events, including
unauthorized access or security breaches, inclement weather, natural or man-made disasters, earthquakes, explosions, terrorist
attacks, floods, fires, cyber-attacks, computer viruses, power loss, telecommunications or equipment failures, transportation interruptions,
accidents or other disruptive events or attempts to harm our or Telesat’s systems. In addition, Telesat’s and our facilities
are also potentially vulnerable to break-ins, sabotage and intentional acts of vandalism. Moreover, some of these systems are not
fully redundant, and disaster recovery planning cannot account for all eventualities. Telesat’s and our business and operations
could be adversely affected if, as a result of a significant cyber event or otherwise, operations are disrupted or shut down, confidential
or proprietary information is stolen or disclosed, Telesat loses customers, costs are incurred or fines are required in connection
with confidential or export-controlled information that is disclosed, significant resources are dedicated to system repairs or
to increase cyber security protection or we or Telesat otherwise incur significant litigation or other costs as a result of any
such event. While Telesat’s or our insurance coverage could offset losses relating to some of these types of events, to the
extent any such losses are not covered by insurance, a serious disruption to systems could significantly limit Telesat’s
or our ability to manage and operate our business efficiently, which in turn could have a material adverse effect on our business,
reputation, results of operations and financial condition.
MHR may be viewed as our controlling
stockholder and may have conflicts of interest with us in the future.
As of December 31,
2017, various funds affiliated with MHR and Dr. Rachesky held approximately 39.9% of the outstanding voting common stock of Loral
as well as all issued and outstanding shares of Loral non-voting common stock, which, when taken together, represent approximately
58.4% of the outstanding common equity of Loral as of December 31, 2017. As of March 9, 2018, representatives of MHR occupy two
of the seven seats on our board of directors. One seat on our board, previously occupied by a former managing principal of MHR,
is currently vacant. In addition, one of our other directors was selected by the creditors’ committee in our predecessor’s
chapter 11 cases, in which MHR served as the chairman. Conflicts of interests may arise in the future between us and MHR. For example,
MHR and its affiliated funds are in the business of making investments in companies and may acquire and hold interests in businesses
that compete directly or indirectly with us. Under our agreement with PSP, subject to certain exceptions, in the event that either
(i) ownership or control, directly or indirectly, by Dr. Rachesky, of our voting stock falls below certain levels other than in
certain specific circumstances or (ii) there is a change in the composition of a majority of the members of the Loral board of
directors over a consecutive two-year period without the approval of the incumbent directors, we will lose our veto rights relating
to certain actions by Telesat. In addition, after either of these events, PSP will have certain rights to enable it to exit from
its investment in Telesat, including a right to cause Telesat to conduct an initial public offering in which PSP’s shares
would be the first shares offered or, if no such offering has occurred within one year due to a lack of cooperation from Loral
or Telesat, to cause the sale of Telesat and to drag along the other shareholders in such sale, subject to our right to call PSP’s
shares at fair market value.
There is a thin trading market for our
voting common stock.
Trading activity in
our voting common stock, which is listed on the NASDAQ National Market, has generally been light, averaging approximately 45,100
shares per day for the year ended December 31, 2017. Moreover, over 50% of our voting common stock is effectively held by MHR and
several other stockholders. If any of our significant stockholders should sell some or all of their holdings, it will likely have
an adverse effect on our share price. Although the funds affiliated with MHR have restrictions on their ability to sell our shares
under U.S. securities laws, we have filed a shelf registration statement in respect of the voting common stock and non-voting common
stock they hold in Loral that effectively eliminates such restrictions. Such funds also have other demand and piggyback registration
rights in respect of their Loral voting common stock and non-voting common stock that would also, if exercised, effectively eliminate
such restrictions.
The market for our voting common stock
could be adversely affected by future issuance of significant amounts of our voting common stock.
As of December 31,
2017, 21,427,078 shares of our voting common stock and 9,505,673 shares of our non-voting common stock were outstanding. On that
date, there were also outstanding 75,262 vested restricted stock units. These restricted stock units may be settled either in cash
or Loral voting common stock at the Company’s option.
Sales of significant
amounts of our voting common stock to the public, or the perception that those sales could happen, could adversely affect the market
for, and the trading price of, our voting common stock.
Changes in tax rates or policies or
changes to our tax liabilities could affect operating results.
We are subject to U.S.
federal, state and local income taxation on our worldwide income and foreign taxes on certain income from sources outside the United
States. Telesat is subject to income taxes in Canada and numerous foreign jurisdictions. Significant judgment is required to determine
and estimate tax liabilities, and future annual and quarterly tax rates could be affected by numerous factors, including changes
in the applicable tax laws, composition of earnings in countries or states with differing tax rates, valuation and utilization
of deferred tax assets and liabilities and the outcome of income tax audits in various jurisdictions around the world. Many countries
have or are expected to adopt changes to tax laws as a result of the Base Erosion and Profit Shifting final proposals from the
Organization for Economic Co-operation and Development with anti-avoidance initiatives. Such tax law changes increase uncertainty
and may adversely affect our results of operations. Although we believe our tax estimates are reasonable, we regularly evaluate
the adequacy of our provision for income taxes, and there can be no assurance that any final determination by a taxing authority
will not result in additional tax liability which could have a material adverse effect on our results of operations.
The future use of tax attributes is
limited.
As of December 31,
2017, we had various tax attributes including carryforwards for federal net operating losses (“NOLs”) of $139.7 million
and foreign tax credits (“FTCs”) of $104.9 million and state NOLs and tax credits that are available to offset future
tax liability (see Notes 2 and 7 to the Loral consolidated financial statements for a description of the accounting treatment of
such tax attributes). As our emergence from bankruptcy on November 21, 2005 constituted an “ownership change” under
Section 382 of the Internal Revenue Code, our ability to use these tax attributes existing at such effective date is subject to
an annual limitation of approximately $32.6 million (tax effect of $6.8 million), subject to increase or decrease based on certain
factors. If Loral experiences an additional “ownership change” during any three-year period after November 21, 2005,
future use of these tax attributes may become further limited. An ownership change may be triggered by sales or acquisitions of
Loral equity interests in excess of 50% by shareholders owning five percent or more of our total equity value, i.e., the total
market value of our equity interests, as determined on any applicable testing date. A strategic transaction with respect to our
ownership interest in Telesat could result in such an ownership change. We would be adversely affected by an additional “ownership
change” if, at the time of such change, the total market value of our equity multiplied by the federal applicable long-term
tax exempt rate, which at December 31, 2017 was 1.96%, was less than $32.6 million. As of December 31, 2017, the total market value
of our equity ($1.4 billion) multiplied by the federal applicable long-term tax exempt rate was approximately $26.7 million.
We are subject to the Foreign Corrupt
Practices Act.
We are subject to the
Foreign Corrupt Practices Act, or the FCPA, which generally prohibits U.S. companies and their intermediaries from making corrupt
payments to foreign officials for the purpose of obtaining or keeping business or otherwise obtaining favorable treatment, and
requires companies to maintain adequate record-keeping and internal accounting practices to accurately reflect the transactions
of the company. The FCPA applies to companies, individual directors, officers, employees and agents. Under the FCPA, U.S. companies
may be held liable for actions taken by strategic or local partners or representatives. If we, our intermediaries or companies
in which we have an interest, such as Telesat and XTAR, fail to comply with the requirements of the FCPA, governmental authorities
in the United States could seek to impose civil and/or criminal penalties, which could have a material adverse effect on our business,
results of operations, financial conditions and cash flows.
Accounting standards periodically change
and the application of our accounting policies and methods may require management to make estimates about matters that are uncertain.
The regulatory bodies
that establish accounting standards, including, among others, the Financial Accounting Standards Board, or the FASB, and the U.S.
Securities and Exchange Commission, or the SEC, periodically revise or issue new financial accounting and reporting standards that
govern the preparation of our consolidated financial statements. The effect of such revised or new standards on our consolidated
financial statements can be difficult to predict and can materially affect how we record and report our results of operations and
financial condition. In addition, our management must exercise judgment in appropriately applying many of our accounting policies
and methods so they comply with generally accepted accounting principles. In some cases, the accounting policy or method chosen
might be reasonable under the circumstances and yet might result in our reporting materially different amounts than would have
been reported if we had selected a different policy or method. Accounting policies are critical to fairly presenting our results
of operations and financial condition and may require management to make difficult, subjective or complex judgments about matters
that are uncertain.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
Corporate
We lease approximately
8,000 square feet of space for our corporate offices in New York, NY.
Satellite Services
Telesat’s primary
SCC is located at its headquarters in Ottawa, Ontario. This facility operates 14 of Telesat’s 15 satellites as well as ViaSat-1
and numerous other satellites for third parties. Telesat’s Telstar 14R/Estrela do Sul 2 satellite is operated from Telesat’s
SCC in Rio de Janeiro, Brazil. Telesat leases approximately 112,000 rentable square feet for its Ottawa headquarters pursuant to
a lease which commenced February 1, 2009 and provides for a 15 year term (terminable by Telesat Canada at any time after 10 years
upon two years notice). In January 2017, Telesat gave notice that it would be terminating its lease effective January 31, 2019.
Telesat is moving its headquarters to a location in downtown Ottawa comprised of approximately 76,000 rentable square feet. The
new lease commences on February 1, 2019 and expires on July 31, 2029. Telesat has two options to extend the lease for an additional
five years each.
The Allan Park earth
station, located northwest of Toronto, Ontario on approximately 65 acres of owned land, houses a customer support center and a
technical control center. This facility is the single point of contact for Telesat’s international customers and is also
the main earth station complex providing TT&C services for the satellites Telesat operates. The Allan Park earth station also
houses Telesat’s backup SCC for the Nimiq and Anik satellites. The back-up satellite control center for the Telstar satellites
is located at the Mount Jackson earth station. Telesat would have the functional ability to restore satellite control services
via the Allan Park and Mount Jackson back-up control centers if Telesat’s primary SCCs became disabled.
Telesat also operates
12 other earth stations in Canada, the United States, Brazil and Australia.
In addition to these
facilities, Telesat leases facilities for administrative and sales offices in various locations throughout Canada and the United
States as well as in Brazil, England and Singapore.
Item 3.
Legal Proceedings
We discuss certain
legal proceedings against the Company in the notes to the Loral consolidated financial statements and refer you to that discussion
for important information concerning those legal proceedings, including the basis for such actions and relief sought. See Note
13 to the Loral consolidated financial statements for this discussion.
Item 4.
Mine Safety Disclosures
Not Applicable
PART II
Item 5.
Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) Market Price and Dividend Information
Loral’s amended
and restated certificate of incorporation provides that the total authorized capital stock of the Company is eighty million (80,000,000)
shares consisting of two classes: (i) seventy million (70,000,000) shares of common stock, $0.01 par value per share, divided into
two series, of which 50,000,000 shares are voting common stock and 20,000,000 shares are non-voting common stock and (ii) ten million
(10,000,000) shares of preferred stock, $0.01 par value per share. Each share of voting common stock and each share of non-voting
common stock are identical and are treated equally in all respects, except that the non-voting common stock does not have voting
rights except as set forth in Article IV(a)(iv) of the amended and restated certificate of incorporation and as otherwise provided
by law. Article IV(a)(iv) of Loral’s amended and restated certificate of incorporation provides that Article IV(a) of the
amended and restated certificate of incorporation, which provides for, among other things, the equal treatment of the non-voting
common stock with the voting common stock, may not be amended, altered or repealed without the affirmative vote of holders of a
majority of the outstanding shares of the non-voting common stock, voting as a separate class. Except as otherwise provided in
the amended and restated certificate of incorporation or bylaws of Loral, each holder of Loral voting common stock is entitled
to one vote in respect of each share of Loral voting common stock held of record on all matters submitted to a vote of stockholders.
Holders of shares of
Loral common stock are entitled to share equally, share for share in dividends when and as declared by the Board of Directors out
of funds legally available for such dividends. Upon a liquidation, dissolution or winding up of Loral, the assets of Loral available
to stockholders will be distributed equally per share to the holders of Loral common stock. The holders of Loral common stock do
not have any cumulative voting rights. Loral common stock has no preemptive or conversion rights or other subscription rights.
There are no redemption or sinking fund provisions applicable to Loral common stock. All outstanding shares of Loral common stock
are fully paid and non-assessable.
Our voting common stock
trades on the NASDAQ National Market under the ticker symbol “LORL.” The table below sets forth the high and low sales
prices of Loral voting common stock as reported on the NASDAQ National Market from January 1, 2016 through December 31, 2017.
|
|
High
|
|
|
Low
|
|
Year ended December 31, 2017
|
|
|
|
|
|
|
|
|
Quarter ended December 31, 2017
|
|
$
|
51.75
|
|
|
$
|
43.00
|
|
Quarter ended September 30, 2017
|
|
|
49.55
|
|
|
|
40.50
|
|
Quarter ended June 30, 2017
|
|
|
43.75
|
|
|
|
36.80
|
|
Quarter ended March 31, 2017
|
|
|
42.10
|
|
|
|
38.00
|
|
Year ended December 31, 2016
|
|
|
|
|
|
|
|
|
Quarter ended December 31, 2016
|
|
$
|
42.20
|
|
|
$
|
35.55
|
|
Quarter ended September 30, 2016
|
|
|
40.17
|
|
|
|
33.85
|
|
Quarter ended June 30, 2016
|
|
|
41.04
|
|
|
|
32.04
|
|
Quarter ended March 31, 2016
|
|
|
40.57
|
|
|
|
29.55
|
|
There is no established
trading market for the Company’s non-voting common stock. All of the shares of non-voting common stock were issued pursuant
to the exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”)
provided by Section 4(2) of the Securities Act.
(b) Approximate Number of Holders of
Common Stock
At March 9, 2018, there
were 147 holders of record of our voting common stock and five holders of record of our non-voting common stock.
(c) Dividends
Loral’s ability
to pay dividends or distributions on its common stock will depend upon its earnings, financial condition and capital needs and
other factors deemed pertinent by the Board of Directors. Loral has not paid any dividends on its common stock for the years ended
December 31, 2017 and 2016. In the first quarter of 2017, we received a $242.7 million cash distribution from Telesat. We intend
to use the proceeds of such distribution, net of reasonable reserves for working capital and other liabilities, to make a distribution
to our stockholders. There can be no assurance as to the amount and timing of any such distribution, and such distribution may
be impacted by the outcome of our discussions regarding, and the structure of, the strategic combination transaction with respect
to our interest in Telesat that we are pursuing.
(d) Securities Authorized for Issuance
under Equity Compensation Plans
See Note 9 to the Loral
consolidated financial statements for information regarding the Company’s stock incentive plan. Compensation information
required by Item 11 will be presented in the Company’s 2018 definitive proxy statement which is incorporated herein by reference
or by an amendment to this Annual Report on Form 10-K.
(e) Comparison of Cumulative Total Returns
Set forth below is
a graph comparing the cumulative performance of our voting common stock with the NASDAQ Composite Index and the NASDAQ Telecommunications
Index from December 31, 2012 to December 31, 2017. The graph assumes that $100 was invested on December 31, 2012 in each of our
voting common stock, the NASDAQ Composite Index and the NASDAQ Telecommunications Index and that all dividends were reinvested.
The NASDAQ Telecommunications Index is a capitalization weighted index designed to measure the performance of all NASDAQ-traded
stocks in the telecommunications sector, including satellite technology companies.
Item 6. Selected Financial Data
The following table
sets forth our selected historical financial and operating data for each of the five years in the period ended December 31, 2017.
The information set
forth in the following table should be read in conjunction with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our consolidated financial statements and related notes thereto included elsewhere
in this Annual Report on Form 10-K.
LORAL SPACE & COMMUNICATIONS INC.
(In thousands, except per share data)
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Statement of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes and equity in net income (loss) of affiliates
|
|
$
|
(8,770
|
)
|
|
$
|
(8,001
|
)
|
|
$
|
(10,188
|
)
|
|
$
|
(8,030
|
)
|
|
$
|
(15,530
|
)
|
Income tax (provision) benefit
(1)
|
|
|
(73,108
|
)
|
|
|
(28,507
|
)
|
|
|
45,476
|
|
|
|
8,105
|
|
|
|
(1,841
|
)
|
(Loss) income from continuing operations before equity in net income (loss) of affiliates(2)
|
|
|
(81,878
|
)
|
|
|
(36,508
|
)
|
|
|
35,288
|
|
|
|
75
|
|
|
|
(17,371
|
)
|
Equity in net income (loss) of affiliates
(2)
|
|
|
216,347
|
|
|
|
84,078
|
|
|
|
(104,792
|
)
|
|
|
(1,502
|
)
|
|
|
38,827
|
|
Income (loss) from continuing operations
|
|
|
134,469
|
|
|
|
47,570
|
|
|
|
(69,504
|
)
|
|
|
(1,427
|
)
|
|
|
21,456
|
|
Loss from discontinued operations, net of tax
(3)
|
|
|
(5
|
)
|
|
|
(370
|
)
|
|
|
(778
|
)
|
|
|
(24,402
|
)
|
|
|
(4,877
|
)
|
Net income (loss)
|
|
|
134,464
|
|
|
|
47,200
|
|
|
|
(70,282
|
)
|
|
|
(25,829
|
)
|
|
|
16,579
|
|
Income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
4.35
|
|
|
$
|
1.54
|
|
|
$
|
(2.25
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
0.70
|
|
Discontinued operations
|
|
|
—
|
|
|
|
(0.01
|
)
|
|
|
(0.03
|
)
|
|
|
(0.79
|
)
|
|
|
(0.16
|
)
|
|
|
$
|
4.35
|
|
|
$
|
1.53
|
|
|
$
|
(2.28
|
)
|
|
$
|
(0.84
|
)
|
|
$
|
0.54
|
|
Diluted income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
4.30
|
|
|
$
|
1.50
|
|
|
$
|
(2.25
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
0.67
|
|
Discontinued operations
|
|
|
—
|
|
|
|
(0.01
|
)
|
|
|
(0.03
|
)
|
|
|
(0.79
|
)
|
|
|
(0.16
|
)
|
|
|
$
|
4.30
|
|
|
$
|
1.49
|
|
|
$
|
(2.28
|
)
|
|
$
|
(0.84
|
)
|
|
$
|
0.51
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
255,139
|
|
|
$
|
37,458
|
|
|
$
|
58,853
|
|
|
$
|
51,433
|
|
|
$
|
5,926
|
|
Total assets
|
|
|
374,711
|
|
|
|
264,231
|
|
|
|
214,618
|
|
|
|
304,626
|
|
|
|
327,740
|
|
Non-current liabilities
|
|
|
80,261
|
|
|
|
87,692
|
|
|
|
91,697
|
|
|
|
113,262
|
|
|
|
110,120
|
|
Total liabilities
|
|
|
84,113
|
|
|
|
93,820
|
|
|
|
106,128
|
|
|
|
128,986
|
|
|
|
119,830
|
|
Loral shareholders’ equity
|
|
|
290,598
|
|
|
|
170,411
|
|
|
|
108,490
|
|
|
|
175,640
|
|
|
|
207,910
|
|
|
(1)
|
The income tax (provision) benefit for each period included
the impact of equity in net income (loss) of affiliates reflected below.
|
|
(2)
|
Our principal affiliate is Telesat. Loral also has investments
in XTAR and joint ventures providing Globalstar service, which are accounted for under the equity method and have no carrying
value as of December 31, 2017 and 2016.
|
|
(3)
|
Loss from discontinued operations resulted from the sale
of our wholly-owned subsidiary, SSL, to MDA, in 2012 (see Notes 1 and 13 to the Loral consolidated financial statements). In 2014,
the loss from discontinued operations primarily comprises an increase to our indemnification liability related to the sale of
SSL pursuant to the ViaSat Suit Settlement Agreement and Allocation Agreement.
|
Item
7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion
and analysis should be read in conjunction with our consolidated financial statements (the “financial statements”)
included in Item 15 of this Annual Report on Form 10-K
.
Loral Space & Communications
Inc., a Delaware corporation, together with its subsidiaries, is a leading satellite communications company engaged, through our
ownership interests in affiliates, in satellite-based communications services.
Disclosure Regarding Forward-Looking
Statements
Except for the historical
information contained in the following discussion and analysis, the matters discussed below are not historical facts, but are “forward-looking
statements” as that term is defined in the Private Securities Litigation Reform Act of 1995. In addition, we or our representatives
have made and may continue to make forward-looking statements, orally or in writing, in other contexts. These forward-looking statements
can be identified by the use of words such as “believes,” “expects,” “plans,” “may,”
“will,” “would,” “could,” “should,” “anticipates,” “estimates,”
“project,” “intend,” or “outlook” or other variations of these words. These statements, including
without limitation those relating to Telesat, are not guarantees of future performance and involve risks and uncertainties that
are difficult to predict or quantify. Actual events or results may differ materially as a result of a wide variety of factors and
conditions, many of which are beyond our control. For a detailed discussion of these and other factors and conditions, please refer
to the Risk Factors section above, the Commitments and Contingencies section below and to our other periodic reports filed with
the Securities and Exchange Commission (“SEC”). We operate in an industry sector in which the value of securities may
be volatile and may be influenced by economic and other factors beyond our control. We undertake no obligation to update any forward-looking
statements.
Overview
Business
Loral has one operating
segment consisting of satellite-based communications services. Loral participates in satellite services operations primarily through
its ownership interest in Telesat, a leading global satellite operator. Telesat provides its satellite and communication services
from a fleet of satellites that occupy Canadian and other orbital locations.
Loral holds a 62.7%
economic interest and a 32.7% voting interest in Telesat as of December 31, 2017. Our economic interest decreased from 62.8% to
62.7% in March 2016 when certain Telesat employees exercised share appreciation rights related to a total of 178,642 stock options
granted under Telesat’s share-based compensation plan and received 129,400 non-voting participating preferred shares.
At December 31, 2017,
Telesat, with approximately $3.0 billion of backlog, provided satellite services to customers from its fleet of 15 in-orbit geostationary
satellites. In addition, Telesat owns the Canadian Ka-band payload on the ViaSat-1 satellite and has two other geostationary satellites
under construction. In January 2018, an additional satellite was launched into low earth orbit as part of Telesat’s plan
to deploy an advanced, global LEO constellation that will deliver low latency fiber-like broadband to commercial and government
users worldwide. Telesat also manages the operations of additional satellites for third parties.
The satellite services
business is capital intensive and the build-out of a satellite fleet requires substantial time and investment. Once the investment
in a satellite is made, the incremental costs to maintain and operate the satellite are relatively low over the life of the satellite,
with the exception of in-orbit insurance. Telesat has been able to generate a large contracted revenue backlog by entering into
long-term contracts with some of its customers for all or substantially all of a satellite’s life. Historically, this has
resulted in revenue from the satellite services business being fairly predictable.
Telesat’s desirable
spectrum rights, commitment to providing the highest level of customer service, deep technical expertise and culture of innovation
have enabled it to successfully develop its business to date. Leveraging these strengths and building on its existing contractual
revenue backlog, Telesat’s focus is on profitably growing its business by increasing the utilization of its in-orbit satellites
and, in a disciplined manner, deploying expansion satellite capacity where strong market demand is anticipated. Telesat currently
has two geostationary satellites, Telstar 18 VANTAGE and Telstar 19 VANTAGE, under construction.
Telesat believes that
it is well positioned to serve its customers and the markets in which it participates. Telesat actively pursues opportunities to
develop new satellites, particularly in conjunction with current or prospective customers who will commit to long-term service
agreements prior to the time the satellite construction contract is signed. However, while Telesat regularly pursues these opportunities,
it does not procure additional or replacement satellites until it believes there is a demonstrated need and a sound business plan
for such satellite capacity.
In 2018, Telesat remains
focused on increasing utilization of its existing satellites, the construction and launch of its new satellites, the development
of its global LEO constellation and identifying and pursuing opportunities to invest in expansion satellite capacity, all while
maintaining operating discipline.
On November 17, 2016,
Telesat entered into amended senior secured credit facilities which provide for term loan borrowings of $2.43 billion which mature
on November 17, 2023 and revolving credit borrowings of up to $200 million (or Canadian dollar equivalent) which mature on November
17, 2021. Telesat also issued, through a private placement, $500 million of 8.875% senior notes which mature on November 17, 2024.
On November 17, 2016,
Telesat repaid all outstanding amounts under its former senior secured credit facilities and its 6.0% senior notes.
On February 1, 2017,
Telesat amended the senior secured credit facilities to effectively reprice the then outstanding term loan borrowings of $2.424
billion.
Telesat’s operating
results are subject to fluctuations as a result of exchange rate variations. During 2017, approximately 52% of Telesat’s
revenues, 42% of its operating expenses, 100% of its interest expense and a majority of its capital expenditures were denominated
in U.S. dollars. The most significant impact of variations in the exchange rate is on the U.S. dollar denominated indebtedness
and cash and short-term investments. As of December 31, 2017, Telesat’s U.S. dollar denominated debt totaled $2.9 billion.
As of December 31, 2017, a five percent increase (decrease) in the Canadian dollar against the U.S. dollar would have increased
(decreased) Telesat’s net income by approximately $129 million. This analysis assumes all other variables, in particular
interest rates, remain constant.
Sale of SSL
On November 2, 2012,
Loral completed the Sale of SSL to MDA. Pursuant to the Purchase Agreement dated as of June 26, 2012, as amended on October 30,
2012 and March 28, 2013, by and among Loral, SSL, MDA and MDA Holdings, Loral agreed to indemnify MDA and its affiliates from certain
damages in the ViaSat Suit brought in 2012 by ViaSat against Loral and SSL. On September 5, 2014, Loral, SSL and ViaSat entered
into the Settlement Agreement pursuant to which the ViaSat Suit and an additional patent infringement and breach of contract lawsuit
brought by ViaSat against SSL in September 2013 were settled. Loral was also released by MDA, MDA Holdings and SSL from indemnification
claims relating to the ViaSat lawsuits under the Purchase Agreement. The terms of the Settlement Agreement provided, among other
things, for payment by Loral and SSL to ViaSat on a joint and several basis of $100 million, $40 million of which was paid in September
2014 in connection with entering into the Settlement Agreement, with the remaining $60 million payable with interest in ten equal
quarterly installments of $6.9 million from October 15, 2014 through January 15, 2017.
Following a mediation
session held on December 1, 2014, Loral and MDA entered into the Allocation Agreement, pursuant to which Loral and MDA agreed that
Loral was responsible for $45 million, and MDA and SSL were responsible for $55 million, of the $100 million litigation settlement
with ViaSat. Culminating with the final installment payment of $2.8 million in January 2017, Loral paid a total of $46.1 million,
including interest, as its share of the ViaSat settlement (see Note 13 to the financial statements).
General
Our principal asset
is our majority ownership interest in Telesat. In an effort to maximize shareholder value, we have been exploring, and are in discussions
with PSP regarding, potential strategic transactions to alter the status quo in our ownership of Telesat. Subject to market conditions
and the cooperation of PSP, we continue to explore the combination of Loral and Telesat into one public company and/or the sale
of Loral in connection with a sale of Telesat. Also, as described more fully below, we have exercised our right to require that
Telesat initiate a public offering, and we may further pursue this right in the event a combination transaction or a sale of Telesat
is not likely to be achievable in a timely manner or on satisfactory terms. There can be no assurance as to whether or when we
will be able to conclude any strategic transaction or that any strategic initiatives or transaction involving Telesat or Loral
may occur, or that any particular economic, tax, structural or other objectives or benefits with respect to any initiative or transaction
involving Telesat or Loral’s interest therein will be achieved.
In the first quarter
of 2017, we received $242.7 million in cash from Telesat, representing our share of an aggregate approximately $400 million distribution
from Telesat to its shareholders and stock option holders. We intend to use the proceeds of such distribution, net of reasonable
reserves for working capital and other liabilities, to make a distribution to our stockholders. There can be no assurance as to
the amount and timing of any such distribution, and such distribution may be impacted by the outcome of our discussions regarding,
and the structure of, the strategic combination transaction that we are pursuing.
As mentioned above,
we have the right under the Telesat Shareholders Agreement to require Telesat to conduct an initial public offering of its equity
shares, and, in July 2015, we exercised this right. Specifically, we requested that Telesat issue not more than 25 million newly
issued shares of Telesat voting common stock. We also requested the termination of the Shareholders Agreement and the elimination
of certain provisions in Telesat’s Articles of Incorporation, both of which we believe are important for a successful public
offering. If those provisions are eliminated, an impediment to the conversion of our non-voting Telesat shares to voting shares
would be eliminated. Termination or modification of the Shareholders Agreement and conversion of our non-voting shares to voting
shares would enable us, after a Telesat IPO and subject to the receipt of any necessary regulatory approvals, to obtain majority
voting control of Telesat. Telesat selected two co-managing underwriters and informed us that it will work to implement a Telesat
IPO pending our agreement with PSP on governance matters following a Telesat IPO. To date, no such agreement has been reached.
In the event a combination transaction that we are pursuing or a sale of Telesat as described above is not likely to be achievable
in a timely manner or on satisfactory terms, we may further pursue our right to a Telesat IPO. There can be no assurance as to
whether, when or on what terms a Telesat IPO, termination or modification of the Shareholders Agreement or any requested changes
to Telesat’s Articles of Incorporation may occur or that any particular economic, tax, structural or other objectives or
benefits with respect to a Telesat IPO will be achieved. If a Telesat IPO is expected to proceed under unfavorable terms or at
an unfavorable price, we may withdraw our demand for a Telesat IPO.
Depending upon the
outcome of the strategic initiatives discussed above, we may assert certain claims against PSP for actions we believe violated
our rights relating to the affairs of Telesat under the Telesat Shareholders Agreement and otherwise. In response to our claims,
PSP has informed us that it believes that it may have claims against us, although we are not aware of the legal or factual basis
for any such claims. We and PSP have agreed that, pending the outcome of our discussions relating to Telesat, it would be beneficial
to delay the commencement of any action relating to either party’s claims and have entered into an agreement (the “Tolling
Agreement”) which preserves the parties’ rights to assert against one another legal claims relating to Telesat. We
also included Telesat as a party to the Tolling Agreement because, as a technical matter of Canadian law and for purposes of potentially
seeking equitable relief, Telesat may be a necessary party. There can be no assurance that if the Tolling Agreement lapses that
we and PSP will not pursue legal claims against one another relating to Telesat. If we pursue claims against PSP, there can be
no assurance that our claims will be successful or that the relief we seek will be granted. If PSP pursues claims against us, there
can be no assurance that PSP will not prevail on its claims.
Loral may, from time
to time, explore and evaluate other possible strategic transactions and alliances which may include joint ventures and strategic
relationships as well as business combinations or the acquisition or disposition of assets. In order to pursue certain of these
opportunities, additional funds are likely to be required. There can be no assurance that we will enter into additional strategic
transactions or alliances, nor do we know if we will be able to obtain the necessary financing for transactions that require additional
funds on favorable terms, if at all.
In connection
with the acquisition of our ownership interest in Telesat in 2007, Loral has agreed that, subject to certain exceptions described
in the Shareholders Agreement, for so long as Loral has an interest in Telesat, it will not compete in the business of leasing,
selling or otherwise furnishing fixed satellite service, broadcast satellite service or audio and video broadcast direct to home
service using transponder capacity in the C-band, Ku-band and Ka-band (including in each case extended band) frequencies and the
business of providing end-to-end data solutions on networks comprised of earth terminals, space segment, and, where appropriate,
networking hubs.
Consolidated Operating Results
Please refer to Critical
Accounting Matters set forth below in this section.
2017
Compared with 2016 and 2016 Compared with 2015
The following compares
our consolidated results for 2017, 2016 and 2015 as presented in our financial statements:
General and Administrative
Expenses
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
General and administrative expenses
|
|
$
|
7,935
|
|
|
$
|
6,726
|
|
|
$
|
6,530
|
|
General and administrative
expenses increased by $1.2 million for the year ended December 31, 2017 as compared to the year ended December 31, 2016 primarily
due to a $0.8 million increase in professional fees and a $0.3 million decrease in pension charges allocated to XTAR.
General and administrative
expenses increased by $0.2 million for the year ended December 31, 2016 as compared to the year ended December 31, 2015 primarily
due to $0.8 million of income earned during the year ended December 31, 2015 under the ViaSat-1 revenue share arrangement with
Telesat which expired in December 2015 (see Note 14 to the financial statements) and a $0.3 million increase in professional fees,
partially offset by pension charges to XTAR of $0.4 million for the year ended December 31, 2016, a $0.3 million reduction in accrued
expenses and a $0.2 million reduction in consulting charges.
Interest and Investment Income
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Interest and investment income
|
|
$
|
2,483
|
|
|
$
|
194
|
|
|
$
|
138
|
|
Interest and investment
income for 2017, 2016 and 2015 consists primarily of interest on our cash balance. The increase from 2016 to 2017 was the result
of interest income earned on the cash distribution of $242.7 million received from Telesat in the first quarter of 2017.
Other Expense
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Other expense
|
|
$
|
3,291
|
|
|
$
|
1,449
|
|
|
$
|
3,779
|
|
Other expense for the
year ended December 31, 2017 was primarily related to strategic initiatives and settlement and litigation expenses resulting from
certain arbitration and legal proceedings with our former Russian joint venture partner. Other expense for the years ended December
31, 2016 and 2015 was primarily comprised of expenses related to the evaluation of strategic initiatives. See Overview –
General
.
Income Tax (Provision) Benefit
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Income tax (provision) benefit
|
|
$
|
(73,108
|
)
|
|
$
|
(28,507
|
)
|
|
$
|
45,476
|
|
For 2017, we recorded
a current tax benefit of $7.1 million and a deferred tax provision of $80.2 million, resulting in a total tax provision of $73.1
million. For 2016, we recorded a current tax benefit of $1.0 million and a deferred tax provision of $29.5 million, resulting in
a total tax provision of $28.5 million. For 2015, we recorded a current tax benefit of $5.8 million and a deferred tax benefit
of $39.7 million, resulting in a total tax benefit of $45.5 million.
The deferred tax (provision)
benefit for each period included the impact of equity in net income (loss) of affiliates in our consolidated statement of operations.
The Tax Cuts and Jobs
Act made broad and complex changes to the U.S tax code, such as the imposition of a one-time transition tax in 2017 on certain
unrepatriated earnings of controlled foreign corporations, including Telesat, and numerous changes first effective in 2018 including,
but not limited to, (1) reducing the U.S. federal corporate income tax rate from 35 percent to 21 percent; (2) eliminating U.S
federal income taxes on dividends from certain foreign investments, such as Telesat; (3) requiring a current inclusion in U.S.
federal taxable income of certain earnings of controlled foreign corporations, including Telesat; (4) limiting the use of FTCs
to reduce U.S. federal tax liability; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing how
existing AMT credits can be realized; (6) creating the base erosion anti-abuse tax, a new minimum tax; (7) creating a new limit
on deductible interest expense; and (8) changing the rules related to the use of NOL carryforwards created in tax years beginning
after December 31, 2017. We recognized the
income tax effects of the Tax Cuts and Jobs Act in accordance
with the Securities and Exchange Commission Staff Accounting Bulletin No. 118,
Income Tax Accounting Implication of the Tax
Cuts and Job Act
(SAB 118), in our consolidated financial statements for the year ended December 31, 2017. SAB 118 provides
guidance for the application of income tax accounting standards related to the Tax Cuts and Jobs Act. Based upon
our analysis,
as of December 31, 2017, we reduced deferred tax assets by $33.2 million related to the tax rate reduction with a corresponding
increase to our deferred income tax provision and increased non-current income taxes receivable by $1.6 million related to refundable
AMT credits with a corresponding reduction to deferred tax assets. The preliminary effect recorded may change in the future due
to revisions in the interpretation of the Tax Cuts and Jobs Act or legislative action to clarify interpretation of the Tax Cuts
and Jobs Act. The Company expects to finalize the effect of the Tax Cuts and Jobs Act with the filing of its 2017 tax return and
record in the fourth quarter of 2018 any difference between the final effect and the provisional effect recorded.
The current tax provision
for the year ended December 31, 2017 included our anticipated income tax liability related to the cash distribution received from
Telesat after use of AMT credits and NOL carryforwards and FTCs from Telesat. Upon receiving the cash distribution from Telesat
in the first quarter of 2017, we recorded a current tax liability of $53.0 million. During 2017, we made tax payments of $12.5
million, primarily with respect to the distribution, and commenced a tax study to determine the allowable amount of FTCs that could
be utilized to minimize our cash tax liability. After completing our analysis in the fourth quarter of 2017, we reduced
our current tax liability to approximately $2.0 million and established a deferred tax asset of $104.9 million for the carryforward
of unused FTCs. Since, at the current time, sufficient positive evidence does not exist to support full recovery of the FTC
carryforward, we recorded a full valuation allowance against this deferred tax asset during the year ended December 31, 2017. As
of December 31, 2017, we had no income taxes payable and a current income tax receivable of $11.1 million, primarily related to
recovery of tax payments previously made on the cash distribution.
For each period presented,
the statute of limitations for the assessment of additional tax expired with regard to several of our federal and state uncertain
tax positions (“UTPs”) and certain other UTPs were settled. As a result, the reduction to our liability for UTPs provided
a current tax benefit including the reversal of previously recognized interest and penalties, partially offset by an additional
provision for the potential payment of interest on our remaining UTPs.
Subsequent to the Sale,
to the extent that profitability from operations is not sufficient to realize the benefit from our remaining net deferred tax assets,
we would generate sufficient taxable income from the appreciated value of our Telesat investment in order to prevent federal net
operating losses from expiring and realize the benefit of all remaining deferred tax assets.
See Critical Accounting
Matters —
Taxation
below for discussion of our accounting method for income taxes.
Equity in Net Income (Loss)
of Affiliates
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Telesat
|
|
$
|
216,347
|
|
|
$
|
84,078
|
|
|
$
|
(74,329
|
)
|
XTAR
|
|
|
—
|
|
|
|
—
|
|
|
|
(30,463
|
)
|
|
|
$
|
216,347
|
|
|
$
|
84,078
|
|
|
$
|
(104,792
|
)
|
The following is a
reconciliation of the changes in our investment in Telesat for the years ended December 31, 2017 and 2016:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Opening Balance, January 1,
|
|
|
|
|
|
$
|
107,950
|
|
|
|
|
|
|
$
|
—
|
|
Less: Cash distribution received
|
|
|
|
|
|
|
(242,735
|
)
|
|
|
|
|
|
|
—
|
|
Components of equity in net income of Telesat:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net income of Telesat
|
|
$
|
212,001
|
|
|
|
|
|
|
$
|
140,604
|
|
|
|
|
|
Eliminations of affiliate transactions and related amortization
|
|
|
4,346
|
|
|
|
|
|
|
|
1,398
|
|
|
|
|
|
Recognition of equity loss suspended as of prior year-end
|
|
|
—
|
|
|
|
216,347
|
|
|
|
(57,924
|
)
|
|
|
84,078
|
|
Components of equity in other comprehensive income of Telesat:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in other comprehensive (loss) income of Telesat
|
|
|
(28,132
|
)
|
|
|
|
|
|
|
3,045
|
|
|
|
|
|
Recognition of equity in other comprehensive income suspended as of prior year-end
|
|
|
—
|
|
|
|
(28,132
|
)
|
|
|
20,827
|
|
|
|
23,872
|
|
Ending balance, December 31,
|
|
|
|
|
|
$
|
53,430
|
|
|
|
|
|
|
$
|
107,950
|
|
As of December 31,
2016, we held a 62.7% economic interest and a 32.7% voting interest in Telesat. Loral’s equity in net income of Telesat is
based on our proportionate share of Telesat’s results in accordance with U.S. GAAP and in U.S. dollars. The amortization
of Telesat fair value adjustments applicable to the Loral Skynet assets and liabilities acquired by Telesat in 2007 is proportionately
eliminated in determining our share of the net income or loss of Telesat. Our equity in net income or loss of Telesat also reflects
amortization of profits eliminated, to the extent of our economic interest in Telesat, on satellites we constructed for Telesat
while we owned SSL and on Loral’s sale to Telesat in April 2011 of its portion of the payload on the ViaSat-1 satellite and
related assets.
As of December 31,
2015, we had an unrecorded equity loss in Telesat of $57.9 million, the amount by which our share of Telesat’s losses together
with cash distributions we received from Telesat exceeded our recorded cumulative equity in net income of Telesat and our initial
investment in Telesat. In following the equity method of accounting, our investment balance in Telesat was reduced to zero as of
December 31, 2015. In addition, our equity in Telesat’s other comprehensive income that we could not record as of December
31, 2015 was $20.8 million. We recognized this $57.9 million equity loss and our $20.8 million share in the equity of Telesat’s
other comprehensive income in 2016.
Summary financial information
for Telesat in accordance with U.S. GAAP in Canadian dollars and U.S. dollars for the years ended December 31, 2017, 2016 and 2015
and as of December 31, 2017 and 2016 follows (in thousands):
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In Canadian dollars)
|
|
|
(In U.S. dollars)
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
927,771
|
|
|
|
931,101
|
|
|
|
954,157
|
|
|
|
712,390
|
|
|
|
703,131
|
|
|
|
751,684
|
|
Operating expenses
|
|
|
(196,486
|
)
|
|
|
(184,254
|
)
|
|
|
(178,607
|
)
|
|
|
(150,872
|
)
|
|
|
(139,141
|
)
|
|
|
(140,706
|
)
|
Depreciation, amortization and stock-based compensation
|
|
|
(252,917
|
)
|
|
|
(259,258
|
)
|
|
|
(242,430
|
)
|
|
|
(194,203
|
)
|
|
|
(195,781
|
)
|
|
|
(190,985
|
)
|
Insurance proceeds
|
|
|
6,171
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,739
|
|
|
|
—
|
|
|
|
—
|
|
Loss on disposition of long lived assets
|
|
|
(269
|
)
|
|
|
(2,565
|
)
|
|
|
(30
|
)
|
|
|
(207
|
)
|
|
|
(1,937
|
)
|
|
|
(24
|
)
|
Operating income
|
|
|
484,270
|
|
|
|
485,024
|
|
|
|
533,090
|
|
|
|
371,847
|
|
|
|
366,272
|
|
|
|
419,969
|
|
Interest expense
|
|
|
(197,340
|
)
|
|
|
(192,393
|
)
|
|
|
(176,165
|
)
|
|
|
(151,528
|
)
|
|
|
(145,288
|
)
|
|
|
(138,783
|
)
|
Loss on refinancing
|
|
|
—
|
|
|
|
(16,216
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(12,246
|
)
|
|
|
—
|
|
Foreign exchange gain (loss)
|
|
|
225,868
|
|
|
|
90,999
|
|
|
|
(541,991
|
)
|
|
|
173,433
|
|
|
|
68,719
|
|
|
|
(426,980
|
)
|
(Loss) gain on financial instruments
|
|
|
(4,579
|
)
|
|
|
1,290
|
|
|
|
9,914
|
|
|
|
(3,516
|
)
|
|
|
974
|
|
|
|
7,810
|
|
Other income
|
|
|
3,004
|
|
|
|
6,078
|
|
|
|
4,661
|
|
|
|
2,307
|
|
|
|
4,590
|
|
|
|
3,672
|
|
Income tax provision
|
|
|
(70,879
|
)
|
|
|
(77,827
|
)
|
|
|
(94,499
|
)
|
|
|
(54,424
|
)
|
|
|
(58,772
|
)
|
|
|
(74,447
|
)
|
Net income (loss)
|
|
|
440,344
|
|
|
|
296,955
|
|
|
|
(264,990
|
)
|
|
|
338,119
|
|
|
|
224,249
|
|
|
|
(208,759
|
)
|
Average exchange rate for translating Canadian dollars to U.S. dollars ( 1 U.S. dollar equals)
|
|
|
1.3036
|
|
|
|
1.3253
|
|
|
|
1.2714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In Canadian dollars)
|
|
|
(In U.S. dollars)
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
559,540
|
|
|
|
911,785
|
|
|
|
445,104
|
|
|
|
678,361
|
|
Total assets
|
|
|
5,132,075
|
|
|
|
5,637,164
|
|
|
|
4,082,472
|
|
|
|
4,194,006
|
|
Current liabilities
|
|
|
158,520
|
|
|
|
207,226
|
|
|
|
126,100
|
|
|
|
154,173
|
|
Long-term debt, including current portion
|
|
|
3,557,481
|
|
|
|
3,868,252
|
|
|
|
2,829,911
|
|
|
|
2,877,950
|
|
Total liabilities
|
|
|
4,448,443
|
|
|
|
4,834,804
|
|
|
|
3,538,656
|
|
|
|
3,597,056
|
|
Shareholders’ equity
|
|
|
683,632
|
|
|
|
802,360
|
|
|
|
543,816
|
|
|
|
596,950
|
|
Period end exchange rate for translating Canadian dollars to U.S. dollars (1 U.S. dollar equals)
|
|
|
1.2571
|
|
|
|
1.3441
|
|
|
|
|
|
|
|
|
|
Telesat’s revenue
increased by $9 million for the year ended December 31, 2017 as compared to the year ended December 31, 2016 due primarily to an
increase in short-term services provided to other satellite operators, higher enterprise services revenue from mobility sector
customers and the favorable impact of the change in the U.S. dollar/Canadian dollar exchange rate on Canadian dollar denominated
revenue, partially offset by the end of service or service reductions for certain North American broadcast services customers and
certain enterprise services customers and lower equipment sales. Telesat’s revenue excluding foreign exchange impact would
have increased by $4 million for the year ended December 31, 2017 as compared to the year ended December 31, 2016.
Telesat’s revenue
decreased by $49 million for the year ended December 31, 2016 as compared to the year ended December 31, 2015 due primarily to
the unfavorable impact of the change in the U.S. dollar/Canadian dollar exchange rate on Canadian dollar denominated revenue, lower
enterprise revenue from customers in the energy and resource sector, the reduction in broadcast services for an international customer,
lower equipment sales, a reduction in revenue from Canadian spectrum license fees and lower consulting activities, partially offset
by higher revenue from certain government services. Telesat’s revenue excluding foreign exchange impact would have decreased
by $34 million for the year ended December 31, 2016 as compared to the year ended December 31, 2015.
Telesat’s operating
expenses increased by $11 million for the year ended December 31, 2017 as compared to the year ended December 31, 2016 primarily
due to the special payment made to stock option holders in the first quarter of 2017 in connection with the cash distribution made
to Telesat’s shareholders, higher professional fees, higher performance-based compensation and the unfavorable impact of
the change in in the U.S. dollar/Canadian dollar exchange rate on Canadian dollar denominated expenses, partially offset by lower
expense on development of LEO satellites, lower share based compensation and lower cost of sales from lower third-party satellite
capacity expenses. Telesat’s operating expenses excluding foreign exchange impact increased by $10 million for the year ended
December 31, 2017 as compared to the year ended December 31, 2016.
Telesat’s operating
expenses decreased by $2 million for the year ended December 31, 2016 as compared to the year ended December 31, 2015 primarily
due to lower third party satellite capacity expenses, lower in-orbit insurance expenses, lower Canadian spectrum license fees,
lower equipment sales and the favorable impact of the change in the U.S. dollar/Canadian dollar exchange rate on Canadian dollar
denominated expenses, partially offset by an $11.9 million expense related to development of LEO satellites in 2016 and increased
performance-based compensation and certain employee benefits expenses. Telesat’s operating expenses excluding foreign exchange
impact would have increased by $2 million for the year ended December 31, 2016 as compared to the year ended December 31, 2015.
Telesat’s loss
on refinancing of $12.2 million for the year ended December 31, 2016 primarily
represents the write-off
of deferred financing costs, interest rate floors, prepayment option and premiums on Telesat’s former senior secured credit
facilities and 6.0% senior notes as a result of the refinancing in November 2016.
Telesat’s operating
results are subject to fluctuations as a result of exchange rate variations to the extent that transactions are made in currencies
other than Canadian dollars. Telesat’s main currency exposures as of December 31, 2017, lie in its U.S. dollar denominated
cash and cash equivalents, accounts receivable, accounts payable and debt financing. The most significant impact of variations
in the exchange rate is on the U.S. dollar denominated debt financing. As of December 31, 2017, Telesat’s U.S. dollar denominated
debt totaled $2.9 billion. As of December 31, 2017, a five percent increase (decrease) in the Canadian dollar against the U.S.
dollar would have increased (decreased) Telesat’s net income by approximately $129 million. This analysis assumes all other
variables, in particular interest rates, remain constant.
The equity losses in
XTAR, our 56% owned joint venture, during 2015 represent our share of XTAR losses incurred in connection with its operations and
other-than-temporary impairment of our investment in XTAR due to a decline in its fair value.
As of December 31,
2017 and 2016, the carrying value of our investment in XTAR was zero. Beginning January 1, 2016, we discontinued providing for
our allocated share of XTAR’s net losses as our investment was reduced to zero as of December 31, 2015 and we have no commitment
to provide further financial support. For the year ended December 31, 2015, we recorded other-than-temporary, non-cash, impairment
charges of $21.2 million related to our investment in XTAR primarily as a result of an increase in the discount rate used to value
our investment in XTAR and reassessment of our revenue expectations for future years dictated by a decline in XTAR’s revenues
by approximately 11% from 2014 to 2015. The value of our investment in XTAR was determined based on the income approach by discounting
projected annual cash flows to their present value using a rate of return appropriate for the risk of achieving the projected cash
flows.
Loss from Discontinued Operations,
net of tax
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Loss from discontinued operations, net of tax
|
|
$
|
(5
|
)
|
|
$
|
(370
|
)
|
|
$
|
(778
|
)
|
Adjustments to amounts
previously reported in discontinued operations and interest expense that is directly related to the Sale are classified as discontinued
operations for the years ended December 31, 2017, 2016 and 2015. Loss from discontinued operations in 2016 and 2015 primarily comprises
interest expense of $0.6 million and $1.4 million, respectively, on the ViaSat Settlement Agreement and the Allocation Agreement,
net of an income tax benefit of $0.2 million and $0.5 million, respectively.
Backlog
Telesat’s backlog
as of December 31, 2017 and 2016 was $3.0 billion and $3.2 billion, respectively. It is expected that approximately 18.8% of satellite
services backlog will be recognized as revenue by Telesat during 2018. As of December 31, 2017, Telesat had received approximately
$310 million of customer prepayments.
Critical Accounting Matters
The preparation of
financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the amounts
of income (loss) reported for the period. Actual results could differ from estimates. We believe the following critical accounting
matters contain the more significant judgments and estimates used in the preparation of our financial statements.
Evaluation of Investments
in Affiliates for Impairment
The carrying value
of our investments in affiliates is reviewed for impairment in accordance with Financial Accounting Standards Board (“FASB”)
Codification Topic 323
Investments – Equity Method and Joint Ventures
. We monitor our equity method investments for
factors indicating other-than-temporary decrease in value. An impairment charge would be recognized when the decrease in value
is determined to be other-than-temporary. The fair value of each investment is determined based on the income approach by discounting
our investee’s projected annual free cash flows to their present value using a rate of return appropriate for the risk of
achieving the projected cash flows. We recorded impairment charges of $21.2 million related to our investment in XTAR for the year
ended December 31, 2015.
Fair Value Measurements
U.S. GAAP defines fair
value as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal
or most advantageous market in an orderly transaction between market participants. U.S. GAAP also establishes a fair value hierarchy
that gives the highest priority to observable inputs and the lowest priority to unobservable inputs. The three levels of the fair
value hierarchy are described below:
Level 1:
Inputs
represent a fair value that is derived from unadjusted quoted prices for identical assets or liabilities traded in active markets
at the measurement date.
Level 2:
Inputs
represent a fair value that is derived from quoted prices for similar instruments in active markets, quoted prices for identical
or similar instruments in markets that are not active, model-based valuation techniques for which all significant assumptions are
observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities,
and pricing inputs, other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable
as of the reporting date.
Level 3:
Inputs
are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use
in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing
models, discounted cash flow models, and similar techniques.
These provisions are
applicable to all of our assets and liabilities that are measured and recorded at fair value.
Assets and Liabilities Measured at Fair
Value
The following table
presents our assets and liabilities measured at fair value at December 31, 2017:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(In thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: Money market funds
|
|
$
|
251,742
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Indemnification - Sale of SSL
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,410
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Indemnification - Globalstar do Brasil S.A.
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
293
|
|
The carrying amount
of cash equivalents approximates fair value because of the short maturity of those instruments.
The Company did not
have any non-financial assets or non-financial liabilities that were recognized or disclosed at fair value as of December 31, 2017.
Assets and Liabilities Measured
at Fair Value on a Non-recurring Basis
We review the carrying
values of our equity method investments when events and circumstances warrant and consider all available evidence in evaluating
when declines in fair value are other-than-temporary. The fair values of our investments are determined based on valuation techniques
using the best information available, and may include quoted market prices, market comparables and discounted cash flow projections.
An impairment charge would be recorded when the carrying amount of the investment exceeds its current fair value and is determined
to be other-than-temporary.
The asset resulting
from the indemnification of SSL is for certain pre-closing taxes and reflects the excess of payments since inception over the estimated
liability, which was originally determined using the fair value objective approach. The estimated liability for indemnifications
relating to Globalstar do Brasil S.A. (“GdB”), originally determined using expected value analysis, is net of payments
since inception.
Taxation
Loral is subject to
U.S. federal, state and local income taxation on its worldwide income and foreign taxes on certain income from sources outside
the United States. Our foreign subsidiaries are subject to taxation in local jurisdictions. Telesat is subject to tax in Canada
and other jurisdictions and Loral will provide in operating earnings any additional U.S. current and deferred tax required on distributions
received or deemed to be received from Telesat.
We use the liability
method in accounting for taxes whereby income taxes are recognized during the year in which transactions are recorded in the financial
statements. Deferred taxes reflect the future tax effect of temporary differences between the carrying amount of assets and liabilities
for financial and income tax reporting and are measured by applying anticipated statutory tax rates in effect for the year during
which the differences are expected to reverse. We assess the recoverability of our deferred tax assets and, based upon this analysis,
record a valuation allowance against the deferred tax assets to the extent recoverability does not satisfy the “more likely
than not” recognition criteria.
The tax benefit of
a UTP taken or expected to be taken in income tax returns is recognized only if it is “more likely-than-not” to be
sustained on examination by the taxing authorities, based on its technical merits as of the reporting date. The tax benefit recognized
in the financial statements from such a position is measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement. We recognize interest and penalties related to income taxes in income tax
expense on a quarterly basis.
The unrecognized tax
benefit of a UTP is recognized in the period when the UTP is effectively settled. Previously recognized tax positions are derecognized
in the first period in which it is no longer more likely than not that the tax position would be sustained upon examination. Evaluating
the technical merits of a tax position and determining the benefit to be recognized involves a significant level of judgment in
the assumptions underlying such evaluation.
Pension and Other Employee
Benefits
We maintain a qualified
pension plan, which is a defined benefit pension plan. In addition to providing pension benefits, we provide certain health care
and life insurance benefits for retired employees and dependents. Effective January 1, 2015, we discontinued retiree medical coverage
for Medicare eligible retirees and their dependents. Pension and other employee postretirement benefit costs are developed from
actuarial valuations. Inherent in these valuations are key assumptions, including the discount rate and expected long-term rate
of return on plan assets. Material changes in these pension and other employee postretirement benefit costs may occur in the future
due to changes in these assumptions, as well as our actual experience.
The discount rate is
subject to change each year, based on a hypothetical yield curve developed from a portfolio of high quality, corporate, non-callable
bonds with maturities that match our projected benefit payment stream. The resulting discount rate reflects the matching of the
plan liability cash flows to the yield curve. The discount rate determined on this basis for the qualified pension plan and other
employee postretirement benefit costs was 3.5% and 4.0% as of December 31, 2017 and 2016, respectively.
The expected long-term
rate of return on pension plan assets is selected by taking into account the expected duration of the plan’s projected benefit
obligation, asset mix and the fact that its assets are actively managed to mitigate risk. Allowable investment types include equity
investments, fixed income investments and real assets. Both equity and fixed income investment types may include alternative investments
which are permitted to be up to 20% of total plan assets. Pension plan assets are primarily managed by Russell Investment Corp.
(“Russell”), which allocates the assets into specified Russell-designed funds as we direct. Each specified Russell
fund is then managed by investment managers chosen by Russell. We also engage non-Russell related investment managers through Russell,
in its role as trustee, to invest pension plan assets. The targeted long-term allocation of our pension plan assets is 56.5% in
liquid return-seeking investments, 29% in fixed income investments and 14.5% in alternative investments. The expected long-term
rate of return on plan assets was 6.75% for 2017, 7.00% for 2016 and 7.25% for 2015. For 2018, we have updated our expected long-term
rate of return to 7.25%.
Pension and other employee
postretirement benefit costs included in income from continuing operations in 2018 are expected to be approximately $1.1 million,
compared with $1.6 million in 2017. Lowering the discount rate and the expected long-term rate of return each by 0.5% would have
increased benefit costs by approximately $0.2 million and $0.2 million, respectively, in 2017.
The benefit obligations
for pensions and other employee postretirement benefits exceeded the fair value of plan assets by $18.9 million at December 31,
2017. We are required to recognize the funded status of a benefit plan on our balance sheet. Market conditions and interest rates
significantly affect future assets and liabilities of Loral’s pension and other employee benefits plans.
Contingencies
Contingencies by their
nature relate to uncertainties that require management to exercise judgment both in assessing the likelihood that a liability has
been incurred as well as in estimating the amount of potential loss, if any. We accrue for costs relating to litigation, claims
and other contingent matters when, in management’s opinion, such liabilities become probable and reasonably estimable. Such
estimates may be based on advice from third parties or on management’s judgment, as appropriate. Actual amounts paid may
differ from amounts estimated, and such differences will be charged to operations in the period in which the final determination
of the liability is made. Management considers the assessment of loss contingencies as a critical accounting policy because of
the significant uncertainty relating to the outcome of any potential legal actions and other claims and the difficulty of predicting
the likelihood and range of the potential liability involved, coupled with the material impact on our results of operations that
could result from legal actions or other claims and assessments.
Accounting Standards
Issued and Not Yet Implemented
For discussion of accounting
standards issued and not yet implemented that could have an impact on us, see Note 2 to the financial statements.
Liquidity and Capital Resources
Loral
As described above,
Loral’s principal asset is a 62.7% economic interest in Telesat. We also have a 56% economic interest in XTAR. The operations
of Telesat and XTAR are not consolidated but are presented using the equity method of accounting. As of December 31, 2017, the
value of our investment in XTAR was zero as a result of the decline in its fair value that was determined to be other-than-temporary.
Loral has no debt.
Telesat has third party debt with financial institutions. XTAR has no external debt other than to its LLC member, Hisdesat, for
restructured lease payments on the Spainsat satellite. XTAR is required to make payments of $5 million per year to pay down the
outstanding restructured lease balance. As of December 31, 2017 and 2016, XTAR had deferred payment of liabilities to Hisdesat
of $32.7 million and $28.8 million, respectively, for lease payments, including the restructured lease payments. The Company has
not provided a guarantee for the debt of Telesat or XTAR.
Cash is maintained
at Loral, Telesat and XTAR to support the operating needs of each respective entity. The ability of Telesat to pay dividends or
certain other restricted payments in cash to Loral is governed by applicable covenants relating to its debt and its shareholder
agreement. The ability of XTAR to pay dividends and management fees in cash to Loral is governed by its operating agreement.
Cash and Available
Credit
At December 31, 2017,
Loral had $255.1 million of cash and cash equivalents and no debt. The Company’s cash and cash equivalents as of December
31, 2017 increased by $217.7 million from December 31, 2016 due primarily to a cash distribution by Telesat of $242.7 million and
interest income received of $2.2 million, partially offset by net payments of $12.5 million for income taxes primarily related
to the cash distribution, corporate expenses of $6.5 million, adjusted for changes in working capital and net of consulting fees
from Telesat, a $2.8 million payment to ViaSat pursuant to the Settlement Agreement and Allocation Agreement, litigation expenditures
of $1.1 million, postretirement benefits funding of $2.3 million and payments of $2.0 million related to strategic initiatives.
A discussion of cash changes by activity is set forth in the sections, “Net Cash Used in Operating Activities,” “Net
Cash Provided by (Used in) Investing Activities,” and “Net Cash (Used in) Provided by Financing Activities.”
The Company did not
have a credit facility as of December 31, 2017 and 2016.
Cash Management
We have a cash management
investment program that seeks a competitive return while maintaining a conservative risk profile. Our cash management investment
policy establishes what we believe to be conservative guidelines relating to the investment of surplus cash. The policy allows
us to invest in commercial paper, money market funds and other similar short-term investments but does not permit us to engage
in speculative or leveraged transactions, nor does it permit us to hold or issue financial instruments for trading purposes. The
cash management investment policy was designed to preserve capital and safeguard principal, to meet all of our liquidity requirements
and to provide a competitive rate of return for similar risk categories of investment. The policy addresses dealer qualifications,
lists approved securities, establishes minimum acceptable credit ratings, sets concentration limits, defines a maturity structure,
requires all firms to safe keep securities on our behalf, requires certain mandatory reporting activity and discusses review of
the portfolio. We operate the cash management investment program under the guidelines of our investment policy and continuously
monitor the investments to avoid risks.
We currently invest
our cash in several liquid Prime and Government AAA money market funds. The dispersion across funds reduces the exposure of a default
at one fund.
Liquidity
We believe that our
cash and cash equivalents will be sufficient to fund projected expenditures during 2018. We expect that our major cash outlays
during 2018 will include income tax payments, payments under employee benefit programs and general corporate expenses net of consulting
fees from Telesat.
In the first quarter
of 2017, we received $242.7 million in cash from Telesat, representing our share of an aggregate approximately $400 million distribution
from Telesat to its shareholders and stock option holders. We intend to use the proceeds of such distribution, net of reasonable
reserves for working capital and other liabilities, to make a distribution to our stockholders. There can be no assurance as to
the amount and timing of any such distribution, and such distribution may be impacted by the outcome of our discussions regarding,
and the structure of, the strategic combination transaction with respect to our interest in Telesat that we are pursuing.
Risks to Cash Flow
In the fourth quarter
of 2012, we sold our former subsidiary, SSL, to MDA pursuant to the Purchase Agreement. Under the terms of the Purchase Agreement,
we are obligated to indemnify MDA from liabilities with respect to certain pre-closing taxes the total amount of which has not
yet been determined. Where appropriate, we intend vigorously to contest the underlying tax assessments, but there can be no assurance
that we will be successful. Although no assurance can be provided, we do not believe that these tax-related matters will have a
material adverse effect on our financial position or results of operations.
Telesat
Cash and Available
Credit
As of December 31,
2017, Telesat had CAD 479 million of cash and short-term investments as well as approximately $200 million of borrowing availability
under its revolving credit facility.
Liquidity
A large portion of Telesat’s
annual cash receipts are reasonably predictable because they are primarily derived from an existing backlog of long-term customer
contracts and high contract renewal rates. Telesat believes its cash and short-term investments as of December 31, 2017, cash flows
from operating activities, and drawings on the revolving credit facility under its senior secured credit facilities will be adequate
to meet Telesat’s expected cash requirements for at least the next 12 months for activities in the normal course of business,
including capital requirements and required interest and principal payments on debt.
The construction of
any satellite replacement or expansion program will require significant capital expenditures. Telesat may choose to invest in new
satellites to further grow its business. Cash required for current and future satellite construction programs may be funded from
some or all of the following: cash and short-term investments, cash flow from operating activities, cash flow from customer prepayments
or through borrowings on the revolving credit facility under Telesat’s senior secured credit facilities. In addition, Telesat
may sell certain satellite assets and, in accordance with the terms and conditions of Telesat’s senior secured credit facilities,
reinvest the proceeds in replacement satellites or pay down indebtedness under Telesat’s senior secured credit facilities.
Subject to market conditions and subject to compliance with the terms and conditions of its senior secured credit facilities and
the financial leverage covenant tests therein, Telesat may also have the ability to obtain additional secured or unsecured financing
to fund current or future satellite construction. Telesat’s ability to access these sources of funding, however, is not guaranteed,
and therefore, Telesat may not be able to fully fund additional replacement or new satellite construction programs.
Debt
Telesat’s debt
as of December 31, 2017 and 2016 was as follows:
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December 31,
|
|
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Maturity
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Currency
|
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2017
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|
|
2016
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|
|
|
|
|
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(in thousands)
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|
Senior secured credit facilities:
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|
|
|
|
|
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Revolving credit facility
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November 2021
|
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USD or CAD equivalent
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|
|
—
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|
|
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—
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Term Loan B - U.S. facility
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|
November 2023
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|
USD
|
|
$
|
2,399,686
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|
|
$
|
2,423,925
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|
8.875% Senior notes
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|
November 2024
|
|
USD
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
2,899,686
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|
|
|
2,923,925
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Less: Deferred financing costs, interest rate floors and prepayment options
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|
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|
(80,994
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)
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|
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(58,336
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)
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Total debt under international financial reporting standards
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|
|
|
|
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2,818,692
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|
|
|
2,865,589
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U.S. GAAP adjustments
|
|
|
|
|
|
|
11,219
|
|
|
|
12,361
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|
Total debt under U.S. GAAP
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|
|
|
|
|
|
2,829,911
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|
|
|
2,877,950
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Current portion
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|
|
|
|
|
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13,551
|
|
|
|
18,182
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|
Long term portion
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|
|
|
|
|
$
|
2,816,360
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|
|
$
|
2,859,768
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|
On November 17, 2016,
Telesat entered into amended senior secured credit facilities which provide for term loan borrowings of $2.43 billion which mature
on November 17, 2023 and revolving credit borrowings of up to $200 million (or Canadian dollar equivalent) which mature on November
17, 2021. Telesat also issued, through a private placement, $500 million of 8.875% senior notes which mature on November 17, 2024.
On November 17, 2016,
Telesat repaid all outstanding amounts under its former senior secured credit facilities and its 6.0% senior notes.
On February 1, 2017,
Telesat amended the senior secured credit facilities to effectively reprice the then outstanding term loan borrowings of $2.424
billion.
Senior
Secured Credit Facilities
The obligations under
Telesat’s new credit agreement and the guarantees of those obligations are secured, subject to certain exceptions, by a first
priority security interest in the assets of Telesat and certain of its subsidiaries (the “Guarantors”). The credit
agreement contains covenants that restrict the ability of Telesat and the Guarantors to take specified actions, including, among
other things and subject to certain significant exceptions: creating liens, incurring indebtedness, making investments, engaging
in mergers, selling property, paying dividends, entering into sale-leaseback transactions, creating subsidiaries, repaying subordinated
debt or amending organizational documents. The credit agreement also requires Telesat and the Guarantors to comply with a maximum
first lien leverage ratio and contains customary events of default and affirmative covenants, including an excess cash sweep, that
may require Telesat to repay a portion of the outstanding principal under its senior secured credit facilities prior to the stated
maturity.
Telesat’s senior
secured credit facilities are comprised of the following facilities:
i
— Revolving Credit Facility
Telesat’s revolving
credit facility (“Revolving Facility”) is a $200 million loan facility available in either U.S. dollar or Canadian
dollar equivalent, maturing on November 17, 2021. Loans under the Revolving Facility bear interest at a floating interest rate.
For Canadian Prime Rate and Alternative Base Rate (“ABR”) loans, an applicable margin ranging from 1.5% to 2.00% is
applied to the Prime Rate and ABR as these interest rates are defined in the senior credit facilities. For Bankers Acceptance (“BA”)
Loans and Eurodollar Loans, an applicable margin ranging from 2.50% to 3.00% is applied to either the BA interest rate or LIBOR.
The rates on the Revolving Facility vary depending upon the results of the first lien leverage ratio. Telesat’s Revolving
Facility currently has an unused commitment fee of 40 basis points. As at December 31, 2017, other than approximately CAD 0.2 million
in drawings related to letters of credit, there were no borrowings under this facility.
ii
— Term Loan B — U.S. Facility
Telesat’s term
loan B — U.S. facility (“U.S. TLB Facility”) is a $2.430 billion loan maturing on November 17, 2023. As of December
31, 2017, $2.4 billion of this facility was outstanding, which represents the full amount available following mandatory repayments.
The initial terms had the outstanding borrowings under the U.S. TLB Facility bear interest at a floating rate of either: (i) LIBOR
as periodically determined for interest rate periods selected by Telesat in accordance with the terms of the senior secured credit
facilities, but not less than 0.75%, plus an initial applicable margin of 3.00%; or (ii) Alternative Base Rate as determined in
accordance with the terms of the senior secured credit facilities plus an applicable margin of 2.00%. On February 1, 2017, Telesat
amended the Senior Secured Credit Facilities to reduce the applicable margin to 3.00% from 3.75% on the then outstanding $2.424
billion. As at February 1, 2017, the mandatory principal repayments on the U.S. TLB Facility are one quarter of 1.00% of the value
of the loan at the time of the amendment, which must be paid on the last day of each quarter.
Senior
Notes
Telesat’s senior
notes of $500 million bear interest at an annual rate of 8.875% and are due November 17, 2024. They include covenants or terms
that restrict Telesat’s ability to, among other things, incur additional indebtedness, incur liens, pay dividends or make
certain other restricted payments, investments or acquisitions, enter into certain transactions with affiliates, modify or cancel
Telesat’s satellite insurance, effect mergers with another entity, and redeem Telesat’s senior notes, without penalty,
before November 15, 2022, in each case subject to exceptions provided in the senior notes indenture.
As of December 31, 2017,
Telesat was in compliance with the financial covenants of its senior secured credit facilities and the indenture governing the
senior notes.
Debt
Service Cost
Telesat’s interest
expense for the year ending December 31, 2017 was approximately CAD 197 million.
Derivatives
Telesat uses, from time
to time, interest rate and currency derivatives to manage its exposure to changes in interest rates and foreign exchange rates.
As of December 31, 2017,
Telesat had four outstanding interest rate swaps which hedge the interest rate risk on $1.8 billion of U.S. denominated Term
Loan B borrowings. As of December 31, 2017, the fair value of the interest rate swaps was an asset of $13.8 million. These contracts,
which mature between September 2019 and September 2022, are at fixed interest rates ranging from 1.72% to 2.04%, excluding applicable
margin.
Telesat also has foreign
currency embedded derivatives in its purchase contracts with suppliers and sales contracts with customers as a result of some of
these contracts being denominated in a currency other than the functional currency of the substantial parties to the respective
contract. The fair value of these foreign currency embedded derivatives as of December 31, 2017 was CAD 6.3 million.
Capital Expenditures
Telesat has entered into
contracts for the construction and launch of satellites and other capital expenditures. The outstanding commitments associated
with these contracts were approximately CAD 52 million as of December 31, 2017. These expenditures may be funded from some or all
of the following: cash and short-term investments, cash flow from operating activities, cash flow from customer prepayments or
funds available under the Revolving Facility.
Contractual Obligations and Other Commercial
Commitments
The following table
aggregates Loral’s contractual obligations and other commercial commitments as of December 31, 2017:
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Payments Due by Period
(2)
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Less than
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More than
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Total
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1 Year
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1-3 Years
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4-5 Years
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|
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5 Years
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(in thousands)
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Lease payments
(1)
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$
|
955
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|
|
$
|
637
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|
|
$
|
318
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|
—
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—
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(1)
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Represents future minimum payments under operating leases.
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(2)
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Does not include our liabilities for UTPs of $61.2 million.
Because the timing of future cash outflows associated with our liabilities for UTPs is highly uncertain, we are unable to make
reasonably reliable estimates of the period of cash settlement with the respective taxing authorities (see Note 8 to the financial
statements). Does not include obligations for pension and other postretirement benefits, for which we expect to make employer
contributions of approximately $2.4 million in 2018. We also expect to make employer contributions to our plans in future years.
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Net
Cash Used in Operating Activities
The following summarizes
Loral’s cash used in operating activities for the three years in the period ended December 31, 2017:
Net cash used in operations
was $24.7 million for the year ended December 31, 2017.
Net
cash used in operating activities by continuing operations was $21.9 million for the year ended December 31, 2017, consisting primarily
of a $0.6 million cash use attributable to income from continuing operations adjusted for non-cash operating items, an increase
in income taxes receivable of $12.1 million, a $7.5 million decrease in long-term liabilities, primarily liabilities for
UTP
s,
and a $1.8 million decrease in pension and other postretirement liabilities.
Net cash used by operating
activities from discontinued operations was $2.8 million for the year ended December 31, 2017 representing the final payment to
ViaSat pursuant to the Settlement Agreement and the Allocation Agreement.
Net cash used in operations
was $21.2 million for the year ended December 31, 2016.
Net cash used in operating
activities by continuing operations was $9.6 million for the year ended December 31, 2016, consisting primarily of a $6.0 million
cash use attributable to income from continuing operations adjusted for non-cash operating items, a $1.6 million decrease in pension
and other postretirement liabilities, a $1.6 million decrease in long-term liabilities and a $0.4 million decrease in accrued expenses.
Net cash used by operating
activities from discontinued operations was $11.7 million for the year ended December 31, 2016 representing $11.2 million of payments
to ViaSat pursuant to the Settlement Agreement and the Allocation Agreement and a $0.5 million indemnification payment for pre-closing
taxes pursuant to the Purchase Agreement.
Net cash used in operations
was $28.8 million for the year ended December 31, 2015.
Net cash used in operating
activities by continuing operations was $16.0 million for the year ended December 31, 2015, consisting primarily of a $7.6 million
decrease in our liability for UTPs, a $3.5 million decrease in pension and other postretirement liabilities, a $3.1 million cash
use attributable to loss from continuing operations adjusted for non-cash operating items, a $1.0 million decrease in accrued expenses
and other current liabilities and a $0.8 million decrease in income taxes payable.
Net cash used by operating
activities from discontinued operations was $12.8 million for the year ended December 31, 2015 representing $11.2 million of payments
to ViaSat pursuant to the Settlement Agreement and the Allocation Agreement and a $1.5 million pre-closing tax indemnification
payment pursuant to the Purchase Agreement.
Net
Cash Provided by (Used in) Investing Activities
The following summarizes
Loral’s cash provided by (used in) investing activities for the years ended December 31, 2017 and 2015:
Net cash provided by
investing activities by continuing operations for the year ended December 31, 2017 was $242.7 million primarily representing the
cash distribution received from Telesat.
Net cash provided by
investing activities from discontinued operations for the year ended December 31, 2015 was $33.7 million consisting of the receipt
of the final principal payment under a three-year promissory note received in connection with the Sale.
Net Cash (Used in) Provided by Financing
Activities
Loral’s net cash
(used in) provided by financing activities was $(0.1) million and $2.6 million for the years ended December 31, 2016 and 2015,
respectively, consisting of adjustments to excess tax benefits associated with stock-based compensation.
Off-Balance Sheet Arrangements
We do not have any
off-balance sheet arrangements, as defined by the rules and regulations of the SEC, that have or are reasonably likely to have
a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources. As a result, we are not materially exposed to any financing, liquidity, market or credit
risk that could arise if we had engaged in these arrangements.
Other
Loral’s operating
cash flows for 2017 and 2016 included contributions of approximately $2.3 million and $2.2 million, respectively, to the qualified
pension plan. Operating cash flows for 2015 included contributions of approximately $2.7 million to the qualified pension plan
and payments of approximately $1.0 million to participants related to the reduction of retiree medical benefits.
Affiliate Matters
Loral has made certain
investments in joint ventures in the satellite services business that are accounted for under the equity method of accounting (see
Note 5 to the financial statements for further information on affiliate matters).
Commitments and Contingencies
Our business and operations
are subject to a number of significant risks, the most significant of which are summarized in Item 1A —
Risk Factors
and also in Note 13 to our consolidated financial statements.
Item 7A.
Quantitative and Qualitative
Disclosures about Market Risk
Loral
Foreign Currency
In the normal course
of business, we are subject to the risks associated with fluctuations in foreign currency exchange rates. To limit this foreign
exchange rate exposure, the Company seeks to denominate its contracts in U.S. dollars. If we are unable to enter into a contract
in U.S. dollars, we review our foreign exchange exposure and, where appropriate, derivatives are used to minimize the risk of foreign
exchange rate fluctuations to operating results and cash flows. We do not use derivative instruments for trading or speculative
purposes.
Interest
During 2017, our excess
cash was invested in money market securities; we did not hold any other marketable securities.
Derivatives
As a result of the
use of derivative instruments, the Company is exposed to the risk that counterparties to derivative contracts will fail to meet
their contractual obligations. To mitigate the counterparty credit risk, the Company has a policy of entering into contracts only
with carefully selected major financial institutions based upon their credit ratings and other factors.
Loral had no derivative
instruments as of December 31, 2017.
Telesat
Foreign Exchange Risk
Telesat’s operating
results are subject to fluctuations as a result of exchange rate variations to the extent that transactions are made in currencies
other than Canadian dollars. The most significant impact of variations in the exchange rate is on Telesat’s U.S. dollar denominated
debt financing, cash and short-term investments, trade and other receivables and trade and other payables. As of December 31, 2017,
Telesat’s U.S. dollar denominated debt totaled $2.9 billion. Telesat is also exposed to foreign currency risk on anticipated
transactions, such as the costs of satellite construction, launch and acquisition.
For the year ended
December 31, 2017, approximately 52% of Telesat’s revenues, 42% of its operating expenses, 100% of its interest expense and
the majority of its capital expenditures were denominated in U.S. dollars. As a result, the volatility of U.S. currency may expose
Telesat to foreign exchange risks.
As of December 31,
2017, a five percent increase (decrease) in the value of the Canadian dollar against the U.S. dollar would have increased (decreased)
Telesat’s net income by approximately $129 million. This analysis assumes all other variables, in particular interest rates,
remain constant.
Interest Rate Risk
Telesat is exposed
to interest rate risk on its cash and short-term investments and on its indebtedness, a portion of which includes a variable interest
rate. Changes in the interest rates could impact the amount of interest that Telesat receives or is required to pay.
Derivative Financial Instruments
Telesat uses derivative
instruments to manage its exposure to foreign currency and interest rate risk. Telesat’s policy is that it does not use derivative
instruments for speculative purposes.
Tel
esat
uses the following instruments, as required
:
|
•
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forward currency contracts to hedge foreign exchange risk on anticipated cash flows, mainly related to the construction of satellites and interest payments;
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|
|
|
•
|
currency derivative instruments to hedge the foreign exchange risk on its U.S. dollar denominated indebtedness; and
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|
|
|
|
•
|
interest rate swaps to hedge the interest rate risk related to its indebtedness, a portion of which includes a variable interest rate.
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Item 8.
Financial Statements and
Supplementary Data
See Index to Financial Statements
and Financial Statement Schedules on page F-1.
Item 9.
Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls
and Procedures
Our president
and our chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (“the Exchange Act”)) as of December 31,
2017, have concluded that our disclosure controls and procedures were effective and designed to ensure that information relating
to Loral and its consolidated subsidiaries required to be disclosed in our filings under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. The term disclosure
controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required
to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that the information required to be disclosed by an issuer in the
reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including
its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
Management’s
Report on Internal Control Over Financial Reporting
Our management
is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in
Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our president
and our chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting
based on the framework set forth in
Internal Control — Integrated Framework
(2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our evaluation under such criteria, our management concluded that our internal
control over financial reporting was effective as of December 31, 2017.
Our
management’s assessment of the effectiveness of our internal control over financial reporting as of December 31,
2017 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in its
attestation report which is included below.
Changes
in Internal Controls Over Financial Reporting
In our quarterly
report for the third quarter of 2017, we identified and disclosed a material weakness related to the absence of satisfactory internal
controls requiring timely reporting of any allegations of fraud involving management, regardless of the source of allegation or
its level of credibility, to the Company’s Audit Committee and performance of appropriate due diligence on anyone acting
on behalf of the Company. As a result, management did not timely communicate to the Company’s Audit Committee the following
allegation of fraud: in July 2017, a Russian attorney, who the Company believes participated in the fraud in Russia that diverted
funds due to be paid to the Company in connection with its exit from its joint venture to provide Globalstar service in Russia
to a shell company formed by that attorney (see Note 13 to the consolidated financial statements), alleged that an officer of the
Company was also involved in the fraud in Russia. The attorney was affiliated with a Russian law firm retained by the Company’s
U.S. counsel to pursue the Company’s exit from the joint venture and was not known to the Company at the time of the fraud
in Russia. Prior to communicating the allegation to the Audit Committee, management, notwithstanding its view regarding the lack
of credibility of the unsubstantiated allegation, retained outside counsel to examine the allegation; following such examination,
outside counsel concluded that there was no evidence implicating Loral personnel. Subsequent to receiving the report from outside
counsel retained by management, the Audit Committee retained its own independent counsel to perform an investigation, and the Audit
Committee’s independent counsel also has determined, based on its investigation procedures, that there was no evidence implicating
Loral personnel.
In
the fourth quarter of 2017, we adopted and implemented remedial steps designed to address the material weakness and to ensure the
fair presentation of our consolidated financial statements. These remedial steps included:
1) employee refresher training
on the identification of fraud risks and fraud-related matters, with specific emphasis on the identification and reporting of alleged,
suspected or actual fraud; 2) revision of our code of conduct and related controls to require timely reporting of any alleged or
suspected fraud involving management regardless of the source of the allegation or its level of credibility; 3) acceleration of
employee recertification of our code of conduct; 4) enhancement of the process for preparation of management certifications required
by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 and management representations provided to the Company’s auditors;
and 5) enhancement of our internal controls to add a requirement to perform appropriate due diligence on anyone acting on behalf
of the Company.
We have successfully
completed the testing necessary to conclude that the previously identified material weakness has been remediated as of December
31, 2017.
Except as noted
above, there has been no change in the Company’s internal control over financial reporting as of December 31, 2017, that
has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Inherent Limitations on Effectiveness
of Controls
Our management,
including our president and our chief financial officer, does not expect that our disclosure controls or our internal control over
financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated,
can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control
system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their
costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance
that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company
have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns
can occur because of simple error or mistake. Controls may also be circumvented by the individual acts of some persons, by collusion
of two or more people or by management override of the controls. The design of any system of controls is based in part on certain
assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are
subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of
compliance with policies or procedures.
R
EPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Loral Space & Communications Inc.
New York, New York
Opinion
on Internal Control over Financial Reporting
We
have audited the internal control over financial reporting of Loral Space & Communications, Inc. and subsidiaries (the “Company”)
as of December 31, 2017, based on criteria established in
Internal Control — Integrated Framework (2013)
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal
Control — Integrated Framework (2013)
issued by COSO.
We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated financial statements as of and for the year ended December 31, 2017, of the Company and our report dated March 15,
2018, expressed an unqualified opinion on those financial statements.
Basis
for Opinion
The
Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
Definition
and Limitations of Internal Control over Financial Reporting
A
company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets
that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/
DELOITTE & TOUCHE LLP
|
|
New York, New York
|
March 15, 2018
|
Item 9B.
Other Information
None.
PART III
Item 10.
Directors, Executive Officers
and Corporate Governance
Executive Officers of the Registrant
The following table
sets forth information concerning the executive officers of Loral as of March 9, 2018.
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
Avi Katz
|
|
59
|
|
President, General Counsel and Secretary since December 2012. Senior Vice President, General Counsel and Secretary from January 2008 to December 2012.
|
John Capogrossi
|
|
64
|
|
Vice President, Chief Financial Officer and Treasurer since January 2016. Vice President, Chief Financial Officer, Treasurer and Controller from March 2013 to January 2016. Vice President and Controller from January 2008 to March 2013.
|
Ravinder S. Girgla
|
|
54
|
|
Vice President and Controller since January 2016. Deputy Controller from February 2013 to January 2016. Assistant Controller from July 2008 to February 2013.
|
The remaining information
required under Item 10 will be presented in the Company’s 2018 definitive proxy statement which is incorporated herein by
reference or by amendment to this Annual Report on Form 10-K.
Item 11.
Executive Compensation
Information required
under Item 11 will be presented in the Company’s 2018 definitive proxy statement which is incorporated herein by reference
or by amendment to this Annual Report on Form 10-K.
Item 12.
Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters
Information required
under Item 12 will be presented in the Company’s 2018 definitive proxy statement which is incorporated herein by reference
or by amendment to this Annual Report on Form 10-K.
Item 13.
Certain Relationships and
Related Transactions, and Director Independence
Information required
under Item 13 will be presented in the Company’s 2018 definitive proxy statement which is incorporated herein by reference
or by amendment to this Annual Report on Form 10-K.
Item 14.
Principal Accountant Fees
and Services
Information required
under Item 14 will be presented in the Company’s 2018 definitive proxy statement which is incorporated herein by reference
or by amendment to this Annual Report on Form 10-K.
PART IV
Item 15.
Exhibits and Financial Statement
Schedules
|
(a)
|
1. Financial Statements
|
Index to Financial Statements and Financial Statement Schedule
|
|
|
|
Loral Space & Communications Inc. and Subsidiaries:
|
|
Report of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated Balance Sheets as of December 31, 2017 and 2016
|
F-3
|
Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015
|
F-4
|
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016 and 2015
|
F-5
|
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2017, 2016 and 2015
|
F-6
|
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
|
F-7
|
Notes to Consolidated Financial Statements
|
F-8
|
Schedule II
|
F-38
|
|
|
Separate Financial Statements of Subsidiaries not consolidated Pursuant to Rule 3-09 of Regulation S-X
|
|
|
|
Telesat Canada (formerly Telesat Holdings Inc.) and Subsidiaries:
|
|
Report of Independent Registered Public Accounting Firm
|
F-39
|
Consolidated Statements of Income (Loss) for the years ended December 31, 2017, 2016 and 2015
|
F-40
|
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016 and 2015
|
F-41
|
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2017, 2016 and 2015
|
F-42
|
Consolidated Balance Sheets as of December 31, 2017 and 2016
|
F-43
|
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
|
F-44
|
Notes to the 2017 Consolidated Financial Statements
|
F-45
|
INDEX TO EXHIBITS
Exhibit
|
|
|
Number
|
|
Description
|
3.1
|
|
Restated Certificate of Incorporation of Loral Space & Communications Inc. dated May 19, 2009(6)
|
|
|
|
3.2
|
|
Amended and Restated Bylaws of Loral Space & Communications Inc. dated December 23, 2008(4)
|
|
|
|
3.3
|
|
Amendment No. 1 to Bylaws of Loral Space & Communications dated January 12, 2010(8)
|
|
|
|
10.1
|
|
Purchase Agreement, dated as of June 26, 2012, by and among Loral Space & Communications Inc., Space Systems/Loral, Inc., MacDonald, Dettwiler and Associates Ltd. and MDA Communications Holdings, Inc.(14)
|
|
|
|
10.2
|
|
Amendment No. 1 to the Purchase Agreement, dated as of October 30, 2012, by and among Loral Space & Communications Inc., Space Systems/Loral, Inc., MacDonald, Dettwiler and Associates Ltd. and MDA Communications Holdings, Inc.(15)
|
|
|
|
10.3
|
|
Amendment No. 2 to Purchase Agreement, dated March 28, 2013, by and among Loral Space & Communications Inc., Space Systems/Loral, LLC, MacDonald, Dettwiler and Associates Ltd. and MDA Communications Holdings, Inc.(19)
|
|
|
|
10.4
|
|
Shareholders Agreement, dated as of October 31, 2007, between Public Sector Pension Investment Board, Red Isle Private Investments Inc., Loral Space & Communications Inc., Loral Space & Communications Holdings Corporation, Loral Holdings Corporation, Loral Skynet Corporation, John P. Cashman, Colin D. Watson, Telesat Holdings Inc. (formerly 4363205 Canada Inc.), Telesat Interco Inc. (formerly 4363213 Canada Inc.), Telesat and MHR Fund Management LLC(2)
|
|
|
|
10.5
|
|
Consulting Services Agreement, dated as of October 31, 2007, by and between Loral Space & Communications Inc. and Telesat(2)
|
|
|
|
10.6
|
|
Indemnity Agreement, dated as of October 31, 2007, by and among Loral Space & Communications Inc., Telesat, Telesat Holdings Inc., Telesat Interco Inc. and Henry Gerard (Hank) Intven(2)
|
|
|
|
10.7
|
|
Acknowledgement and Indemnity Agreement, dated as of October 31, 2007, between Loral Space & Communications Inc., Telesat, Telesat Holdings Inc. (formerly 4363205 Canada Inc.), Telesat Interco Inc. (formerly 4363213 Canada Inc.) and McCarthy Tétrault LLP(2)
|
|
|
|
10.8
|
|
Amended and Restated Registration Rights Agreement dated December 23, 2008 by and among Loral Space & Communications Inc. and the Persons Listed on the Signature Pages Thereof(4)
|
|
|
|
10.9
|
|
Letter Agreement, dated as of June 30, 2009, by and among Loral Space & Communications Inc., MHR Capital Partners Master Account LP, MHR Capital Partners (100) LP, MHR Institutional Partners LP, MHRA LP, MHRM LP, MHR Institutional Partners II LP, MHR Institutional Partners IIA LP and MHR Institutional Partners III LP.(7)
|
|
|
|
10.10
|
|
Partnership Interest Purchase Agreement dated December 21, 2007 by and among GSSI, LLC, Globalstar, Inc., Loral/DASA Globalstar, LP, Globalstar do Brasil, SA., Loral/DASA do Brasil Holdings Ltda., Loral Holdings LLC, Global DASA LLC, LGP (Bermuda) Ltd., Mercedes-Benz do Brasil Ltda. (f/k/a DaimlerChrysler do Brasil Ltda.) and Loral Space & Communications Inc.(3)
|
|
|
|
10.11
|
|
General Release dated December 14, 2012 between Loral Space & Communications Inc. and Michael B. Targoff(16) ‡
|
|
|
|
10.12
|
|
Consulting Agreement dated December 14, 2012 between Loral Space & Communications Inc. and Michael B. Targoff(16) ‡
|
|
|
|
10.13
|
|
General Release and Separation Agreement dated December 14, 2012 between Loral Space & Communications Inc. and Richard P. Mastoloni(16) ‡
|
|
|
|
10.14
|
|
Consulting Agreement dated December 14, 2012 between Loral Space & Communications Inc. and Richard P. Mastoloni(16) ‡
|
Exhibit
|
|
|
Number
|
|
Description
|
10.15
|
|
General Release and Separation Agreement dated March 15, 2013 between Loral Space & Communications Inc. and Harvey B. Rein(18) ‡
|
|
|
|
10.16
|
|
Consulting Agreement dated March 15, 2013 between Loral Space & Communications Inc. and Harvey B. Rein(18) ‡
|
|
|
|
10.17
|
|
Form of Officers’ and Directors’ Indemnification Agreement between Loral Space & Communications Inc. and Loral Executives(1) ‡
|
|
|
|
10.18
|
|
Loral Space Management Incentive Bonus Program (Adopted as of December 17, 2008)(4) ‡
|
|
|
|
10.19
|
|
Loral Space & Communications Inc. 2005 Stock Incentive Plan (Amended and Restated as of April 3, 2009)(5) ‡
|
|
|
|
10.20
|
|
Form of Director 2009 Restricted Stock Unit Agreement(9) ‡
|
|
|
|
10.21
|
|
Form of Director 2010 Restricted Stock Unit Agreement(10) ‡
|
|
|
|
10.22
|
|
Form of Director 2011 Restricted Stock Unit Agreement(13) ‡
|
|
|
|
10.23
|
|
Form of Director 2012 Restricted Stock Unit Agreement(17) ‡
|
|
|
|
10.24
|
|
Loral Space & Communications Inc. Severance Policy for Corporate Officers (Amended and restated as of August 4, 2011)(12) ‡
|
|
|
|
10.25
|
|
Grant Agreement, dated as of May 20, 2011, by and among Telesat Holdings Inc., Telesat Canada, Loral Space & Communications Inc., the Public Sector Pension Investment Board, 4440480 Canada Inc. and Daniel Goldberg(11) ‡
|
|
|
|
10.26
|
|
Grant Agreement, dated as of May 31, 2011, by and among Telesat Holdings Inc., Telesat Canada, Loral Space & Communications Inc., the Public Sector Pension Investment Board, 4440480 Canada Inc. and Michael C. Schwartz(11) ‡
|
|
|
|
10.27
|
|
Grant Agreement, dated as of May 31, 2011, by and among Telesat Holdings Inc., Telesat Canada, Loral Space & Communications Inc., the Public Sector Pension Investment Board, 4440480 Canada Inc. and Michel G. Cayouette(11) ‡
|
|
|
|
10.28
|
|
Grant Agreement, dated as of November 18, 2013, by and among Telesat Holdings Inc., Telesat Canada, Loral Space & Communications Inc., the Public Sector Pension Investment Board, 4440480 Canada Inc. and Daniel Goldberg(20) ‡
|
|
|
|
10.29
|
|
Grant Agreement, dated as of January 28, 2016, by and among Telesat Holdings Inc., Telesat Canada, Loral Space & Communications Inc., the Public Sector Pension Investment Board, 4440480 Canada Inc. and Michael C. Schwartz(24) ‡
|
|
|
|
10.30
|
|
Grant Agreement, dated as of August 25, 2017, by and among Telesat Canada, Loral Space & Communications Inc., the Public Sector Pension Investment Board, 4440480 Canada Inc. and Michael G. Cayouette †
|
|
|
|
10.31
|
|
Settlement Agreement, dated September 5, 2014, by and among ViaSat, Inc., Space Systems/Loral, LLC (f/k/a Space Systems/Loral, Inc.), Loral Space & Communications Inc., and (with respect to Section 4.2) MacDonald, Dettwiler and Associates Ltd.(21)
|
|
|
|
10.32
|
|
Release Agreement, dated September 5, 2014, by and among Loral Space & Communications Inc., Space Systems/Loral, LLC, MacDonald, Dettwiler and Associates Ltd. and MDA Communications Holdings, Inc.(21)
|
|
|
|
10.33
|
|
MDA/Loral Dispute Resolution, dated December 1, 2014, by and between Loral Space & Communications Inc. and MacDonald, Dettwiler and Associates Ltd.(22)
|
|
|
|
14.1
|
|
Code of Conduct, Revised as of December 8, 2017†
|
|
|
|
21.1
|
|
List of Subsidiaries of the Registrant†
|
|
|
|
23.1
|
|
Consent of Deloitte & Touche LLP†
|
Exhibit
|
|
|
Number
|
|
Description
|
23.2
|
|
Consent of Deloitte LLP†
|
|
|
|
31.1
|
|
Certification of President pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 302 of the Sarbanes-Oxley Act of 2002†
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 302 of the Sarbanes-Oxley Act of 2002†
|
|
|
|
32.1
|
|
Certification of President pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002†
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002†
|
|
|
|
99.1
|
|
Certificate and Articles of Amalgamation of Telesat Canada, dated as of January 1, 2017(29)
|
|
|
|
99.2
|
|
By-Law No. 1 of Telesat Canada, dated as of January 1, 2017(29)
|
|
|
|
99.3
|
|
Credit Agreement, dated as of March 28, 2012, by and among Telesat Holdings Inc., Telesat Canada, Telesat LLC, the guarantors party thereto, JP Morgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto(25)
|
|
|
|
99.4
|
|
Amendment No. 1, dated as of April 2, 2013, to the Credit Agreement, dated as of March 28, 2012, by and among Telesat Holdings Inc., Telesat Canada, Telesat LLC, the guarantors party thereto, JP Morgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto(26)
|
|
|
|
99.5
|
|
Amendment No. 2, dated as of November 17, 2016, to the Credit Agreement, dated as of March 28, 2012, as amended by Amendment No. 1 on April 2, 2013, by and among Telesat Holdings Inc., Telesat Canada, Telesat LLC, the guarantors party thereto, the lenders party thereto, and JP Morgan Chase Bank, N.A., as administrative agent, collateral agent, swingline lender and L/C Issuer(27)
|
|
|
|
99.6
|
|
Amendment No. 3 dated December 19, 2016 to the Credit Agreement, dated as of March 28, 2012, as amended by Amendment No. 1 on April 2, 2013, as further amended by Amendment No. 2 on November 17, 2016, by and among Telesat Canada, Telesat LLC, the guarantors party thereto, the lenders party thereto and JP Morgan Chase Bank, N.A., as administrative agent, collateral agent, swingline lender and L/C Issuer(28)
|
|
|
|
99.7
|
|
Amendment No. 4 dated February 1, 2017 to the Credit Agreement, dated as of March 28, 2012, as amended by Amendment No. 1 on April 2, 2013, as further amended by Amendment No. 2 on November 17, 2016, and as further amended by Amendment No. 3 on December 19, 2016, by and among Telesat Canada, Telesat LLC, the guarantors party thereto, the lenders party thereto and JP Morgan Chase Bank, N.A., as administrative agent, collateral agent, swingline lender and L/C Issuer(28)
|
|
|
|
99.8
|
|
Indenture, dated November 17, 2016, with respect to Telesat Canada’s 8.875% Senior Notes due 2024, among Telesat Holdings Inc., Telesat Canada, Telesat LLC, as co-issuer, the guarantors party thereto, and The Bank of New York Mellon, as Trustee(27)
|
|
|
|
99.9
|
|
First Supplemental Indenture, dated as of December 29, 2016, with respect to Telesat Canada’s 8.875% Senior Notes due 2024, among Telesat Canada, Telesat LLC, as co-issuer, the guarantors party thereto and The Bank of New York Mellon, as Trustee(29)
|
|
|
|
101
|
|
Interactive Data Files†
|
|
|
(101.INS) XBRL Instance Document
|
|
|
(101.SCH) XBRL Taxonomy Extension Schema Document
|
|
|
(101.CAL) XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
(101.DEF) XBRL Taxonomy Extension Definition Linkbase Document
|
|
|
(101.LAB) XBRL Taxonomy Extension Label Linkbase Document
|
|
|
(101.PRE) XBRL Taxonomy Extension Presentation Linkbase Document
|
|
(1)
|
Incorporated by reference from the Company’s Current Report on Form 8-K filed on November
23, 2005.
|
|
(2)
|
Incorporated by reference from the Company’s Current Report on Form 8-K filed on November
2, 2007.
|
|
(3)
|
Incorporated by reference from the Company’s Current Report on Form 8-K filed December 21,
2007.
|
|
(4)
|
Incorporated by reference from the Company’s Current Report on Form 8-K filed on December
23, 2008.
|
|
(5)
|
Incorporated by reference from the Company’s Current Quarterly Report on Form 10-Q for the
quarter ended March 31, 2009 filed on May 11, 2009.
|
|
(6)
|
Incorporated by reference from the Company’s Current Report on Form 8-K filed on May 20,
2009.
|
|
(7)
|
Incorporated by reference from the Company’s Current Report on Form 8-K filed on June 30,
2009.
|
|
(8)
|
Incorporated by reference from the Company’s Current Report on Form 8-K filed on January
15, 2010.
|
|
(9)
|
Incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2009 filed on March 15, 2010.
|
|
(10)
|
Incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2010 filed on March 15, 2011.
|
|
(11)
|
Incorporated by reference from the Company’s Current Report on Form 8-K filed on June 13,
2011.
|
|
(12)
|
Incorporated by reference from the Company’s Current Quarterly Report on Form 10-Q for the
quarter ended June 30, 2011 filed on August 9, 2011.
|
|
(13)
|
Incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2011 filed on February 29, 2012.
|
|
(14)
|
Incorporated by reference from the Company’s Current Report on Form 8-K filed on June 28,
2012.
|
|
(15)
|
Incorporated by reference from the Company’s Current Report on Form 8-K filed on November
5, 2012.
|
|
(16)
|
Incorporated by reference from the Company’s Current Report on Form 8-K filed on December
17, 2012.
|
|
(17)
|
Incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2012 filed on March 1, 2013.
|
|
(18)
|
Incorporated by reference from the Company’s Current Report on Form 8-K filed on March 18,
2013.
|
|
(19)
|
Incorporated by reference from the Company’s Current Report on Form 8-K filed on April 3,
2013.
|
|
(20)
|
Incorporated by reference from the Company’s Current Report on Form 8-K filed on November
20, 2013.
|
|
(21)
|
Incorporated by reference from the Company’s Current Report on Form 8-K filed on September
8, 2014.
|
|
(22)
|
Incorporated by reference from the Company’s Current Report on Form 8-K filed on December
3, 2014.
|
|
(23)
|
Incorporated by reference from the Company’s Current Report on Form 8-K filed on January
22, 2016.
|
|
(24)
|
Incorporated by reference from the Company’s Current Report on Form 8-K filed on January
29, 2016.
|
|
(25)
|
Incorporated by reference from the Report of Foreign Issuer on Form 6-K filed by Telesat Canada
on March 29, 2012.
|
|
(26)
|
Incorporated by reference from the Report of Foreign Issuer on Form 6-K filed by Telesat Holdings
Inc. on April 2, 2013.
|
|
(27)
|
Incorporated by reference from the Report of Foreign Issuer on Form 6-K filed by Telesat Holdings
Inc. on November 17, 2016.
|
|
(28)
|
Incorporated by reference from the Report of Foreign Issuer on Form 6-K filed by Telesat Canada
(formerly Telesat Holdings Inc.) on February 2, 2017.
|
|
(29)
|
Incorporated by reference from the Annual Report on Form 20-F filed by Telesat Canada (formerly
Telesat Holdings Inc.) on March 2, 2017.
|
|
‡
|
Management contract or compensatory plan, contract or arrangement with directors or named executive
officers.
|
SIGNATURES
Pursuant to the requirements
of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
|
LORAL SPACE & COMMUNICATIONS INC.
|
|
|
|
|
By:
|
/s/
Avi Katz
|
|
|
Avi Katz
|
|
|
|
|
|
President, General Counsel & Secretary
|
|
|
Dated: March 15, 2018
|
Pursuant to the requirements
of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
Signatures
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ MARK H. RACHESKY, M.D.
|
|
Director, Non-Executive
|
|
March 15, 2018
|
Mark H. Rachesky, M.D.
|
|
Chairman of the Board
|
|
|
|
|
|
|
|
/s/ MICHAEL B. TARGOFF
|
|
Director, Vice Chairman of the Board
|
|
March 15, 2018
|
Michael B. Targoff
|
|
|
|
|
|
|
|
|
|
/s/ JOHN D. HARKEY, JR.
|
|
Director
|
|
March 15, 2018
|
John D. Harkey, Jr.
|
|
|
|
|
|
|
|
|
|
/s/ ARTHUR L. SIMON
|
|
Director
|
|
March 15, 2018
|
Arthur L. Simon
|
|
|
|
|
|
|
|
|
|
/s/ JOHN P. STENBIT
|
|
Director
|
|
March 15, 2018
|
John P. Stenbit
|
|
|
|
|
|
|
|
|
|
/s/ JANET T. YEUNG
|
|
Director
|
|
March 15, 2018
|
Janet T. Yeung
|
|
|
|
|
|
|
|
|
|
/s/ AVI KATZ
|
|
President, General Counsel & Secretary (Principal
|
|
March 15, 2018
|
Avi Katz
|
|
Executive Officer)
|
|
|
|
|
|
|
|
/s/ JOHN CAPOGROSSI
|
|
Vice President, Chief Financial Officer and
|
|
March 15, 2018
|
John Capogrossi
|
|
Treasurer
(Principal Financial Officer)
|
|
|
|
|
|
|
|
/s/ RAVINDER S. GIRGLA
|
|
Vice President and Controller
|
|
March 15, 2018
|
Ravinder S. Girgla
|
|
(Principal Accounting Officer)
|
|
|
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULES
Loral Space & Communications Inc. and Subsidiaries
|
|
Report of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated Balance Sheets as of December 31, 2017 and 2016
|
F-3
|
Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015
|
F-4
|
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016 and 2015
|
F-5
|
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2017, 2016 and 2015
|
F-6
|
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
|
F-7
|
Notes to Consolidated Financial Statements
|
F-8
|
Schedule II
|
F-38
|
Separate Financial Statements of Subsidiaries not consolidated Pursuant to Rule 3-09 of Regulation S-X
|
|
Telesat Canada (formerly Telesat Holdings Inc.) and Subsidiaries :
|
|
Report of Independent Registered Public Accounting Firm
|
F-39
|
Consolidated Statements of Income (Loss) for the years ended December 31, 2017, 2016 and 2015
|
F-40
|
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016 and 2015
|
F-41
|
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2017, 2016 and 2015
|
F-42
|
Consolidated Balance Sheets as of December 31, 2017 and 2016
|
F-43
|
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
|
F-44
|
Notes to the 2017 Consolidated Financial Statements
|
F-45
|
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Loral Space & Communications Inc.
New York, New York
Opinion
on the Financial Statements
We have audited
the accompanying consolidated balance sheets of Loral Space & Communications Inc. and subsidiaries (the “Company”)
as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income (loss), shareholders’
equity, and cash flows for each of the three years in the period ended December 31, 2017,
and
the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements")
.
In our opinion, the financial statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United
States of America.
We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
Company's internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal
Control — Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 15, 2018
,
expressed an unqualified opinion on the Company's internal control over financial
reporting.
Basis
for Opinion
These
financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's
financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or
fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
/s/
DELOITTE & TOUCHE LLP
|
|
New York, New York
|
March 15, 2018
|
We
have served as the Company’s auditor since 1996.
LORAL SPACE & COMMUNICATIONS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
255,139
|
|
|
$
|
37,458
|
|
Income taxes receivable
|
|
|
11,105
|
|
|
|
545
|
|
Other current assets
|
|
|
3,099
|
|
|
|
2,938
|
|
Total current assets
|
|
|
269,343
|
|
|
|
40,941
|
|
Income taxes receivable, non-current
|
|
|
1,550
|
|
|
|
—
|
|
Investments in affiliates
|
|
|
53,430
|
|
|
|
107,950
|
|
Deferred tax assets
|
|
|
50,016
|
|
|
|
115,285
|
|
Other assets
|
|
|
372
|
|
|
|
55
|
|
Total assets
|
|
$
|
374,711
|
|
|
$
|
264,231
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accrued employment costs
|
|
$
|
2,573
|
|
|
$
|
2,356
|
|
Other current liabilities
|
|
|
1,279
|
|
|
|
3,772
|
|
Total current liabilities
|
|
|
3,852
|
|
|
|
6,128
|
|
Pension and other postretirement liabilities
|
|
|
18,786
|
|
|
|
18,433
|
|
Long-term liabilities
|
|
|
61,475
|
|
|
|
69,259
|
|
Total liabilities
|
|
|
84,113
|
|
|
|
93,820
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders' Equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; 10,000,000 shares authorized, no shares issued and outstanding
|
|
|
—
|
|
|
|
—
|
|
Common Stock:
|
|
|
|
|
|
|
|
|
Voting common stock, $0.01 par value; 50,000,000 shares authorized, 21,581,572 issued
|
|
|
216
|
|
|
|
216
|
|
Non-voting common stock, $0.01 par value; 20,000,000 shares authorized 9,505,673 issued and outstanding
|
|
|
95
|
|
|
|
95
|
|
Paid-in capital
|
|
|
1,019,988
|
|
|
|
1,019,988
|
|
Treasury stock (at cost), 154,494 shares of voting common stock
|
|
|
(9,592
|
)
|
|
|
(9,592
|
)
|
Accumulated deficit
|
|
|
(682,831
|
)
|
|
|
(826,460
|
)
|
Accumulated other comprehensive loss
|
|
|
(37,278
|
)
|
|
|
(13,836
|
)
|
Total shareholders' equity
|
|
|
290,598
|
|
|
|
170,411
|
|
Total liabilities and shareholders' equity
|
|
$
|
374,711
|
|
|
$
|
264,231
|
|
See notes to consolidated financial statements
LORAL SPACE & COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
General and administrative expenses
|
|
$
|
(7,935
|
)
|
|
$
|
(6,726
|
)
|
|
$
|
(6,530
|
)
|
Operating loss
|
|
|
(7,935
|
)
|
|
|
(6,726
|
)
|
|
|
(6,530
|
)
|
Interest and investment income
|
|
|
2,483
|
|
|
|
194
|
|
|
|
138
|
|
Interest expense
|
|
|
(27
|
)
|
|
|
(20
|
)
|
|
|
(17
|
)
|
Other expense
|
|
|
(3,291
|
)
|
|
|
(1,449
|
)
|
|
|
(3,779
|
)
|
Loss from continuing operations before income taxes and equity in net income (loss) of affiliates
|
|
|
(8,770
|
)
|
|
|
(8,001
|
)
|
|
|
(10,188
|
)
|
Income tax (provision) benefit
|
|
|
(73,108
|
)
|
|
|
(28,507
|
)
|
|
|
45,476
|
|
(Loss) income from continuing operations before equity in net income (loss) of affiliates
|
|
|
(81,878
|
)
|
|
|
(36,508
|
)
|
|
|
35,288
|
|
Equity in net income (loss) of affiliates
|
|
|
216,347
|
|
|
|
84,078
|
|
|
|
(104,792
|
)
|
Income (loss) from continuing operations
|
|
|
134,469
|
|
|
|
47,570
|
|
|
|
(69,504
|
)
|
Loss from discontinued operations, net of tax
|
|
|
(5
|
)
|
|
|
(370
|
)
|
|
|
(778
|
)
|
Net income (loss)
|
|
$
|
134,464
|
|
|
$
|
47,200
|
|
|
$
|
(70,282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
4.35
|
|
|
$
|
1.54
|
|
|
$
|
(2.25
|
)
|
Loss from discontinued operations, net of tax
|
|
|
—
|
|
|
|
(0.01
|
)
|
|
|
(0.03
|
)
|
Net income (loss)
|
|
$
|
4.35
|
|
|
$
|
1.53
|
|
|
$
|
(2.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
4.30
|
|
|
$
|
1.50
|
|
|
$
|
(2.25
|
)
|
Loss from discontinued operations, net of tax
|
|
|
—
|
|
|
|
(0.01
|
)
|
|
|
(0.03
|
)
|
Net income (loss)
|
|
$
|
4.30
|
|
|
$
|
1.49
|
|
|
$
|
(2.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,933
|
|
|
|
30,933
|
|
|
|
30,928
|
|
Diluted
|
|
|
31,008
|
|
|
|
31,008
|
|
|
|
30,928
|
|
See notes to consolidated financial statements
LORAL SPACE & COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS)
(In thousands)
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net income (loss)
|
|
$
|
134,464
|
|
|
$
|
47,200
|
|
|
$
|
(70,282
|
)
|
Other comprehensive (loss) income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-retirement benefits
|
|
|
(694
|
)
|
|
|
(615
|
)
|
|
|
523
|
|
Proportionate share of Telesat other comprehensive (loss) income
|
|
|
(18,280
|
)
|
|
|
15,477
|
|
|
|
—
|
|
Other comprehensive (loss) income net of tax
|
|
|
(18,974
|
)
|
|
|
14,862
|
|
|
|
523
|
|
Comprehensive income (loss)
|
|
$
|
115,490
|
|
|
$
|
62,062
|
|
|
$
|
(69,759
|
)
|
See notes to consolidated financial statements
LORAL SPACE & COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’
EQUITY
(In thousands, except per share amounts)
|
|
Common Stock
|
|
|
|
|
|
Treasury Stock
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Voting
|
|
|
Non-Voting
|
|
|
|
|
|
Voting
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Paid-In
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Shareholders'
|
|
|
|
Issued
|
|
|
Amount
|
|
|
Issued
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Deficit
|
|
|
Loss
|
|
|
Equity
|
|
Balance, January 1, 2015
|
|
|
21,569
|
|
|
$
|
216
|
|
|
|
9,506
|
|
|
$
|
95
|
|
|
$
|
1,017,520
|
|
|
|
154
|
|
|
$
|
(9,592
|
)
|
|
$
|
(803,378
|
)
|
|
$
|
(29,221
|
)
|
|
$
|
175,640
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(70,282
|
)
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
523
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(69,759
|
)
|
Settlement of restricted stock units
|
|
|
13
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Adjustment to tax benefit associated with stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,609
|
|
Balance, December 31, 2015
|
|
|
21,582
|
|
|
|
216
|
|
|
|
9,506
|
|
|
|
95
|
|
|
|
1,020,129
|
|
|
|
154
|
|
|
|
(9,592
|
)
|
|
|
(873,660
|
)
|
|
|
(28,698
|
)
|
|
|
108,490
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,200
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,862
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,062
|
|
Adjustment to tax benefit associated with stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(141
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(141
|
)
|
Balance, December 31, 2016
|
|
|
21,582
|
|
|
|
216
|
|
|
|
9,506
|
|
|
|
95
|
|
|
|
1,019,988
|
|
|
|
154
|
|
|
|
(9,592
|
)
|
|
|
(826,460
|
)
|
|
|
(13,836
|
)
|
|
|
170,411
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134,464
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,974
|
)
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,490
|
|
Tax Cuts and Jobs Act, reclassification tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,468
|
|
|
|
(4,468
|
)
|
|
|
—
|
|
Cumulative effect adjustment attributable to previously unrecognized excess tax benefits on stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,697
|
|
|
|
|
|
|
|
4,697
|
|
Balance, December 31, 2017
|
|
|
21,582
|
|
|
$
|
216
|
|
|
|
9,506
|
|
|
$
|
95
|
|
|
$
|
1,019,988
|
|
|
|
154
|
|
|
$
|
(9,592
|
)
|
|
$
|
(682,831
|
)
|
|
$
|
(37,278
|
)
|
|
$
|
290,598
|
|
See notes to consolidated financial statements
LORAL SPACE & COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
134,464
|
|
|
$
|
47,200
|
|
|
$
|
(70,282
|
)
|
Loss from discontinued operations, net of tax
|
|
|
5
|
|
|
|
370
|
|
|
|
778
|
|
Adjustments to reconcile net income (loss) to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash operating items (Note 2)
|
|
|
(135,087
|
)
|
|
|
(53,567
|
)
|
|
|
66,399
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets and other assets
|
|
|
(161
|
)
|
|
|
140
|
|
|
|
25
|
|
Accrued employment costs and other current liabilities
|
|
|
325
|
|
|
|
(376
|
)
|
|
|
(988
|
)
|
Income taxes receivable
|
|
|
(12,110
|
)
|
|
|
(187
|
)
|
|
|
(834
|
)
|
Pension and other postretirement liabilities
|
|
|
(1,787
|
)
|
|
|
(1,563
|
)
|
|
|
(3,504
|
)
|
Long-term liabilities
|
|
|
(7,540
|
)
|
|
|
(1,572
|
)
|
|
|
(7,586
|
)
|
Net cash used in operating activities – continuing operations
|
|
|
(21,891
|
)
|
|
|
(9,555
|
)
|
|
|
(15,992
|
)
|
Net cash used in operating activities – discontinued operations
|
|
|
(2,809
|
)
|
|
|
(11,694
|
)
|
|
|
(12,762
|
)
|
Net cash used in operating activities
|
|
|
(24,700
|
)
|
|
|
(21,249
|
)
|
|
|
(28,754
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution received from affiliate
|
|
|
242,735
|
|
|
|
—
|
|
|
|
—
|
|
Capital expenditures
|
|
|
(50
|
)
|
|
|
(5
|
)
|
|
|
(102
|
)
|
Net cash provided by (used in) investing activities – continuing operations
|
|
|
242,685
|
|
|
|
(5
|
)
|
|
|
(102
|
)
|
Receipt of principal, promissory note - discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
33,667
|
|
Net cash provided by (used in) investing activities
|
|
|
242,685
|
|
|
|
(5
|
)
|
|
|
33,565
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to tax benefit associated with stock based-based compensation
|
|
|
—
|
|
|
|
(141
|
)
|
|
|
2,609
|
|
Net cash (used in) provided by financing activities – continuing operations
|
|
|
—
|
|
|
|
(141
|
)
|
|
|
2,609
|
|
Net cash provided by financing activities – discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net cash (used in) provided by financing activities
|
|
|
—
|
|
|
|
(141
|
)
|
|
|
2,609
|
|
Cash, cash equivalents and restricted cash — period increase (decrease)
|
|
|
217,985
|
|
|
|
(21,395
|
)
|
|
|
7,420
|
|
Cash, cash equivalents and restricted cash — beginning of year
|
|
|
37,458
|
|
|
|
58,853
|
|
|
|
51,433
|
|
Cash, cash equivalents and restricted cash — end of year
|
|
$
|
255,443
|
|
|
$
|
37,458
|
|
|
$
|
58,853
|
|
See notes to consolidated financial statements
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Principal Business
Loral Space &
Communications Inc., together with its subsidiaries (“Loral,” the “Company,” “we,” “our”
and “us”) is a leading satellite communications company engaged, through our ownership interests in affiliates, in
satellite-based communications services.
Description of Business
Loral has one operating
segment consisting of satellite-based communications services. Loral participates in satellite services operations primarily through
its ownership interest in Teleast Canada (“Telesat”), a leading global satellite services provider. Prior to and as
of December 31, 2016, Telesat Canada was a subsidiary of, and Loral held its ownership interest in Telesat Canada through, Telesat
Holdings Inc. Effective January 1, 2017, Telesat Holdings Inc. completed a corporate reorganization of companies under common
control, pursuant to which Telesat Holdings Inc. amalgamated with Telesat Interco Inc., a wholly owned subsidiary of Telesat Holdings
Inc., and immediately thereafter the newly amalgamated company amalgamated with Telesat Canada. The continuing entity, existing
under the laws of Canada, is named Telesat Canada. Telesat has accounted for the reorganization as a continuation of Telesat Holdings
Inc.
Telesat owns and leases
a satellite fleet that operates in geostationary earth orbit approximately 22,000 miles above the equator. In this orbit, satellites
remain in a fixed position relative to points on the earth’s surface and provide reliable, high-bandwidth services anywhere
in their coverage areas, serving as the backbone for many forms of telecommunications. Telesat is also developing a global constellation
of low earth orbit (“LEO”) satellites. LEO satellites operate in a circular orbit around the earth with an altitude
typically between 500 and 870 miles. Unlike geostationary satellites that operate in a fixed orbital location above the equator,
LEO satellites travel around the earth at high velocities requiring antennas on the ground to track their movement. LEO satellite
systems have the potential to offer a number of advantages over geostationary orbit satellites to meet growing requirements for
broadband services, both consumer and commercial, by providing increased data speeds and capacity, global coverage, and latency
on par with, or potentially better than, terrestrial services.
Loral holds a 62.7%
economic interest and a 32.7% voting interest in Telesat (see Note 5). We use the equity method of accounting for our ownership
interest in Telesat.
Loral, a Delaware
corporation, was formed on June 24, 2005, to succeed to the business conducted by its predecessor registrant, Loral Space &
Communications Ltd., which emerged from chapter 11 of the federal bankruptcy laws on November 21, 2005 (the “Effective Date”)
pursuant to the terms of the fourth amended joint plan of reorganization, as modified.
2. Basis of Presentation
The consolidated financial
statements include the results of Loral and its subsidiaries and have been prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”). All intercompany transactions have been eliminated. Amounts
in prior periods have been reclassified to conform to the current year presentation.
Discontinued Operations
On November 2, 2012,
Loral completed the sale (the “Sale”) of its wholly-owned subsidiary, Space Systems/Loral, LLC (formerly known as Space
Systems/Loral, Inc.) (“SSL”), to MDA Communications Holdings, Inc. (“MDA Holdings”), a subsidiary of MacDonald,
Dettwiler and Associates Ltd. (“MDA”). Pursuant to the purchase agreement (the “Purchase Agreement”), dated
as of June 26, 2012, as amended on October 30, 2012 and March 28, 2013, by and among Loral, SSL, MDA and MDA Holdings, Loral agreed
to indemnify MDA and its affiliates from (1) liabilities with respect to certain pre-closing taxes; and (2) certain litigation
costs and litigation damages in a lawsuit (the “ViaSat Suit”) brought in 2012 by ViaSat, Inc. (“ViaSat”)
against Loral and SSL (see Note 13).
Adjustments to amounts
previously reported in discontinued operations and interest expense that is directly related to the Sale are classified as discontinued
operations in the statements of operations and cash flows for the years ended December 31, 2017, 2016 and 2015.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– (Continued)
Investments in Affiliates
Our ownership interest
in Telesat is accounted for using the equity method of accounting. Income and losses of Telesat are recorded based on our economic
interest. Our equity in net income or loss of Telesat also reflects amortization of profits eliminated, to the extent of our economic
interest in Telesat, on satellites we constructed for them while we owned SSL and on Loral’s sale to Telesat in April 2011
of its portion of the payload on the ViaSat-1 satellite and related assets. Non-refundable cash distributions received from Telesat
in excess of our initial investment and our share of cumulative equity in comprehensive income of Telesat, net of cash distributions
received in prior periods, are recorded as equity in net income of Telesat (“Excess Cash Distribution”) since we have
no obligation to provide future financial support to Telesat. We do not record additional equity in net income of Telesat until
our share of Telesat’s future net income exceeds the Excess Cash Distribution. Equity in losses of affiliates is not recognized
after the carrying value of an investment, including advances and loans, has been reduced to zero, unless guarantees or other funding
obligations exist. We had no guarantees or other funding obligations for our equity method investments for the years ended December
31, 2017, 2016 and 2015. We use the nature of distribution approach to classify distributions from equity method investments on
the statements of cash flows. The Company monitors its equity method investments for factors indicating other-than-temporary impairment.
An impairment loss is recognized when there has been a loss in value of the affiliate that is other-than-temporary.
Use of Estimates in Preparation
of Financial Statements
The preparation of
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the amount of income (loss) reported for the period. Actual results could materially differ from estimates.
Significant estimates
also included the allowances for doubtful accounts, income taxes, including the valuation of deferred tax assets, the fair value
of liabilities indemnified and our pension liabilities.
Cash, Cash Equivalents and
Restricted Cash
As of December 31,
2017, the Company had $255.1 million of cash and cash equivalents. Cash and cash equivalents include liquid investments, primarily
money market funds, with maturities of less than 90 days at the time of purchase. Management determines the appropriate classification
of its investments at the time of purchase and at each balance sheet date.
As of December 31,
2017 and December 31, 2016, the Company had restricted cash of $0.3 million and nil, respectively. The restricted cash of $0.3
million as of December 31, 2017 represents the amount pledged as collateral to the issuer of a standby letter of credit (the “LC”).
The LC, which expires in October 2018 and contains an automatic renewal period of one year, has been provided as a guaranty to
the lessor of our corporate offices.
The following table
provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheet
to the condensed consolidated statement of cash flows (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
Cash and cash equivalents
|
|
$
|
255,139
|
|
Restricted cash included in other assets
|
|
|
304
|
|
Cash, cash equivalents and restricted cash shown in the statement of cash flows
|
|
$
|
255,443
|
|
Concentration
of Credit Risk
Financial instruments
which potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents and receivables.
Our cash and cash equivalents are maintained with high-credit-quality financial institutions. As of December 31, 2017 and December
31, 2016, our cash and cash equivalents were invested primarily in several liquid Prime and Government AAA money market funds.
Such funds are not insured by the Federal Deposit Insurance Corporation. The dispersion across funds reduces the exposure of a
default at any one fund. As a result, management believes that its potential credit risks are minimal.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– (Continued)
Fair Value Measurements
U.S. GAAP defines fair
value as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal
or most advantageous market in an orderly transaction between market participants. U.S. GAAP also establishes a fair value hierarchy
that gives the highest priority to observable inputs and the lowest priority to unobservable inputs. The three levels of the fair
value hierarchy are described below:
Level 1:
Inputs
represent a fair value that is derived from unadjusted quoted prices for identical assets or liabilities traded in active markets
at the measurement date.
Level 2:
Inputs
represent a fair value that is derived from quoted prices for similar instruments in active markets, quoted prices for identical
or similar instruments in markets that are not active, model-based valuation techniques for which all significant assumptions are
observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities,
and pricing inputs, other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable
as of the reporting date.
Level 3:
Inputs
are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use
in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing
models, discounted cash flow models, and similar techniques.
Assets and Liabilities
Measured at Fair Value
The following table
presents our assets and liabilities measured at fair value at December 31, 2017 and December 31, 2016 (in thousands):
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
251,742
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
35,514
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indemnification - Sale of SSL
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,410
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,410
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indemnification - Globalstar do Brasil S.A.
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
293
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
357
|
|
The carrying amount
of cash equivalents approximates fair value as of each reporting date because of the short maturity of those instruments.
The Company did not
have any non-financial assets or non-financial liabilities that were recognized or disclosed at fair value as of December 31, 2017
and December 31, 2016.
Assets and Liabilities
Measured at Fair Value on a Non-recurring Basis
We review the carrying
values of our equity method investments when events and circumstances warrant and consider all available evidence in evaluating
when declines in fair value are other-than-temporary. The fair values of our investments are determined based on valuation techniques
using the best information available and may include quoted market prices, market comparables and discounted cash flow projections.
An impairment charge is recorded when the carrying amount of the investment exceeds its current fair value and is determined to
be other-than-temporary.
The asset resulting
from the indemnification of SSL is for certain pre-closing taxes and reflects the excess of payments since inception over the estimated
liability, which was originally determined using the fair value objective approach. The estimated liability for indemnifications
relating to Globalstar do Brasil S.A. (“GdB”), originally determined using expected value analysis, is net of payments
since inception.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– (Continued)
Contingencies
Contingencies by their
nature relate to uncertainties that require management to exercise judgment both in assessing the likelihood that a liability has
been incurred as well as in estimating the amount of potential loss, if any. We accrue for costs relating to litigation, claims
and other contingent matters when such liabilities become probable and reasonably estimable. Such estimates may be based on advice
from third parties or on management’s judgment, as appropriate. Actual amounts paid may differ from amounts estimated, and
such differences will be charged to operations in the period in which the final determination of the liability is made.
Income Taxes
Loral and its subsidiaries
are subject to U.S. federal, state and local income taxation on their worldwide income and foreign taxation on certain income from
sources outside the United States. Telesat is subject to tax in Canada and other jurisdictions, and Loral will provide in operating
earnings any additional U.S. current and deferred tax required on distributions received or deemed to be received from Telesat.
Deferred income taxes reflect the future tax effect of temporary differences between the carrying amount of assets and liabilities
for financial and income tax reporting and are measured by applying anticipated statutory tax rates in effect for the year during
which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent it is more
likely than not that the deferred tax assets will not be realized.
The tax benefit of
an uncertain tax position (“UTP”) taken or expected to be taken in income tax returns is recognized only if it is “more
likely than not” to be sustained on examination by the taxing authorities, based on its technical merits as of the reporting
date. The tax benefit recognized in the financial statements from such a position is measured based on the largest benefit that
has a greater than fifty percent likelihood of being realized upon ultimate settlement. The Company recognizes interest and penalties
related to income taxes in income tax expense on a quarterly basis.
The unrecognized tax
benefit of a UTP is recognized in the period when the UTP is effectively settled. Previously recognized tax positions are derecognized
in the first period in which it is no longer more likely than not that the tax position would be sustained upon examination.
Earnings per Share
Basic earnings per
share are computed based upon the weighted average number of shares of voting and non-voting common stock outstanding during each
period. Shares of non-voting common stock are in all respects identical to and treated equally with shares of voting common stock
except for the absence of voting rights (other than as provided in Loral’s Amended and Restated Certificate of Incorporation
which was ratified by Loral’s stockholders on May 19, 2009). Diluted earnings per share are based on the weighted average
number of shares of voting and non-voting common stock outstanding during each period, adjusted for the effect of unvested or unconverted
restricted stock units. For diluted earnings per share, earnings are adjusted for the dilutive effect of Telesat stock options.
Additional Cash Flow Information
The following represents
non-cash activities and supplemental information to the consolidated statements of cash flows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Non-cash operating items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net (income) loss of affiliates
|
|
$
|
(216,347
|
)
|
|
$
|
(84,078
|
)
|
|
$
|
104,792
|
|
Deferred taxes
|
|
|
80,189
|
|
|
|
29,535
|
|
|
|
(39,694
|
)
|
Depreciation and amortization
|
|
|
38
|
|
|
|
60
|
|
|
|
41
|
|
Amortization of prior service credit and actuarial loss
|
|
|
1,033
|
|
|
|
916
|
|
|
|
1,260
|
|
Net non-cash operating items – continuing operations
|
|
$
|
(135,087
|
)
|
|
$
|
(53,567
|
)
|
|
$
|
66,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid – continuing operations
|
|
$
|
27
|
|
|
$
|
20
|
|
|
$
|
314
|
|
Interest paid – discontinued operations
|
|
$
|
55
|
|
|
$
|
750
|
|
|
$
|
1,549
|
|
Tax payments, net of refunds – continuing operations
|
|
$
|
12,504
|
|
|
$
|
153
|
|
|
$
|
(233
|
)
|
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– (Continued)
Recent Accounting Pronouncements
In February 2018, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-02,
Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive Income
. On December 22, 2017, H.R. 1, known as the “Tax Cuts
and Jobs Act” was signed into law. Among other things, the Tax Cuts and Jobs Act permanently reduced the U.S. federal corporate
income tax rate from 35 percent to 21 percent effective for tax years commencing January 1, 2018. According to ASU 2018-02, an
entity may either elect to (a) reclassify from accumulated other comprehensive income (loss) to retained earnings the stranded
income tax effects of the federal tax rate change (the “Reclassification”) or (b) provide certain disclosures. The
new guidance is effective for the Company on January 1, 2019, with earlier adoption permitted in any interim or annual period.
The amendments in this update are to be applied either in the period of adoption or retrospectively to each period in which the
effect of the tax rate change is recognized. The Company early adopted the new guidance in the fourth quarter of 2017 and elected
the Reclassification approach. As a result of adopting the new guidance, we reclassified $4.5 million of stranded deferred federal
income tax benefits from accumulated other comprehensive loss to accumulated deficit in the fourth quarter of 2017 related to the
change in the federal corporate income tax rate.
In March 2017, the
FASB issued ASU No. 2017-07,
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit
Cost
. ASU No. 2017-07, as it applies to the Company, amended the presentation of net periodic pension and postretirement cost
(i.e. net benefit cost). The new guidance requires the service cost component to be presented separate from the other components
of net benefit cost. While service cost will be presented with other employee compensation costs within operations, the other components
of net benefit cost, such as interest cost, amortization of prior service cost, and gains or losses, are required to be separately
presented outside of operations, if income or loss from operations is presented. The guidance, to be applied retrospectively, is
effective for the Company on January 1, 2018, with earlier application permitted only within the first interim period starting
January 1, 2017. The change in presentation of net benefit cost, which we adopted as of January 1, 2018, will not have
a material impact on our condensed consolidated financial statements.
In November 2016, the
FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash,
a consensus of the FASB’s Emerging
Issues Task Force (the “Task Force”). The new guidance requires entities to show the changes in total cash including
cash equivalents and restricted cash, in the statement of cash flows. As a result, entities will no longer present transfers between
cash and cash equivalents and restricted cash in the statement of cash flows. Entities will also be required to reconcile such
total to amounts on the balance sheet and disclose the nature of the restrictions. The new guidance is effective for the Company
on January 1, 2018, with earlier application permitted in any interim or annual period, using a retrospective transition method.
The Company early adopted the new guidance in the third quarter of 2017. As a result of adopting the new guidance, the statements
of cash flows for the years ended December 31, 2017, 2016 and 2015 show changes in total cash including cash equivalents and restricted
cash, and the nature of the restrictions are disclosed above under
Cash, Cash Equivalents and Restricted Cash.
In August 2016, the
FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230)
, a consensus of the FASB’s Task Force. The new guidance
is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The guidance
relevant to the Company provides an accounting policy election for classifying distributions received from equity method investments.
Such amounts can be classified using (i) a cumulative earnings approach, or (ii) a nature of distribution approach. Under the cumulative
earnings approach, an investor compares the distributions received to such investor’s cumulative equity method earnings since
inception. Any distributions received up to the amount of cumulative equity earnings are considered a return on investment and
classified in operating activities. Any excess distributions are considered a return of investment and classified in investing
activities. Alternatively, under the nature of distribution approach, an investor classifies the distributions based on the nature
of activities of the investee that generated the distribution. If the necessary information is subsequently not available for an
investee to determine the nature of the activities, the entity should use the cumulative earnings approach for that investee and
report a change in accounting principle on a retrospective basis. The new guidance is effective for the Company on January 1, 2018,
with earlier application permitted in any interim or annual period, using a retrospective transition method. The Company early
adopted the new guidance on January 1, 2017 and made an accounting policy election to use the nature of distribution approach to
classify distributions from equity method investments on its statements of cash flows. As a result of adopting the new guidance,
the entire distribution of $242.7 million received from Telesat in the first quarter of 2017 is classified in investing activities
on the statement of cash flows for the year ended December 31, 2017 (see Note 5).
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– (Continued)
In March 2016, the
FASB issued ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting.
ASU No. 2016-09 simplified several
aspects of the accounting for share-based payment transactions, including the income tax consequences. Under the new guidance,
all excess tax benefits and tax deficiencies related to share-based payment transactions are recognized in the current period as
discrete adjustments to income tax expense or benefit in the income statement. Under previous U.S. GAAP, excess tax benefits were
recognized in additional paid-in capital while tax deficiencies were recognized first as an offset to accumulated excess tax benefits,
then as additional income tax expense. Also, under previous U.S. GAAP, excess tax benefits were not recognized until the related
income tax deduction reduced income taxes payable. The Company adopted the new guidance on January 1, 2017, and upon adoption previously
unrecognized excess tax benefits of $4.7 million were recognized as a cumulative-effect adjustment to increase retained earnings
and deferred tax assets.
In February 2016, the
FASB amended the Accounting Standards Codification (“ASC”) by creating ASC Topic 842,
Leases.
ASC Topic 842
requires a lessee to record a right-of-use asset and a lease liability for all leases with a lease term greater than 12 months.
The main difference between previous U.S. GAAP and ASC Topic 842 is the recognition under ASC 842 of lease assets and lease liabilities
by lessees for those leases classified as operating leases under previous U.S. GAAP. The new guidance, effective for the Company
on January 1, 2019, with earlier application permitted, is not expected to have a material impact on our consolidated financial
statements.
3. Accumulated Other Comprehensive Loss
The components of accumulated
other comprehensive loss, net of tax, are as follows (in thousands):
|
|
|
|
|
Proportionate
|
|
|
|
|
|
|
|
|
|
Share of
|
|
|
Accumulated
|
|
|
|
|
|
|
Telesat Other
|
|
|
Other
|
|
|
|
Postretirement
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
|
Benefits
|
|
|
(Loss) Income
|
|
|
Loss
|
|
Balance at January 1, 2015
|
|
$
|
(13,982
|
)
|
|
$
|
(15,239
|
)
|
|
$
|
(29,221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss before reclassification
|
|
|
(265
|
)
|
|
|
—
|
|
|
|
(265
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
788
|
|
|
|
—
|
|
|
|
788
|
|
Net current-period other comprehensive income
|
|
|
523
|
|
|
|
—
|
|
|
|
523
|
|
Balance at December 31, 2015
|
|
|
(13,459
|
)
|
|
|
(15,239
|
)
|
|
|
(28,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income before reclassification
|
|
|
(1,209
|
)
|
|
|
15,477
|
|
|
|
14,268
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
594
|
|
|
|
—
|
|
|
|
594
|
|
Net current-period other comprehensive (loss) income
|
|
|
(615
|
)
|
|
|
15,477
|
|
|
|
14,862
|
|
Balance at December 31, 2016
|
|
|
(14,074
|
)
|
|
|
238
|
|
|
|
(13,836
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss before reclassification
|
|
|
(1,365
|
)
|
|
|
(18,280
|
)
|
|
|
(19,645
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
671
|
|
|
|
—
|
|
|
|
671
|
|
Net current-period other comprehensive loss
|
|
|
(694
|
)
|
|
|
(18,280
|
)
|
|
|
(18,974
|
)
|
Tax Cuts and Jobs Act, reclassification of tax effect from accumulated other comprehensive loss to accumulated deficit
|
|
|
(1,686
|
)
|
|
|
(2,782
|
)
|
|
|
(4,468
|
)
|
Balance at December 31, 2017
|
|
$
|
(16,454
|
)
|
|
$
|
(20,824
|
)
|
|
$
|
(37,278
|
)
|
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– (Continued)
The components of other
comprehensive (loss) income and related tax effects are as follows (in thousands):
|
|
Before-Tax
Amount
|
|
|
Tax
(Provision)
Benefit
|
|
|
Net-of-Tax
Amount
|
|
Year ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss and prior service credits
|
|
$
|
(2,101
|
)
|
|
$
|
736
|
|
|
$
|
(1,365
|
)
|
Amortization of prior service credits and net actuarial loss
|
|
|
1,033
|
(a)
|
|
|
(362
|
)
|
|
|
671
|
|
Postretirement benefits
|
|
|
(1,068
|
)
|
|
|
374
|
|
|
|
(694
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proportionate share of Telesat other comprehensive loss
|
|
|
(28,132
|
)
|
|
|
9,852
|
|
|
|
(18,280
|
)
|
Other comprehensive loss
|
|
$
|
(29,200
|
)
|
|
$
|
10,226
|
|
|
$
|
(18,974
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss and prior service credits
|
|
$
|
(1,865
|
)
|
|
$
|
656
|
|
|
$
|
(1,209
|
)
|
Amortization of prior service credits and net actuarial loss
|
|
|
916
|
(a)
|
|
|
(322
|
)
|
|
|
594
|
|
Postretirement benefits
|
|
|
(949
|
)
|
|
|
334
|
|
|
|
(615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proportionate share of Telesat other comprehensive income
(b)
|
|
|
23,872
|
|
|
|
(8,395
|
)
|
|
|
15,477
|
|
Other comprehensive income
|
|
$
|
22,923
|
|
|
$
|
(8,061
|
)
|
|
$
|
14,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss and prior service credits
|
|
$
|
(424
|
)
|
|
$
|
159
|
|
|
$
|
(265
|
)
|
Amortization of prior service credits and net actuarial loss
|
|
|
1,260
|
(a)
|
|
|
(472
|
)
|
|
|
788
|
|
Postretirement benefits
|
|
|
836
|
|
|
|
(313
|
)
|
|
|
523
|
|
Proportionate share of Telesat other comprehensive gain (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other comprehensive income
|
|
$
|
836
|
|
|
$
|
(313
|
)
|
|
$
|
523
|
|
|
(a)
|
Reclassifications are included in general and administrative expenses.
|
|
(b)
|
Includes $20.8 million ($13.5 million, net of tax) share in the equity of Telesat’s other
comprehensive income that we could not record in 2015 (see Note 5).
|
4. Other Current Assets
Other current assets
consist of (in thousands):
|
|
December 31
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Indemnification receivable from SSL for pre-closing taxes (see Note 13)
|
|
$
|
2,410
|
|
|
$
|
2,410
|
|
Due from affiliates
|
|
|
217
|
|
|
|
225
|
|
Prepaid expenses
|
|
|
198
|
|
|
|
192
|
|
Other
|
|
|
274
|
|
|
|
111
|
|
|
|
$
|
3,099
|
|
|
$
|
2,938
|
|
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– (Continued)
5. Investments in Affiliates
Investments in affiliates
consist of (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Telesat
|
|
$
|
53,430
|
|
|
$
|
107,950
|
|
Equity in net income
(loss) of affiliates consists of (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Telesat
|
|
$
|
216,347
|
|
|
$
|
84,078
|
|
|
$
|
(74,329
|
)
|
XTAR
|
|
|
—
|
|
|
|
—
|
|
|
|
(30,463
|
)
|
|
|
$
|
216,347
|
|
|
$
|
84,078
|
|
|
$
|
(104,792
|
)
|
Telesat
As of December 31,
2017 and 2016, we held a 62.7% economic interest and a 32.7% voting interest in Telesat. Our economic interest decreased from 62.8%
to 62.7% in March 2016 when certain Telesat employees exercised share appreciation rights related to a total of 178,642 stock options
granted under Telesat’s share-based compensation plan and received 129,400 non-voting participating preferred shares. Also
in March 2016, a total of 1,253,477 vested stock options were repurchased by Telesat at fair value from Telesat management personnel
and other employees for total cash consideration of CAD 24.7 million, of which CAD 18.7 million was paid to management personnel.
In the first quarter
of 2017, we received $242.7 million in cash from Telesat, representing our share of an aggregate approximately $400 million distribution
from Telesat to its shareholders and stock option holders.
We use the equity method
of accounting for our majority economic interest in Telesat because we own 32.7% of the voting stock and do not exercise control
by other means to satisfy the U.S. GAAP requirement for treatment as a consolidated subsidiary. We have also concluded that Telesat
is not a variable interest entity for which we are the primary beneficiary. Loral’s equity in net income or loss of Telesat
is based on our proportionate share of Telesat’s results in accordance with U.S. GAAP and in U.S. dollars. Our proportionate
share of Telesat’s net income or loss is based on our economic interest as our holdings consist of common stock and non-voting
participating preferred shares that have all the rights of common stock with respect to dividends, return of capital and surplus
distributions, but have no voting rights.
In addition to recording
our share of equity in net income of Telesat, we also recorded our share of equity in other comprehensive loss of Telesat of $28.1
million for the year ended December 31, 2017.
As of December 31,
2015, we had an unrecorded equity loss in Telesat of $57.9 million, the amount by which our share of Telesat’s losses together
with cash distributions we received from Telesat exceeded our recorded cumulative equity in net income of Telesat and our initial
investment. Accordingly, in following the equity method of accounting, our investment balance in Telesat was reduced to zero as
of December 31, 2015. In addition, our equity in Telesat’s other comprehensive income that we could not record as of December
31, 2015 was $20.8 million. We recognized this $57.9 million equity loss and our $20.8 million share in the equity of Telesat’s
other comprehensive income in 2016 as a result of the recognition of the suspended loss.
During the year ended
December 31, 2016, we recorded an increase in equity in net income of affiliates of $3.0 million ($1.9 million, net of tax) that
should have been recognized in prior years. As a result, net income per share (basic and diluted) increased $0.06 per share. During
the year ended December 31, 2015, we recorded an increase to our equity in net loss of affiliates of $3.5 million ($2.2 million,
net of tax) and an increase in other comprehensive income of $5.3 million that should have been recognized in prior years. As a
result, net loss per share (basic and diluted) increased $0.07 per share. The 2016 non-cash adjustment relates primarily to an
error in mark-to-market accounting for embedded foreign exchange derivatives in a Telesat customer contract. Changes in fair value
of these embedded derivatives are required to be recognized under U.S. GAAP, but not under International Financial Reporting Standards,
the basis of accounting used by Telesat. The 2015 non-cash adjustment consisted primarily of foreign exchange gains and losses.
The Company has not revised previous financial statements for these adjustments based on its belief that the effect of such adjustments
is not material to the financial statements taken as a whole.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– (Continued)
On November 17, 2016,
Telesat entered into amended senior secured credit facilities which provide for term loan borrowings of $2.43 billion which mature
on November 17, 2023 and revolving credit borrowings of up to $200 million (or Canadian dollar equivalent) which mature on November
17, 2021. Telesat also issued, through a private placement, $500 million of 8.875% senior notes which mature on November 17, 2024.
On November 17, 2016,
Telesat repaid all outstanding amounts under its former senior secured credit facilities and its 6.0% senior notes.
On February 1, 2017,
Telesat amended the senior secured credit facilities to effectively reprice the then outstanding term loan borrowings of $2.424
billion.
The ability of Telesat
to pay dividends or certain other restricted payments in cash to Loral is governed by applicable covenants in Telesat’s debt
and shareholder agreements. Telesat’s credit agreement governing its senior secured credit facilities limits, among other
items, Telesat’s ability to incur debt and make dividend payments if the total leverage ratio (“Total Leverage Ratio”)
is above 4.50:1.00, with certain exceptions. As of December 31, 2017, Telesat’s Total Leverage Ratio was 4.55:1.00. Telesat
is, however, permitted to pay annual consulting fees of $5 million to Loral in cash (see Note 14).
The contribution of
Loral Skynet, a wholly owned subsidiary of Loral prior to its contribution to Telesat in 2007, was recorded by Loral at the historical
book value of our retained interest combined with the gain recognized on the contribution. However, the contribution was recorded
by Telesat at fair value. Accordingly, the amortization of Telesat fair value adjustments applicable to the Loral Skynet assets
and liabilities is proportionately eliminated in determining our share of the net income or losses of Telesat. Our equity in net
income or loss of Telesat also reflects amortization of profits eliminated, to the extent of our economic interest in Telesat,
on satellites we constructed for Telesat while we owned SSL and on Loral’s sale to Telesat in April 2011 of its portion of
the payload on the ViaSat-1 satellite and related assets.
The following table
presents summary financial data for Telesat in accordance with U.S. GAAP, for the years ended December 31, 2017, 2016 and 2015
and as of December 31, 2017 and 2016 (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
712,390
|
|
|
$
|
703,131
|
|
|
$
|
751,684
|
|
Operating expenses
|
|
|
(150,872
|
)
|
|
|
(139,141
|
)
|
|
|
(140,706
|
)
|
Depreciation, amortization and stock-based compensation
|
|
|
(194,203
|
)
|
|
|
(195,781
|
)
|
|
|
(190,985
|
)
|
Insurance proceeds
|
|
|
4,739
|
|
|
|
—
|
|
|
|
—
|
|
Loss on disposition of long lived assets
|
|
|
(207
|
)
|
|
|
(1,937
|
)
|
|
|
(24
|
)
|
Operating income
|
|
|
371,847
|
|
|
|
366,272
|
|
|
|
419,969
|
|
Interest expense
|
|
|
(151,528
|
)
|
|
|
(145,288
|
)
|
|
|
(138,783
|
)
|
Loss on refinancing
|
|
|
—
|
|
|
|
(12,246
|
)
|
|
|
—
|
|
Foreign exchange gain (loss)
|
|
|
173,433
|
|
|
|
68,719
|
|
|
|
(426,980
|
)
|
(Loss) gain on financial instruments
|
|
|
(3,516
|
)
|
|
|
974
|
|
|
|
7,810
|
|
Other income
|
|
|
2,307
|
|
|
|
4,590
|
|
|
|
3,672
|
|
Income tax provision
|
|
|
(54,424
|
)
|
|
|
(58,772
|
)
|
|
|
(74,447
|
)
|
Net income (loss)
|
|
$
|
338,119
|
|
|
$
|
224,249
|
|
|
$
|
(208,759
|
)
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
445,104
|
|
|
$
|
678,361
|
|
Total assets
|
|
|
4,082,472
|
|
|
|
4,194,006
|
|
Current liabilities
|
|
|
126,100
|
|
|
|
154,173
|
|
Long-term debt, including current portion
|
|
|
2,829,911
|
|
|
|
2,877,950
|
|
Total liabilities
|
|
|
3,538,656
|
|
|
|
3,597,056
|
|
Shareholders’ equity
|
|
|
543,816
|
|
|
|
596,950
|
|
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– (Continued)
ASU 2014-09,
Revenue
from Contracts with Customers,
and its related amendments (collectively, the “New Revenue Standard”) are effective
for reporting periods beginning after December 15, 2017 and interim periods therein. In accordance with the standard, Telesat has
adopted the New Revenue Standard effective January 1, 2018 and elected the modified retrospective approach with the cumulative
effect of adoption recognized through retained earnings at the date of adoption. While Telesat has not yet provided us with the
financial statement impact of the New Revenue Standard, we anticipate the following:
For
customer contracts that include prepayments that represent a significant financing component, the time value of money related to
the promised amount of consideration will be recognized upon adoption
.
We anticipate that
our investment in Telesat and retained earnings will decrease upon adoption. Going forward, we expect this change will have an
immaterial impact on our net income.
For certain
contracts, it appears that Telesat would be considered as an agent in the arrangement as opposed to the principal. This will result
in a reclassification between revenue and operating expenses. We anticipate that there will be no impact on our investment in Telesat
or net income as a result of this change.
XTAR
We own 56% of XTAR,
a joint venture between us and Hisdesat Servicios Estrategicos S.A. (“Hisdesat”) of Spain. We account for our ownership
interest in XTAR under the equity method of accounting because we do not control certain of its significant operating decisions.
We have also concluded that XTAR is not a variable interest entity for which we are the primary beneficiary.
XTAR owns and operates
an X-band satellite, XTAR-EUR, located at 29° E.L., which is designed to provide X-band communications services exclusively
to United States, Spanish and allied government users throughout the satellite’s coverage area, including Europe, the Middle
East and Asia. XTAR also leases 7.2 72MHz X-band transponders on the Spainsat satellite located at 30° W.L., owned by Hisdesat.
These transponders, designated as XTAR-LANT, provide capacity to XTAR for additional X-band services and greater coverage and flexibility.
As of December 31,
2017 and 2016, the carrying value of our investment in XTAR was zero as a result of the decline in its fair value that was determined
to be other-than-temporary. The value of our investment in XTAR was determined based on the income approach by discounting projected
annual cash flows to their present value using a rate of return appropriate for the risk of achieving the projected cash flows.
We recorded non-cash impairment charges of $21.2 million for the year ended December 31, 2015 related to our investment in XTAR.
In the third quarter of 2015, we recorded an impairment charge of $8 million primarily as a result of an increase in the discount
rate used to value our investment in XTAR. We recorded an additional impairment charge of $13.2 million in the fourth quarter of
2015 primarily due to the reassessment of our revenue expectations for future years dictated by a decline in XTAR’s revenues
by approximately 11% from 2014 to 2015. Beginning January 1, 2016, we discontinued providing for our allocated share of XTAR’s
net losses as our investment was reduced to zero and we have no commitment to provide further financial support to XTAR.
XTAR’s lease
obligation to Hisdesat for the XTAR-LANT transponders (the “Transponder Service”) requires payment by XTAR up to a
maximum amount of $28 million per year through the end of the useful life of the satellite which is estimated to be in 2021. Under
the lease agreement (the “Spainsat Lease Agreement”), Hisdesat may also be entitled under certain circumstances to
a share of the revenues generated on the Transponder Service. In September 2016, XTAR and Hisdesat amended the Spainsat Lease Agreement
to, among other things, reduce for 2016 and 2017 the minimum capacity required to be leased by XTAR, and accordingly lease payments
by XTAR for 2016 and 2017 were reduced from $26 million to $18.2 million. The 2016 reduction was retroactive to January 1, 2016.
In January 2017, XTAR and Hisdesat amended the Spainsat Lease Agreement to, among other things, reduce for 2017 the minimum capacity
required to be leased by XTAR, and accordingly lease payments by XTAR for 2017 were reduced to $9.5 million. In January 2018, XTAR
and Hisdesat again amended the Spainsat Lease Agreement to, among other things, reduce for 2018 the minimum capacity required to
be leased by XTAR, and accordingly lease payments by XTAR for 2018 were reduced from $26.0 million to $10.0 million. In March 2009,
XTAR entered into an agreement with Hisdesat pursuant to which the past due balance on XTAR-LANT transponders of $32.3 million
as of December 31, 2008, together with a deferral of $6.7 million in payments due in 2009, is payable to Hisdesat over 12 years
through annual payments of $5 million (the “Catch Up Payments”). XTAR has a right to prepay, at any time, all unpaid
Catch Up Payments discounted at 9%. Cumulative amounts paid to Hisdesat for Catch-Up Payments through December 31, 2017 were $29.2
million. As of December 31, 2017 and 2016, XTAR has deferred payment of liabilities of $32.7 million and $28.8 million, respectively,
for its lease obligation and Catch-Up Payments to Hisdesat. XTAR has also agreed that XTAR’s excess cash balance (as defined)
will be applied towards making limited payments on future lease obligations, as well as payments of other amounts owed to Hisdesat,
Telesat and Loral for services provided by them to XTAR. The ability of XTAR to pay dividends and management fees in cash to Loral
is governed by XTAR’s operating agreement (see Note 14).
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– (Continued)
The following table
presents summary financial data for XTAR for the years ended December 31, 2017, 2016 and 2015 and as of December 31, 2017 and 2016
(in thousands):
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
16,775
|
|
|
$
|
18,550
|
|
|
$
|
25,852
|
|
Operating expenses
|
|
|
(15,838
|
)
|
|
|
(24,123
|
)
|
|
|
(31,933
|
)
|
Depreciation and amortization
|
|
|
(6,471
|
)
|
|
|
(8,589
|
)
|
|
|
(8,874
|
)
|
Operating loss
|
|
|
(5,534
|
)
|
|
|
(14,162
|
)
|
|
|
(14,955
|
)
|
Net loss
|
|
|
(11,646
|
)
|
|
|
(18,296
|
)
|
|
|
(18,722
|
)
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
5,670
|
|
|
$
|
6,202
|
|
Total assets
|
|
|
28,437
|
|
|
|
35,846
|
|
Current liabilities
|
|
|
2,554
|
|
|
|
1,773
|
|
Related party liabilities
|
|
|
73,699
|
|
|
|
73,459
|
|
Total liabilities
|
|
|
76,253
|
|
|
|
75,232
|
|
Members’ equity
|
|
|
(47,816
|
)
|
|
|
(39,386
|
)
|
Other
As of December 31, 2017
and 2016, the Company held an indirect ownership interest in a foreign company that currently serves as the exclusive service provider
for Globalstar service in Mexico. The Company accounts for this ownership interest using the equity method of accounting. Loral
has written-off its investment in this company, and, because we have no future funding requirements relating to this investment,
there is no requirement for us to provide for our allocated share of this company’s net losses.
The Company also previously
held an indirect ownership interest in a foreign joint venture company that serves as the exclusive service provider for Globalstar
service in Russia. In connection with a settlement agreement entered into in June 2017 with the Russian joint venture partner to
settle certain arbitration and legal proceedings relating to the joint venture, the parties released each other from all claims
either party had or may have against the other relating to the dispute, our investment and their relationship (see Note 13).
6. Other Current Liabilities
Other current liabilities
consists of (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
SSL indemnification liability relating to ViaSat Suit settlement (see Note 13)
|
|
$
|
—
|
|
|
$
|
2,801
|
|
Due to affiliate
|
|
|
9
|
|
|
|
—
|
|
Accrued professional fees
|
|
|
1,117
|
|
|
|
665
|
|
Pension and other postretirement liabilities
|
|
|
69
|
|
|
|
108
|
|
Accrued liabilities
|
|
|
84
|
|
|
|
198
|
|
|
|
$
|
1,279
|
|
|
$
|
3,772
|
|
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– (Continued)
7. Income Taxes
The following summarizes
our income tax (provision) benefit (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
(13,783
|
)
|
|
$
|
(1,718
|
)
|
|
$
|
(1,089
|
)
|
State and local
|
|
|
21,114
|
|
|
|
2,981
|
|
|
|
7,106
|
|
Foreign
|
|
|
(250
|
)
|
|
|
(235
|
)
|
|
|
(235
|
)
|
Total current
|
|
|
7,081
|
|
|
|
1,028
|
|
|
|
5,782
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
|
(80,136
|
)
|
|
|
(26,337
|
)
|
|
|
35,721
|
|
State and local
|
|
|
(53
|
)
|
|
|
(3,198
|
)
|
|
|
3,973
|
|
Total deferred
|
|
|
(80,189
|
)
|
|
|
(29,535
|
)
|
|
|
39,694
|
|
Total income tax (provision) benefit
|
|
$
|
(73,108
|
)
|
|
$
|
(28,507
|
)
|
|
$
|
45,476
|
|
Our current tax benefit
includes a decrease to our liability for UTPs for (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Decrease to unrecognized tax benefits
|
|
$
|
1,062
|
|
|
$
|
2,477
|
|
|
$
|
4,921
|
|
Interest income (expense)
|
|
|
429
|
|
|
|
(2,011
|
)
|
|
|
(103
|
)
|
Penalties
|
|
|
5,985
|
|
|
|
387
|
|
|
|
1,393
|
|
Total
|
|
$
|
7,476
|
|
|
$
|
853
|
|
|
$
|
6,211
|
|
The deferred tax (provision)
benefit for each period included the impact of equity in net income (loss) of affiliates from our consolidated statement of operations.
For each period presented,
the statute of limitations for the assessment of additional tax expired with regard to several of our federal and state UTPs and
certain other UTPs were settled. As a result, the reduction to our liability for UTPs provided a current tax benefit including
the reversal of previously recognized interest and penalties, partially offset by an additional provision for the potential payment
of interest on our remaining UTPs.
The Tax Cuts and Jobs
Act made broad and complex changes to the U.S tax code, such as the imposition of a one-time transition tax in 2017 on certain
unrepatriated earnings of controlled foreign corporations, including Telesat, and numerous changes first effective in 2018 including,
but not limited to, (1) reducing the U.S. federal corporate income tax rate from 35 percent to 21 percent; (2) eliminating
U.S federal income taxes on dividends from certain foreign investments, such as Telesat; (3) requiring a current inclusion in U.S.
federal taxable income of certain earnings of controlled foreign corporations, including Telesat; (4) limiting the use of foreign
tax credits (“FTC”) to reduce U.S. federal tax liability; (5) eliminating the corporate alternative minimum tax (“AMT”)
and changing how existing AMT credits can be realized; (6) creating the base erosion anti-abuse tax, a new minimum tax; (7) creating
a new limit on deductible interest expense; and (8) changing the rules related to the use of net operating loss (“NOL”)
carryforwards created in tax years beginning after December 31, 2017. We recognized the
income tax effects
of the Tax Cuts and Jobs Act in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 118,
Income
Tax Accounting Implication of the Tax Cuts and Job Act
(SAB 118), in our consolidated financial statements for the year ended
December 31, 2017. SAB 118 provides guidance for the application of income tax accounting standards related to the Tax Cuts and
Jobs Act. Based upon
our analysis, as of December 31, 2017, we reduced deferred tax assets by $33.2 million related to the
tax rate reduction with a corresponding increase to our deferred income tax provision and increased non-current income taxes receivable
by $1.6 million related to refundable AMT credits with a corresponding reduction to deferred tax assets. The preliminary effect
recorded may change in the future due to revisions in the interpretation of the Tax Cuts and Jobs Act or legislative action to
clarify interpretation of the Tax Cuts and Jobs Act. The Company expects to finalize the effect of the Tax Cuts and Jobs Act with
the filing of its 2017 tax return and record in the fourth quarter of 2018 any difference between the final effect and the provisional
effect recorded.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– (Continued)
The current tax provision
for the year ended December 31, 2017 included our anticipated income tax liability related to the cash distribution received from
Telesat after use of AMT credits and NOL carryforwards and FTCs from Telesat. Upon receiving the cash distribution from Telesat
in the first quarter of 2017, we recorded a current tax liability of $53.0 million. During 2017, we made tax payments of $12.5
million, primarily with respect to the distribution, and commenced a tax study to determine the allowable amount of FTCs that could
be utilized to minimize our cash tax liability. After completing our analysis in the fourth quarter of 2017, we reduced
our current tax liability to approximately $2.0 million and established a deferred tax asset of $104.9 million for the carryforward
of unused FTCs. Since, at the current time, sufficient positive evidence does not exist to support full recovery of the FTC
carryforward, we recorded a full valuation allowance against this deferred tax asset during the year ended December 31, 2017. As
of December 31, 2017, we had no income taxes payable and a current income tax receivable of $11.1 million, primarily related to
recovery of tax payments previously made on the cash distribution.
In addition to the
income tax (provision) benefit presented above, we also recorded the following items (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Tax benefit on loss from discontinued operations
|
|
$
|
3
|
|
|
$
|
200
|
|
|
$
|
450
|
|
Adjustment to tax benefit associated with stock-based compensation recorded to paid-in-capital
|
|
|
—
|
|
|
|
(141
|
)
|
|
|
2,609
|
|
Cumulative effect adjustment attributable to previously unrecognized excess tax benefits on stock-based compensation
|
|
|
4,697
|
|
|
|
—
|
|
|
|
—
|
|
Deferred tax benefit (provision) for adjustments in other comprehensive loss (see Note 3)
|
|
|
10,226
|
|
|
|
(8,061
|
)
|
|
|
(313
|
)
|
Until December 31,
2016, the Company used the with-and-without approach of determining how and when excess tax benefits from stock-based compensation
had been realized and recorded to paid-in-capital. Effective January 1, 2017, the Company adopted ASU No. 2016-09, and upon adoption,
previously unrecognized excess tax benefits of $4.7 million were recognized as a cumulative-effect adjustment to decrease accumulated
deficit and increase deferred tax assets (see Note 2).
The (provision) benefit
for income taxes differs from the amount computed by applying the statutory U.S. federal income tax rate on the loss from continuing
operations before income taxes and equity in net income (loss) of affiliates because of the effect of the following items (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Tax benefit at U.S. Statutory Rate of 35%
|
|
$
|
3,069
|
|
|
$
|
2,800
|
|
|
$
|
3,566
|
|
Permanent adjustments which change statutory amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local income taxes, net of federal income tax
|
|
|
15,413
|
|
|
|
(4,588
|
)
|
|
|
7,821
|
|
Equity in net income (loss) of affiliates
|
|
|
(73,997
|
)
|
|
|
(29,427
|
)
|
|
|
36,677
|
|
Provision for unrecognized tax benefits
|
|
|
(1,234
|
)
|
|
|
(1,113
|
)
|
|
|
(708
|
)
|
Nondeductible expenses
|
|
|
(1,235
|
)
|
|
|
(586
|
)
|
|
|
(1,411
|
)
|
Change in valuation allowance
|
|
|
(120,389
|
)
|
|
|
4,565
|
|
|
|
(307
|
)
|
Income tax credits
|
|
|
138,780
|
|
|
|
—
|
|
|
|
—
|
|
Foreign income taxes
|
|
|
(250
|
)
|
|
|
(153
|
)
|
|
|
(153
|
)
|
Effect of U.S. tax law changes
|
|
|
(33,248
|
)
|
|
|
—
|
|
|
|
—
|
|
Other, net
|
|
|
(17
|
)
|
|
|
(5
|
)
|
|
|
(9
|
)
|
Total income tax (provision) benefit
|
|
$
|
(73,108
|
)
|
|
$
|
(28,507
|
)
|
|
$
|
45,476
|
|
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– (Continued)
The following table summarizes the activity
related to our unrecognized tax benefits (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Balance at January 1
|
|
$
|
68,149
|
|
|
$
|
72,298
|
|
|
$
|
78,333
|
|
Increases related to prior year tax positions
|
|
|
—
|
|
|
|
1,525
|
|
|
|
1,955
|
|
Decreases as a result of statute expirations
|
|
|
(14,172
|
)
|
|
|
(5,674
|
)
|
|
|
(6,876
|
)
|
Decreases as a result of tax settlements
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,114
|
)
|
Increases related to current year tax positions
|
|
|
16,433
|
|
|
|
—
|
|
|
|
—
|
|
Balance at December 31
|
|
$
|
70,410
|
|
|
$
|
68,149
|
|
|
$
|
72,298
|
|
With few exceptions,
the Company is no longer subject to U.S. federal, state or local income tax examinations by tax authorities for years prior to
2012. Earlier years related to certain foreign jurisdictions remain subject to examination. To the extent allowed by law, the tax
authorities may have the right to examine prior periods where net operating losses were generated and carried forward, and make
adjustments up to the amount of the net operating loss carryforward. While we intend to contest any future tax assessments for
uncertain tax positions, no assurance can be provided that we would ultimately prevail. During the next twelve months, the statute
of limitations for assessment of additional tax will expire with regard to certain UTPs related to our federal income tax return
filed for 2012, potentially resulting in a $27.3 million reduction to our unrecognized tax benefits. Pursuant to the Purchase Agreement
for the Sale, we are obligated to indemnify SSL for taxes related to periods prior to the closing of the transaction.
Our liability for UTPs
decreased from $68.7 million at December 31, 2016 to $61.2 million at December 31, 2017 and is included in long-term liabilities
in the consolidated balance sheets. At December 31, 2017, we have accrued $7.2 million for the potential payment of tax-related
interest. If our positions are sustained by the taxing authorities, approximately $45.3 million of the tax benefits will reduce
the Company’s income tax provision from continuing operations. Other than as described above, there were no significant changes
to our unrecognized tax benefits during the year ended December 31, 2017, and we do not anticipate any other significant increases
or decreases to our unrecognized tax benefits during the next twelve months.
In connection with
the acquisition of our ownership interest in Telesat, Loral indemnified Telesat for Loral Skynet tax liabilities relating to periods
preceding 2007 and retained the benefit of tax recoveries related to the transferred assets. The unrecognized tax benefits related
to the Loral Skynet subsidiaries were transferred to Telesat subject to the Telesat Indemnification. At December 31, 2017, Loral’s
asset or liability for the Telesat Indemnification based upon the probable outcome of these matters is not expected to be material
(see Notes 5 and 14).
At December 31, 2017,
we had federal FTC carryforwards of $104.9 million, federal NOL carryforwards of $139.7 million, New York NOL carryforwards of
$1.6 million and federal research credits of $0.4 million which expire from 2022 to 2034, as well as state AMT and state research
credit carryforwards of approximately $1.3 million that may be carried forward indefinitely.
The reorganization
of the Company on the Effective Date constituted an ownership change under section 382 of the Internal Revenue Code. Accordingly,
use of our tax attributes, such as NOLs and tax credits generated prior to the ownership change, are subject to an annual limitation
of approximately $32.6 million, subject to increase or decrease based on certain factors.
We assess the recoverability
of our FTCs, NOLs and other deferred tax assets and based upon this analysis, record a valuation allowance to the extent recoverability
does not satisfy the “more likely than not” recognition criteria. We continue to maintain our valuation allowance until
sufficient positive evidence exists to support full or partial reversal. As of December 31, 2017, we had a valuation allowance
totaling $124.0 million against our deferred tax assets for certain tax credits, primarily FTC carryovers from 2017, and loss carryovers
due to the limited carryforward periods. During 2017, the valuation allowance increased by $120.4 million, which was recorded as
a provision to continuing operations in our statement of operations. Subsequent to the Sale, to the extent that profitability from
operations is not sufficient to realize the benefit from our remaining net deferred tax assets, we would generate sufficient taxable
income from the appreciated value of our Telesat investment, which currently has a nominal tax basis, in order to prevent federal
net operating losses from expiring and realize the benefit of all remaining deferred tax assets.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– (Continued)
During 2016, the valuation
allowance decreased by $4.6 million, which was recorded as a benefit to continuing operations in our statement of operations after
a significant portion of our California NOL carryforward expired unutilized.
During 2015, the valuation
allowance increased by $0.3 million, which was recorded as a provision to continuing operations in our statement of operations.
The significant components
of the net deferred income tax assets are (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss and tax credit carryforwards
|
|
$
|
165,267
|
|
|
$
|
119,524
|
|
Compensation and benefits
|
|
|
943
|
|
|
|
1,582
|
|
Indemnification liabilities
|
|
|
216
|
|
|
|
1,346
|
|
Other, net
|
|
|
104
|
|
|
|
219
|
|
Federal benefit of uncertain tax positions
|
|
|
1,518
|
|
|
|
7,528
|
|
Pension costs
|
|
|
3,458
|
|
|
|
5,984
|
|
Investments in and advances to affiliates
|
|
|
2,546
|
|
|
|
—
|
|
Total deferred tax assets before valuation allowance
|
|
|
174,052
|
|
|
|
136,183
|
|
Less valuation allowance
|
|
|
(124,036
|
)
|
|
|
(3,647
|
)
|
Deferred tax assets net of valuation allowance
|
|
|
50,016
|
|
|
|
132,536
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Investments in and advances to affiliates
|
|
|
—
|
|
|
|
17,257
|
|
Total deferred tax liabilities
|
|
|
—
|
|
|
|
17,257
|
|
Net deferred tax assets
|
|
$
|
50,016
|
|
|
$
|
115,279
|
|
|
|
|
|
|
|
|
|
|
Classification on consolidated balance sheets:
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
$
|
50,016
|
|
|
$
|
115,285
|
|
Long-term liabilities
|
|
|
—
|
|
|
|
(6
|
)
|
Net deferred tax assets
|
|
$
|
50,016
|
|
|
$
|
115,279
|
|
8. Long-Term Liabilities
Long term liabilities
consists of (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Indemnification liabilities - other (see Note 13)
|
|
|
293
|
|
|
|
357
|
|
Deferred tax liability
|
|
|
—
|
|
|
|
6
|
|
Liabilities for uncertain tax positions
|
|
|
61,182
|
|
|
|
68,658
|
|
Other
|
|
|
—
|
|
|
|
238
|
|
|
|
$
|
61,475
|
|
|
$
|
69,259
|
|
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– (Continued)
9. Stock-Based Compensation
Stock Plans
The Loral amended and
restated 2005 stock incentive plan (the “Stock Incentive Plan”) which allowed for the grant of several forms of stock-based
compensation awards including stock options, stock appreciation rights, restricted stock, restricted stock units, stock bonuses
and other stock-based awards, had a ten-year term and has expired. The Company granted 75,262 restricted stock units under the
Stock Incentive Plan that do not expire and remained unconverted as of December 31, 2017 and December 31, 2016. As of December
31, 2017, there is no unrecognized compensation cost related to non-vested awards.
10. Earnings Per Share
Telesat has awarded
employee stock options, which, if exercised, would result in dilution of Loral’s ownership interest in Telesat to approximately
62.3%. The following table presents the dilutive impact of Telesat stock options on Loral’s reported income from continuing
operations for the purpose of computing diluted earnings per share (in thousands):
|
|
2017
|
|
|
2016
|
|
Income from continuing operations — basic
|
|
$
|
134,469
|
|
|
$
|
47,570
|
|
Less: Adjustment for dilutive effect of Telesat stock options
|
|
|
(1,194
|
)
|
|
|
(1,096
|
)
|
Income from continuing operations — diluted
|
|
$
|
133,275
|
|
|
$
|
46,474
|
|
Telesat stock options
are excluded from the calculation of diluted loss per share for the year ended December 31, 2015 as the effect would be antidilutive.
Basic earnings per
share is computed based upon the weighted average number of shares of voting and non-voting common stock outstanding. The following
is the computation of common shares outstanding for diluted earnings per share (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Weighted average common shares outstanding
|
|
|
30,933
|
|
|
|
30,933
|
|
Unconverted restricted stock units
|
|
|
75
|
|
|
|
75
|
|
Common shares outstanding for diluted earnings per share
|
|
|
31,008
|
|
|
|
31,008
|
|
For the year ended
December 31, 2015, the following unconverted restricted stock units are excluded from the calculation of diluted loss per share
as the effect would have been antidilutive (in thousands):
|
|
Year Ended
|
|
|
|
December 31, 2015
|
|
Unconverted restricted stock units
|
|
|
78
|
|
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– (Continued)
11. Pensions and Other Employee Benefit
Plans
Pensions
We maintain a qualified
defined benefit pension plan to which members may contribute in order to receive enhanced pension benefits. Employees hired after
June 30, 2006 do not participate in the defined benefit pension plan, but participate in our defined contribution savings plan
with an additional Company contribution. Benefits are based primarily on members’ compensation and/or years of service. Our
funding policy is to fund the qualified pension plan in accordance with the Internal Revenue Code and regulations thereon. Plan
assets are generally invested in equity, fixed income and real asset investments. Pension plan assets are managed primarily by
Russell Investment Corp. (“Russell”), which allocates the assets into funds as we direct.
Other Benefits
In addition to providing
pension benefits, we provide certain health care and life insurance benefits for retired employees and dependents. For the years
ended December 31, 2017, 2016 and 2015, certain of these benefits were provided through plans sponsored or managed by Telesat.
Participants are eligible for these benefits generally when they retire from active service and meet the eligibility requirements
for our pension plan. These benefits are funded primarily on a pay-as-you-go basis, with the retiree generally paying a portion
of the cost through contributions, deductibles and coinsurance provisions. Effective January 1, 2015, retiree medical coverage
for retirees age 65 or over and their dependents was discontinued. In 2015, the Company made discretionary lump sum payments to
participants affected to assist them in purchasing alternate coverage. The effects on the consolidated financial statements of
discontinuing this coverage and the lump sum payments were not significant.
Funded Status
The following tables
provide a reconciliation of the changes in the plans’ benefit obligations and fair value of assets for 2017 and 2016, and
a statement of the funded status as of December 31, 2017 and 2016. We use a December 31 measurement date for the pension plan and
other post-retirement benefits (in thousands).
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Reconciliation of benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation at beginning of period
|
|
$
|
49,463
|
|
|
$
|
46,976
|
|
|
$
|
544
|
|
|
$
|
559
|
|
Service cost
|
|
|
702
|
|
|
|
668
|
|
|
|
1
|
|
|
|
1
|
|
Interest cost
|
|
|
1,961
|
|
|
|
1,982
|
|
|
|
21
|
|
|
|
22
|
|
Participant contributions
|
|
|
27
|
|
|
|
45
|
|
|
|
17
|
|
|
|
20
|
|
Actuarial loss (gain)
|
|
|
3,599
|
|
|
|
1,537
|
|
|
|
(22
|
)
|
|
|
(6
|
)
|
Benefit payments
|
|
|
(1,776
|
)
|
|
|
(1,745
|
)
|
|
|
(42
|
)
|
|
|
(52
|
)
|
Obligation at December 31,
|
|
|
53,976
|
|
|
|
49,463
|
|
|
|
519
|
|
|
|
544
|
|
Reconciliation of fair value of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period
|
|
|
31,466
|
|
|
|
29,296
|
|
|
|
—
|
|
|
|
—
|
|
Actual return on plan assets
|
|
|
3,601
|
|
|
|
1,709
|
|
|
|
—
|
|
|
|
—
|
|
Employer contributions
|
|
|
2,322
|
|
|
|
2,161
|
|
|
|
25
|
|
|
|
32
|
|
Participant contributions
|
|
|
27
|
|
|
|
45
|
|
|
|
17
|
|
|
|
20
|
|
Benefit payments
|
|
|
(1,776
|
)
|
|
|
(1,745
|
)
|
|
|
(42
|
)
|
|
|
(52
|
)
|
Fair value of plan assets at December 31,
|
|
|
35,640
|
|
|
|
31,466
|
|
|
|
—
|
|
|
|
—
|
|
Funded status at end of period
|
|
$
|
(18,336
|
)
|
|
$
|
(17,997
|
)
|
|
$
|
(519
|
)
|
|
$
|
(544
|
)
|
The benefit obligations
for pensions and other employee benefits exceeded the fair value of plan assets by $18.9 million at December 31, 2017 (the “unfunded
benefit obligations”). The unfunded benefit obligations were measured using a discount rate of 3.50% and 4.00% at December
31, 2017 and 2016, respectively. Lowering the discount rate by 0.5% would have increased the unfunded benefit obligations by approximately
$3.8 million as of December 31, 2017 and 2016. Market conditions and interest rates will significantly affect future assets and
liabilities of Loral’s pension plan and other post-retirement benefits.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– (Continued)
The pre-tax amounts
recognized in accumulated other comprehensive loss as of December 31, 2017 and 2016 consist of (in thousands):
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Actuarial loss
|
|
$
|
(18,941
|
)
|
|
$
|
(17,816
|
)
|
|
$
|
(48
|
)
|
|
$
|
(80
|
)
|
Amendments-prior service cost
|
|
|
—
|
|
|
|
—
|
|
|
|
(22
|
)
|
|
|
(47
|
)
|
|
|
$
|
(18,941
|
)
|
|
$
|
(17,816
|
)
|
|
$
|
(70
|
)
|
|
$
|
(127
|
)
|
The amounts recognized
in other comprehensive loss during the years ended December 31, 2017, 2016 and 2015 consist of (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
Actuarial (loss) gain during the period
|
|
$
|
(2,123
|
)
|
|
$
|
22
|
|
|
$
|
(1,875
|
)
|
|
$
|
10
|
|
|
$
|
(425
|
)
|
|
$
|
1
|
|
Amortization of actuarial loss
|
|
|
998
|
|
|
|
10
|
|
|
|
889
|
|
|
|
5
|
|
|
|
795
|
|
|
|
26
|
|
Amortization of prior service cost
|
|
|
—
|
|
|
|
25
|
|
|
|
—
|
|
|
|
22
|
|
|
|
—
|
|
|
|
11
|
|
Recognition due to curtailment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
428
|
|
Total recognized in other comprehensive income (loss)
|
|
$
|
(1,125
|
)
|
|
$
|
57
|
|
|
$
|
(986
|
)
|
|
$
|
37
|
|
|
$
|
370
|
|
|
$
|
466
|
|
Amounts recognized
in the balance sheet consist of (in thousands):
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Current Liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
69
|
|
|
$
|
108
|
|
Long-Term Liabilities
|
|
|
18,336
|
|
|
|
17,997
|
|
|
|
450
|
|
|
|
436
|
|
|
|
$
|
18,336
|
|
|
$
|
17,997
|
|
|
$
|
519
|
|
|
$
|
544
|
|
The estimated actuarial
loss for pension benefits that will be amortized from accumulated other comprehensive income into net periodic cost over the next
fiscal year is $1.1 million.
The accumulated pension
benefit obligation was $53.0 million and $48.5 million at December 31, 2017 and 2016, respectively.
During 2017, we contributed
$2.3 million to the qualified pension plan and our contributions for the other employee post-retirement benefits were not significant.
During 2018, based on current estimates, we expect our contributions to the qualified pension plan will be approximately $2.3 million.
We expect that our funding of other employee post-retirement benefits during 2018 will not be significant.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– (Continued)
The following table
provides the components of net periodic cost included in income from continuing operations for the plans for the years ended December
31, 2017, 2016 and 2015 (in thousands):
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Service cost
|
|
$
|
702
|
|
|
$
|
668
|
|
|
$
|
511
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
2
|
|
Interest cost
|
|
|
1,961
|
|
|
|
1,982
|
|
|
|
1,896
|
|
|
|
21
|
|
|
|
22
|
|
|
|
38
|
|
Expected return on plan assets
|
|
|
(2,124
|
)
|
|
|
(2,047
|
)
|
|
|
(2,107
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Recognition due to curtailment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
428
|
|
Amortization of prior service cost
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25
|
|
|
|
22
|
|
|
|
11
|
|
Amortization of net actuarial loss
|
|
|
998
|
|
|
|
889
|
|
|
|
795
|
|
|
|
10
|
|
|
|
5
|
|
|
|
26
|
|
Net periodic cost
|
|
$
|
1,537
|
|
|
$
|
1,492
|
|
|
$
|
1,095
|
|
|
$
|
57
|
|
|
$
|
50
|
|
|
$
|
505
|
|
Assumptions
Assumptions used to
determine net periodic cost:
|
|
For the Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Discount rate
|
|
|
4.00
|
%
|
|
|
4.25
|
%
|
|
|
4.00
|
%
|
Expected return on plan assets
|
|
|
6.75
|
%
|
|
|
7.00
|
%
|
|
|
7.25
|
%
|
Rate of compensation increase
|
|
|
4.25
|
%
|
|
|
4.25
|
%
|
|
|
4.25
|
%
|
Assumptions used to
determine the benefit obligation:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Discount rate
|
|
|
3.50
|
%
|
|
|
4.00
|
%
|
|
|
4.25
|
%
|
Rate of compensation increase
|
|
|
4.25
|
%
|
|
|
4.25
|
%
|
|
|
4.25
|
%
|
The expected long-term
rate of return on pension plan assets is selected by taking into account the expected duration of the projected benefit obligation
for the plans, the asset mix of the plans and the fact that the plan assets are actively managed to mitigate risk. Our expected
long-term rate of return on plan assets for 2018 is 7.25%.
As of December 31,
2017 and 2016, the Company contributions remaining for other benefits were primarily for fixed amounts. Therefore, future health
care cost trend rates will not affect Company costs and accumulated postretirement benefit obligation.
Plan Assets
The Company has established
the pension plan as a retirement vehicle for participants and as a funding vehicle to secure promised benefits. The investment
goal is to provide a total return that over time will earn a rate of return to satisfy the benefit obligations given investment
risk levels, contribution amounts and expenses. The pension plan invests in compliance with the Employee Retirement Income Security
Act 1974, as amended (“ERISA”), and any subsequent applicable regulations and laws.
The Company has adopted
an investment policy for the management and oversight of the pension plan. It sets forth the objectives for the pension plan, the
strategies to achieve these objectives, procedures for monitoring and control and the delegation of responsibilities for the oversight
and management of pension plan assets.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– (Continued)
The Company’s
Board of Directors has delegated primary fiduciary responsibility for pension assets to an investment committee. In carrying out
its responsibilities, the investment committee establishes investment policy, makes asset allocation decisions, determines asset
class strategies and retains investment managers to implement asset allocation and asset class strategy decisions. It is responsible
for the investment policy and may amend such policy from time to time.
Asset allocation policy
is the principal method for achieving the pension plan’s investment objectives stated above. Asset allocation policy is reviewed
regularly by the investment committee. In April 2016, the pension plan revised the asset allocation targets in its investment policy
to introduce a liquid return-seeking portfolio consisting of global equities, marketable real assets and fixed income investments.
Asset allocation policy is reviewed regularly.
Pension plan assets
are invested in various asset classes in what we believe is a prudent manner for the exclusive purpose of providing benefits to
participants. U.S. equities are held for their long-term expected return premium over fixed income investments and inflation. Non-U.S.
equities are held for their expected return premium (along with U.S. equities), as well as diversification relative to U.S. equities
and other asset classes. Fixed income investments are held for diversification relative to equities. Real assets are held for diversification
relative to equities and fixed income. Alternative investments are held for both diversification and higher returns than those
typically available in traditional asset classes.
The pension plan’s
actual and targeted asset allocations, based on the revised policy as of December 31, 2017 were as follows:
|
|
December 31, 2017
|
|
|
Target Allocation
|
|
|
|
Actual Allocation
|
|
|
Target
|
|
|
Target Range
|
|
Liquid return-seeking investments
|
|
|
60
|
%
|
|
|
56.5
|
%
|
|
|
45-65%
|
|
Alternative investments
|
|
|
9
|
%
|
|
|
14.5
|
%
|
|
|
0-20%
|
|
Fixed income investments
|
|
|
31
|
%
|
|
|
29.0
|
%
|
|
|
20-40%
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
The target allocation
within the liquid return-seeking portfolio is 75% global equities, 15% marketable real assets and 10% fixed income. Allocations
may vary by up to 3% from these targets.
The pension plan’s
assets are actively managed using a multi-asset, multi-style, multi-manager investment approach. Portfolio risk is controlled through
this diversification process and monitoring of money managers. Consideration of such factors as differing rates of return, volatility
and correlation are utilized in the asset and manager selection process. Diversification reduces the impact of losses in single
investments. Performance results and fund accounting are provided to the Company by Russell on a monthly basis. Periodic reviews
of the portfolio are performed by the investment committee with Russell. These reviews typically consist of a market and economic
review, a performance review, an allocation review and a strategy review. Performance is judged by investment type against market
indexes. Allocation adjustments or fund changes may occur after these reviews. Performance is reported to the Company’s Board
of Directors at quarterly board meetings.
Fair Value Measurements
The values of the fund
trusts are calculated using systems and procedures widely used across the investment industry. Generally, investments are valued
based on information in financial publications of general circulation, statistical and valuation services, discounted cash flow
methodology, records of security exchanges, appraisal by qualified persons, transactions and bona fide offers.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– (Continued)
The table below provides
the fair values of the Company’s pension plan assets, by asset category, at December 31, 2017 and 2016. The Company’s
pension plan assets are mainly held in commingled employee benefit fund trusts.
|
|
Fair Value Measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measured
|
|
Asset Category
|
|
Total
|
|
|
Percentage
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
at NAV
(1)
|
|
|
|
(In thousands)
|
|
At December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquid return-seeking:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-asset fund
(2)
|
|
$
|
21,447
|
|
|
|
60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,447
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commingled funds
(3)
|
|
|
10,967
|
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,967
|
|
Alternative investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity long/short fund
(4)
|
|
|
1,067
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
$
|
1,067
|
|
|
|
|
|
Private equity fund
(5)
|
|
|
83
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
83
|
|
|
|
|
|
Distressed opportunity limited partnership
(6)
|
|
|
504
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
504
|
|
|
|
|
|
Multi-strategy limited partnerships
(7)
|
|
|
1,572
|
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
1,572
|
|
|
|
|
|
|
|
|
3,226
|
|
|
|
9
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
3,226
|
|
|
|
—
|
|
|
|
$
|
35,640
|
|
|
|
100
|
%
|
|
|
—
|
|
|
|
—
|
|
|
$
|
3,226
|
|
|
$
|
32,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquid return-seeking:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-asset fund
(2)
|
|
$
|
19,142
|
|
|
|
61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,142
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commingled funds
(3)
|
|
|
9,389
|
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,389
|
|
Alternative investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity long/short fund
(4)
|
|
|
835
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
$
|
835
|
|
|
|
|
|
Private equity fund
(5)
|
|
|
129
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
129
|
|
|
|
|
|
Distressed opportunity limited partnership
(6)
|
|
|
448
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
448
|
|
|
|
|
|
Multi-strategy limited partnerships
(7)
|
|
|
1,523
|
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
1,523
|
|
|
|
|
|
|
|
|
2,935
|
|
|
|
9
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
2,935
|
|
|
|
—
|
|
|
|
$
|
31,466
|
|
|
|
100
|
%
|
|
|
—
|
|
|
|
—
|
|
|
$
|
2,935
|
|
|
$
|
28,531
|
|
|
(1)
|
Assets measured using the net asset value (“NAV”) practical expedient have not been
classified in the fair value hierarchy. The NAV practical expedient is based on the fair value of the underlying assets of the
common/collective trust (“CCT”) minus its liabilities, and then divided by the number of units outstanding. The NAV
practical expedient of a CCT is calculated based on a compilation of primarily observable market information.
|
|
(2)
|
A single fund that invests in global equities, marketable real assets and fixed income securities.
The fund has no limitation on redemptions.
|
|
(3)
|
Investments in bonds representing many sectors of the broad bond market with both short-term and
intermediate-term maturities. The fund has no limitation on redemptions.
|
|
(4)
|
Investments primarily in long and short positions in equity securities of U.S. and non-U.S. companies.
The fund has semi-annual tender offer redemption periods on June 30 and December 31 and is reported on a one month lag.
|
|
(5)
|
Fund invests in portfolios of secondary interest in established venture capital, buyout, mezzanine
and special situation funds on a global basis. Fund is valued on a quarterly lag with adjustment for subsequent cash activity.
The fund terminates on June 26, 2019, subject to extension for up to three one-year periods. Earlier redemptions are not permitted.
|
|
(6)
|
Investments mainly in discounted debt securities, bank loans, trade claims and other debt and equity
securities of financially troubled companies. This partnership has semi-annual withdrawal rights on June 30 and December 31. This
fund is reported on a one month lag.
|
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– (Continued)
|
(7)
|
Investments mainly in partnerships that have multi-strategy investment programs and do not rely
on a single investment model. As of December 31, 2017 and 2016, investments include a partnership that has monthly liquidation
rights with notice of 33 days.
|
Additional information
pertaining to the changes in the fair value of the pension plan assets classified as Level 3 for the years ended December 31, 2017
and 2016 is presented below:
|
|
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
|
|
|
|
Private
Equity
Fund
|
|
|
Equity
Long/Short
Fund
|
|
|
Distressed
Opportunity
Ltd. Partnership
|
|
|
Multi
Strategy
Funds
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Balance at January 1, 2016
|
|
$
|
174
|
|
|
$
|
847
|
|
|
$
|
313
|
|
|
$
|
1,455
|
|
|
$
|
2,789
|
|
Unrealized gain (loss)
|
|
|
(2
|
)
|
|
|
(12
|
)
|
|
|
135
|
|
|
|
68
|
|
|
|
189
|
|
Sales
|
|
|
(43
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(43
|
)
|
Balance at December 31, 2016
|
|
|
129
|
|
|
|
835
|
|
|
|
448
|
|
|
|
1,523
|
|
|
|
2,935
|
|
Unrealized gain
|
|
|
7
|
|
|
|
232
|
|
|
|
56
|
|
|
|
49
|
|
|
|
344
|
|
Sales
|
|
|
(53
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(53
|
)
|
Balance at December 31, 2017
|
|
$
|
83
|
|
|
$
|
1,067
|
|
|
$
|
504
|
|
|
$
|
1,572
|
|
|
$
|
3,226
|
|
Both the Equity Long/Short
Fund and the Distressed Opportunity Limited Partnership are valued at each month-end based upon quoted market prices by the investment
managers.
The Multi-Strategy
Fund invests in various underlying securities. The fund’s net asset value is calculated by the fund manager and is not publicly
available. The fund manager accumulates all the underlying security values and uses them in determining the fund’s net asset
value.
The private equity
fund and limited partnership valuations are primarily based on cost/price of recent investments, earnings/performance multiples,
net assets, discounted cash flows, comparable transactions and industry benchmarks.
The annual audited
financial statements of all funds are reviewed by the Company.
Benefit Payments
The following benefit
payments, which reflect future services, as appropriate, are expected to be paid (in thousands):
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
2018
|
|
$
|
1,984
|
|
|
$
|
70
|
|
2019
|
|
|
1,974
|
|
|
|
61
|
|
2020
|
|
|
2,138
|
|
|
|
55
|
|
2021
|
|
|
2,263
|
|
|
|
48
|
|
2022
|
|
|
2,381
|
|
|
|
43
|
|
2023 to 2027
|
|
|
14,044
|
|
|
|
147
|
|
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– (Continued)
Employee Savings (401k) Plan
We have an employee
savings (401k) plan, to which the Company provides contributions which match up to 6% of a participant’s base salary at a
rate of 66⅔%. The Company also makes retirement contributions to the savings (401k) plan, which provide added retirement
benefits to employees hired on or after July 1, 2006, as they are not eligible to participate in our defined benefit pension plan.
Retirement contributions are provided regardless of an employee’s contribution to the savings (401k) plan. Matching contributions
and retirement contributions are collectively known as Company contributions. Company contributions are made in cash and placed
in each participant’s age appropriate “life cycle” fund. For each of the years ended December 31, 2017, 2016
and 2015, Company contributions were $0.1 million. Participants of the savings (401k) plan are able to redirect Company contributions
to any available fund within the plan. Participants are also able to direct their contributions to any available fund.
12.
Financial Instruments, Derivative Instruments and Hedging
Financial Instruments
The carrying amount
of cash equivalents approximates fair value because of the short maturity of those instruments.
Foreign Currency
We are subject to the
risks associated with fluctuations in foreign currency exchange rates. To limit this foreign exchange rate exposure, we attempt
to denominate all contracts in U.S. dollars. Where appropriate, derivatives are used to minimize the risk of foreign exchange rate
fluctuations to operating results and cash flows. We do not use derivative instruments for trading or speculative purposes.
Derivatives and Hedging Transactions
There were no derivative
instruments as of December 31, 2017 and 2016.
13. Commitments and Contingencies
Financial Matters
In the fourth quarter
of 2012, we sold our former subsidiary, SSL, to MDA pursuant to the Purchase Agreement. Under the terms of the Purchase Agreement,
we are obligated to indemnify MDA and its affiliates from (1) liabilities with respect to certain pre-closing taxes; and (2) certain
litigation costs and litigation damages relating to the ViaSat Suit. Our consolidated balance sheets include an indemnification
refund receivable of $2.4 million as of December 31, 2017 and 2016. This receivable represents payments to date net of the estimated
fair value of the liability for our indemnification for our obligation with respect to certain pre-closing taxes. The final amounts
for indemnification claims related to pre-closing taxes have not yet been determined. Where appropriate, we intend vigorously to
contest the underlying tax assessments, but there can be no assurance that we will be successful. Although no assurance can be
provided, we do not believe that these tax-related matters will have a material adverse effect on our financial position or results
of operations. For a discussion of the ViaSat Suit and our indemnification obligations related thereto, see Legal Proceedings,
below.
In connection with
the sale in 2008 by Loral and certain of its subsidiaries and DASA Globalstar LLC to Globalstar Inc. of their respective interests
in GdB, the Globalstar Brazilian service provider, Loral agreed to indemnify Globalstar Inc. and GdB for certain GdB pre-closing
liabilities, primarily related to Brazilian taxes. Our consolidated balance sheets include liabilities of $0.
3
million and $0.4 million as of December 31, 2017 and 2016, respectively, for indemnification liabilities relating to the sale of
GdB.
See Note 14 —
Related Party Transactions —
Transactions with Affiliates
—
Telesat
for commitments and contingencies
relating to our agreement to indemnify Telesat for certain liabilities and our arrangements with ViaSat and Telesat.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– (Continued)
Lease Arrangements
We lease certain facilities
and equipment under agreements expiring at various dates. Certain leases covering facilities contain renewal and/or purchase options
which may be exercised by us. We have no sublease income in any of the periods presented. Rent expense is as follows (in thousands):
|
|
Rent Expense
|
|
Year ended December 31, 2017
|
|
$
|
646
|
|
Year ended December 31, 2016
|
|
|
641
|
|
Year ended December 31, 2015
|
|
|
679
|
|
The following is a
schedule of future minimum payments by year under leases with initial or remaining terms of one year or more as of December 31,
2016 (in thousands):
|
|
Operating
|
|
|
|
Leases
|
|
2018
|
|
$
|
637
|
|
2019
|
|
|
318
|
|
Legal Proceedings
ViaSat
Under the terms of
the Purchase Agreement, Loral agreed to indemnify MDA and its affiliates from certain damages in the ViaSat Suit brought in 2012
by ViaSat against Loral and SSL. In September 2014, Loral, SSL and ViaSat entered into a settlement agreement (the “Settlement
Agreement”) pursuant to which the ViaSat Suit and an additional patent infringement and breach of contract lawsuit brought
by ViaSat against SSL in September 2013 were settled. Loral was also released by MDA, MDA Holdings and SSL from indemnification
claims relating to the ViaSat lawsuits under the Purchase Agreement.
The terms of the Settlement
Agreement provided, among other things, for payment by Loral and SSL to ViaSat on a joint and several basis of $100 million, $40
million of which was paid in September 2014 in connection with entering into the Settlement Agreement, with the remaining $60 million
payable with interest in ten equal quarterly installments of $6.9 million from October 15, 2014 through January 15, 2017.
Following
a mediation session held on December 1, 2014, Loral and MDA entered into an agreement titled “MDA/Loral Dispute Resolution”
dated December 1, 2014 (the “Allocation Agreement”), pursuant to which Loral and MDA agreed that Loral was responsible
for
$45 million, and MDA and SSL were responsible for $55 million, of the $100 million litigation
settlement with ViaSat. Culminating with the final installment payment of $2.8 million in January 2017, Loral paid a total of $46.1
million, including interest, as its share of the ViaSat settlement. Our consolidated balance sheet as of December 31, 2017 and
2016 includes indemnification liabilities related to the ViaSat Settlement Agreement of nil and $2.8 million, respectively.
Russian Joint Venture
In connection with
a joint venture that serves as the provider for Globalstar service in Russia in which Loral held an indirect ownership interest,
in the fourth quarter of 2016, the Russian joint venture partner (the “Russian JV Partner”) commenced an arbitration
against Loral in the London Court of International Arbitration (the “LCIA”). In the arbitration, the Russian JV Partner
sought, among other things, to recover (i) losses it claimed it suffered in defending legal proceedings in Russian state courts
brought by Loral (the “Collection Action”) and (ii) costs of the arbitration. Loral had brought its Collection Action
to collect a payment owed to Loral by the Russian JV Partner in connection with its exit from the joint venture. The amount Loral
expected to receive, after legal fees and expenses, would have been less than $1 million, but the payment was fraudulently diverted,
Loral believes, by Russian attorneys retained by Loral’s US counsel to a shell company formed by one of the Russian attorneys.
In June 2017, Loral entered into a settlement agreement with the Russian JV Partner pursuant to which, among other things, the
arbitration and the Collection Action were settled and the parties released each other from all claims either party had or may
have against the other relating to the dispute, Loral’s investment in the joint venture and their relationship. The settlement,
which was completed in the fourth quarter of 2017, and related legal fees did not have a material adverse effect on Loral’s
financial position or results of operations. The carrying value of Loral’s investment in the Russian joint venture was zero
as of December 31, 2017 and 2016.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– (Continued)
Other Litigation
We are not currently
subject to any legal proceedings that, if decided adversely, could have a material adverse effect on our financial position or
results of operations. In the future, however, we may become subject to legal proceedings and claims, either asserted or unasserted,
that may arise in the ordinary course of business or otherwise.
14. Related Party Transactions
MHR Fund Management LLC
Mark H. Rachesky, President
of MHR Fund Management LLC (“MHR”), and Janet T. Yeung, a principal and the General Counsel of MHR, are members of
Loral’s board of directors. Hal Goldstein, a former managing principal of MHR, was a member of the Loral Board until May
2015.
Various funds affiliated
with MHR and Dr. Rachesky held, as of December 31, 2017 and December 31, 2016, approximately 39.9% of the outstanding voting common
stock and 58.4% of the combined outstanding voting and non-voting common stock of Loral.
Transactions with Affiliates
Telesat
As described in Note
5, we own 62.7% of Telesat and account for our ownership interest under the equity method of accounting.
In connection with
the acquisition of our ownership interest in Telesat (which we refer to as the Telesat transaction), Loral and certain of its subsidiaries,
our Canadian co-owner, Public Sector Pension Investment Board (“PSP”) and one of its subsidiaries, Telesat Canada and
MHR entered into a Shareholders Agreement (the “Shareholders Agreement”). The Shareholders Agreement provides for,
among other things, the manner in which the affairs of Telesat and its subsidiaries will be conducted and the relationships among
the parties thereto and future shareholders of Telesat. The Shareholders Agreement also contains an agreement by Loral not to engage
in a competing satellite communications business and agreements by the parties to the Shareholders Agreement not to solicit employees
of Telesat or any of its subsidiaries. Additionally, the Shareholders Agreement details the matters requiring the approval of the
shareholders of Telesat (including veto rights for Loral over certain extraordinary actions) and provides for preemptive rights
for certain shareholders upon the issuance of certain capital shares of Telesat. The Shareholders Agreement also (i) restricts
the ability of holders of certain shares of Telesat to transfer such shares unless certain conditions are met or approval of the
transfer is granted by the directors of Telesat, (ii) provides for a right of first offer to certain Telesat shareholders if a
holder of equity shares of Telesat wishes to sell any such shares to a third party and (iii) provides for, in certain circumstances,
tag-along rights in favor of shareholders that are not affiliated with Loral if Loral sells equity shares and drag-along rights
in favor of Loral in case Loral or its affiliate enters into an agreement to sell all of its Telesat equity securities.
In addition, the Shareholders
Agreement provides for either PSP or Loral to initiate the process of conducting an initial public offering of the equity shares
of Telesat (a “Telesat IPO”). In connection with our exploration of strategic initiatives to alter the status quo in
our ownership of Telesat, in July 2015, we exercised our right under the Shareholders Agreement to require Telesat to conduct a
Telesat IPO. Specifically, we requested that Telesat issue not more than 25 million newly issued shares of Telesat voting common
stock. We also requested the termination of the Shareholders Agreement and the elimination of certain provisions in Telesat’s
Articles of Incorporation, both of which we believe are important for a successful public offering. If those provisions are eliminated,
an impediment to the conversion of our non-voting Telesat shares to voting shares would be eliminated. Termination or modification
of the Shareholders Agreement and conversion of our non-voting shares to voting shares would enable us, after a Telesat IPO and
subject to the receipt of any necessary regulatory approvals, to obtain majority voting control of Telesat. Telesat selected two
co-managing underwriters and informed us that it will work to implement a Telesat IPO pending our agreement with PSP on the post-IPO
governance matters. To date, no such agreement has been reached. There can be no assurance as to whether, when or on what terms
a Telesat IPO, termination or modification of the Shareholders Agreement or any requested changes to Telesat’s Articles of
Incorporation may occur or that any particular economic, tax, structural or other objectives or benefits with respect to a Telesat
IPO will be achieved. If a Telesat IPO is expected to proceed under unfavorable terms or at an unfavorable price, we may withdraw
our demand for a Telesat IPO.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– (Continued)
Depending upon the
outcome of discussions with PSP relating to Telesat strategic matters, we may assert certain claims against PSP for actions we
believe violated our rights relating to the affairs of Telesat under the Telesat Shareholders Agreement and otherwise. In response
to our claims, PSP has informed us that it believes that it may have claims against us, although we are not aware of the legal
or factual basis for any such claims. We and PSP have agreed that, pending the outcome of our discussions, it would be beneficial
to delay the commencement of any action relating to either party’s claims and have entered into an agreement (the “Tolling
Agreement”) which preserves the parties’ rights to assert against one another legal claims relating to Telesat. We
also included Telesat as a party to the Tolling Agreement because, as a technical matter of Canadian law and for purposes of potentially
seeking equitable relief, Telesat may be a necessary party. There can be no assurance that if the Tolling Agreement lapses that
we and PSP will not pursue legal claims against one another relating to Telesat. If we pursue claims against PSP, there can be
no assurance that our claims will be successful or that the relief we seek will be granted. If PSP pursues claims against us, there
can be no assurance that PSP will not prevail on its claims.
Under the Shareholders
Agreement, in the event that, except in certain limited circumstances, either (i) ownership or control, directly or indirectly,
by Dr. Rachesky of Loral’s voting stock falls below certain levels other than in connection with certain specified circumstances,
including an acquisition by a Strategic Competitor (as defined in the Shareholders Agreement) or (ii) there is a change in the
composition of a majority of the members of the Loral Board of Directors over a consecutive two-year period without the approval
of the incumbent directors, Loral will lose its veto rights relating to certain extraordinary actions by Telesat and its subsidiaries.
In addition, after either of these events, PSP will have certain rights to enable it to exit from its investment in Telesat, including
a right to cause Telesat to conduct an initial public offering in which PSP’s shares would be the first shares offered or,
if no such offering has occurred within one year due to a lack of cooperation from Loral or Telesat, to cause the sale of Telesat
and to drag along the other shareholders in such sale, subject to Loral’s right to call PSP’s shares at fair market
value.
The Shareholders Agreement
provides for a board of directors of each of Telesat and certain of its subsidiaries, including Telesat, consisting of 10 directors,
three nominated by Loral, three nominated by PSP and four independent directors to be selected by a nominating committee comprised
of one PSP nominee, one nominee of Loral and one of the independent directors then in office. Each party to the Shareholders Agreement
is obligated to vote all of its Telesat shares for the election of the directors nominated by the nominating committee. Pursuant
to action by the board of directors taken on October 31, 2007, Dr. Rachesky, who is non-executive Chairman of the Board of Directors
of Loral, was appointed non-executive Chairman of the Board of Directors of Telesat. In addition, Michael B. Targoff, Loral’s
Vice Chairman, serves on the board of directors of Telesat.
On October 31, 2007,
Loral and Telesat entered into a consulting services agreement (the “Consulting Agreement”). Pursuant to the terms
of the Consulting Agreement, Loral provides to Telesat certain non-exclusive consulting services in relation to the business of
Loral Skynet which was transferred to Telesat as part of the Telesat transaction as well as with respect to certain aspects of
the satellite communications business of Telesat. The Consulting Agreement has a term of seven-years with an automatic renewal
for an additional seven-year term if Loral is not then in material default under the Shareholders Agreement. Upon expiration of
the initial term on October 31, 2014, the Consulting Agreement was automatically renewed for the additional seven-year term. In
exchange for Loral’s services under the Consulting Agreement, Telesat pays Loral an annual fee of $5.0 million, payable quarterly
in arrears on the last day of March, June, September and December of each year during the term of the Consulting Agreement. Our
general and administrative expenses for each of the years ended December 31, 2017, 2016 and 2015, are net of income of $5.0 million
related to the Consulting Agreement. Loral received payments in cash from Telesat, net of withholding taxes, of $4.8 million for
each of the years ended December 31, 2017, 2016 and 2015.
In connection with
the acquisition of our ownership interest in Telesat in 2007, Loral retained the benefit of tax recoveries related to the transferred
assets and indemnified Telesat (“Telesat Indemnification”) for certain liabilities, including Loral Skynet’s
tax liabilities arising prior to January 1, 2007. The Telesat Indemnification includes certain tax disputes currently under review
in various jurisdictions including Brazil. The Brazilian tax authorities challenged Loral Skynet’s historical characterization
of its revenue generated in Brazil for the years 2003 to 2006. Telesat received and challenged, on Loral Skynet’s behalf,
tax assessments from Brazil totaling approximately $1.0 million. The Company believes that Loral Skynet’s filing position
will ultimately be sustained requiring no payment under the Telesat Indemnification.
There
can be no assurance that there will be no future claims under the Telesat Indemnification related to tax disputes.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– (Continued)
For the years ended
December 31, 2017, 2016 and 2015, Loral’s employees and retirees participated in certain welfare plans sponsored or managed
by Telesat. Loral paid Telesat an annual administrative fee of $0.1 million and reimbursed Telesat for the plan costs attributable
to Loral participants.
Loral, along with Telesat,
PSP and 4440480 Canada Inc., an indirect wholly-owned subsidiary of Loral (the “Special Purchaser”), entered into grant
agreements (the “Grant Agreements”) with certain executives of Telesat (each, a “Participant” and collectively,
the “Participants”). Each of the Participants is or was, at the time, an executive of Telesat.
The Grant Agreements
confirm grants of Telesat stock options (including tandem SAR rights) to the Participants and provide for certain rights, obligations
and restrictions related to such stock options, which include, among other things: (w) the possible obligation of the Special Purchaser
to purchase the shares in the place of Telesat should Telesat be prohibited by applicable law or under the terms of any credit
agreement applicable to Telesat from purchasing such shares, or otherwise default on such purchase obligation, pursuant to the
terms of the Grant Agreements; and (x) the obligation of the Special Purchaser to purchase shares upon exercise by Telesat of its
call right under Telesat's Management Stock Incentive Plan in the event of a Participant’s termination of employment; and,
in the case of certain executives, (y) the right of each such Participant to require the Special Purchaser or Loral to purchase
a portion of the shares in Telesat owned by him in the event of exercise after termination of employment to cover taxes that are
greater than the minimum withholding amount; and (z) the right of each such Participant to require Telesat to cause the Special
Purchaser or Loral to purchase a portion of the shares in Telesat owned by him, or that are issuable to him under Telesat's Management
Stock Incentive Plan at the relevant time, in the event that more than 90% of Loral's common stock is acquired by an unaffiliated
third party that does not also purchase all of PSP’s and its affiliates’ interest in Telesat.
The Grant Agreements
further provide that, in the event the Special Purchaser is required to purchase shares, such shares, together with the obligation
to pay for such shares, shall be transferred to a subsidiary of the Special Purchaser, which subsidiary shall be wound up into
Telesat, with Telesat agreeing to the acquisition of such subsidiary by Telesat from the Special Purchaser for nominal consideration
and with the purchase price for the shares being paid by Telesat within ten (10) business days after completion of the winding-up
of such subsidiary into Telesat.
In the first quarter
of 2017, Loral received a $242.7 million cash distribution from Telesat.
ViaSat/Telesat
In connection with
an agreement entered into between SSL and ViaSat for the construction by SSL for ViaSat of a high capacity broadband satellite
called ViaSat-1, on January 11, 2008, we entered into certain agreements, pursuant to which we invested in the Canadian coverage
portion of the ViaSat-1 satellite. Until his resignation in February 2012, Michael B. Targoff served, and another Loral director
currently serves, as a member of the ViaSat Board of Directors.
On April 11, 2011,
Loral assigned to Telesat and Telesat assumed from Loral all of Loral’s rights and obligations with respect to the ViaSat-1
satellite payload providing coverage into Canada and all related agreements. Loral also assigned to Telesat and Telesat assumed
Loral’s 15-year contract with Xplornet Communications, Inc. (“Xplornet”) (formerly known as Barrett Xplore Inc.)
for delivery of high throughput satellite Ka-band capacity and gateway services for broadband services in Canada. In connection
with the assignments, Loral was entitled to receive one-half of any net revenue earned by Telesat in connection with the leasing
of certain supplemental capacity on the payload to its customers during the first four years after the commencement of service
using the supplemental capacity. Under this arrangement, which expired in December 2015, we earned approximately $0.8 million for
the year ended December 31, 2015.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– (Continued)
Other
As described in Note
5, we own 56% of XTAR, a joint venture between Loral and Hisdesat and account for our investment in XTAR under the equity method
of accounting. SSL constructed XTAR’s satellite, which was successfully launched in February 2005. XTAR and Loral have entered
into a management agreement whereby Loral provides general and specific services of a technical, financial and administrative nature
to XTAR. For the services provided by Loral, XTAR, until December 31, 2013, was charged a quarterly management fee equal to 3.7%
of XTAR’s quarterly gross revenues. Amounts due to Loral primarily due to the management agreement were $6.8 million as of
December 31, 2017 and 2016. Beginning in 2008, Loral and XTAR agreed to defer amounts owed to Loral under this agreement, and XTAR
has agreed that its excess cash balance (as defined), will be applied at least quarterly towards repayment of receivables owed
to Loral, as well as to Hisdesat and Telesat. No cash was received under this agreement for the years ended December 31, 2017,
2016 and 2015, and we had an allowance of $6.6 million against these receivables as of December 31, 2017 and 2016. Loral and Hisdesat
have agreed to waive future management fees for an indefinite period starting January 1, 2014.
Consulting Agreement
On December 14, 2012,
Loral entered into a consulting agreement with Michael B. Targoff, Vice Chairman of the Company and former Chief Executive Officer
and President. Pursuant to this agreement, Mr. Targoff is engaged as a part-time consultant to the Board to assist the Board with
respect to the oversight of strategic matters relating to Telesat and XTAR. Under the agreement, Mr. Targoff receives consulting
fees of $120,000 per month and reimburses the Company for certain expenses. For each of the years ended December 31, 2017, 2016
and 2015, Mr. Targoff earned $1,440,000 in consulting fees. Mr. Targoff reimbursed Loral net expenses of $54,000 for the year ended
December 31, 2017 and $63,000 for each of the years ended December 31, 2016 and 2015.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– (Continued)
15.
Selected Quarterly Financial Information (unaudited, in thousands, except per share amounts)
|
|
Quarter Ended
|
|
Year ended December 31, 2017
(1)
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
Operating loss
|
|
$
|
(2,063
|
)
|
|
$
|
(1,922
|
)
|
|
$
|
(2,015
|
)
|
|
$
|
(1,935
|
)
|
Loss from continuing operations before income taxes and equity in net income of affiliates
|
|
|
(2,286
|
)
|
|
|
(2,557
|
)
|
|
|
(2,283
|
)
|
|
|
(1,644
|
)
|
Equity in net income of affiliates
(2)
|
|
|
139,714
|
|
|
|
—
|
|
|
|
43,372
|
|
|
|
33,261
|
|
Income (loss) from continuing operations
(3,4)
|
|
|
71,364
|
|
|
|
(2,177
|
)
|
|
|
24,537
|
|
|
|
40,745
|
|
Loss from discontinued operations, net of tax
|
|
|
(5
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net income (loss)
|
|
|
71,359
|
|
|
|
(2,177
|
)
|
|
|
24,537
|
|
|
|
40,745
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
2.31
|
|
|
$
|
(0.07
|
)
|
|
$
|
0.79
|
|
|
$
|
1.32
|
|
Loss from discontinued operations, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net income (loss)
|
|
$
|
2.31
|
|
|
$
|
(0.07
|
)
|
|
$
|
0.79
|
|
|
$
|
1.32
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
2.30
|
|
|
$
|
(0.07
|
)
|
|
$
|
0.77
|
|
|
$
|
1.31
|
|
Loss from discontinued operations, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net income (loss)
|
|
$
|
2.30
|
|
|
$
|
(0.07
|
)
|
|
$
|
0.77
|
|
|
$
|
1.31
|
|
|
|
Quarter Ended
|
|
Year ended December 31, 2016
(1)
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
Operating loss
|
|
$
|
(1,517
|
)
|
|
$
|
(1,674
|
)
|
|
$
|
(1,709
|
)
|
|
$
|
(1,826
|
)
|
Loss from continuing operations before income taxes and equity in net income (loss) of affiliates
|
|
|
(2,000
|
)
|
|
|
(2,223
|
)
|
|
|
(1,858
|
)
|
|
|
(1,920
|
)
|
Equity in net income (loss) of affiliates
(2)
|
|
|
46,494
|
|
|
|
43,357
|
|
|
|
6,948
|
|
|
|
(12,721
|
)
|
Income (loss) from continuing operations
(3,4)
|
|
|
30,819
|
|
|
|
32,654
|
|
|
|
(3,821
|
)
|
|
|
(12,082
|
)
|
Loss from discontinued operations, net of tax
|
|
|
(133
|
)
|
|
|
(102
|
)
|
|
|
(71
|
)
|
|
|
(64
|
)
|
Net income (loss)
|
|
|
30,686
|
|
|
|
32,552
|
|
|
|
(3,892
|
)
|
|
|
(12,146
|
)
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
1.00
|
|
|
$
|
1.06
|
|
|
$
|
(0.12
|
)
|
|
$
|
(0.39
|
)
|
Loss from discontinued operations, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net income (loss)
|
|
$
|
1.00
|
|
|
$
|
1.06
|
|
|
$
|
(0.12
|
)
|
|
$
|
(0.39
|
)
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.95
|
|
|
$
|
1.03
|
|
|
$
|
(0.12
|
)
|
|
$
|
(0.39
|
)
|
Loss from discontinued operations, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net income (loss)
|
|
$
|
0.95
|
|
|
$
|
1.03
|
|
|
$
|
(0.12
|
)
|
|
$
|
(0.39
|
)
|
|
(1)
|
The quarterly earnings per share information is computed
separately for each period. Therefore, the sum of such quarterly per share amounts may differ from the total for the year.
|
|
(2)
|
For the three months ended March 31, 2017, our share of
equity in net income of Telesat was $35.9 million, including a $1.6 million elimination of affiliate transactions and related
amortization. In the first quarter of 2017, we received a $242.7 million cash distribution from Telesat which exceeded our initial
investment and our share of cumulative equity in comprehensive income of Telesat by $103.8 million. In the first quarter of 2017,
we recognized equity in net income of affiliates of $139.7 million, including the excess cash distribution of $103.8 million.
|
For the three months ended June
30, 2017, our share of equity in net income of Telesat was $64.8 million, including a $1.7 million elimination of affiliate transactions
and related amortization. We did not recognize this equity income, and instead reduced by $64.8 million the excess equity income
of $103.8 million recognized during the three months ended March 31, 2017.
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– (Continued)
For the three months ended September
30, 2017, our share of equity in net income of Telesat was $82.4 million, including a $0.8 million elimination of affiliate transactions
and related amortization. We reduced our share of equity in net income of Telesat of $82.4 million by the remaining excess equity
income of $39.0 million, resulting in the recognition of equity in net income of affiliates of $43.4 million.
Amounts include equity in net
income of affiliates of $5.1 million for the quarter ended June 30, 2016 that should have been recognized in prior periods. Equity
in net income of affiliates for the quarter ended March 31, 2016 does not include a loss of $2.1 million that was recognized in
the quarter ended June 30, 2016. These adjustments, which related to our investment in Telesat, consisted primarily of foreign
exchange gains and losses. The Company has not revised previously reported amounts based on its belief that the effect of such
adjustments is not material to the quarterly financial statements taken as a whole.
|
(3)
|
During the fourth quarter of 2017, we recorded additional
tax benefits of approximately $37.2 million after having completed our tax study to determine the allowable amount of FTC benefit
related to the distribution received from Telesat earlier in 2017 and approximately $16.9 million from fourth quarter expiration
of the statute of limitations for the assessment of additional tax with regard to several of our state UTPs. These tax benefits
were partially offset by an additional fourth quarter charge of $33.2 million related to the tax rate reduction from the Tax Cuts
and Jobs Act.
|
|
(4)
|
Variations in income from continuing operations among quarters
in 2017 and 2016 are primarily the result of (i) the effect of changes in foreign exchange rates between the Canadian dollar
and the U.S. dollar on our equity in net income or loss of Telesat and (ii) the limitation on recording our portion of Telesat’s
net income or loss due to the reduction of the carrying amount of our investment in Telesat to zero.
|
SCHEDULE II
LORAL SPACE & COMMUNICATIONS INC.
VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended December 31, 2017,
2016 and 2015
(In thousands)
|
|
|
|
|
Additions
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Charged to
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
Other
|
|
|
End of
|
|
Description
|
|
of Period
|
|
|
Expenses
|
|
|
Accounts
(1)
|
|
|
Period
|
|
Year ended 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for affiliate receivables
|
|
$
|
6,692
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,692
|
|
Deferred tax valuation allowance
|
|
$
|
7,905
|
|
|
$
|
307
|
|
|
$
|
—
|
|
|
$
|
8,212
|
|
Year ended 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for affiliate receivables
|
|
$
|
6,692
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,692
|
|
Deferred tax valuation allowance
|
|
$
|
8,212
|
|
|
$
|
(4,565
|
)
|
|
$
|
—
|
|
|
$
|
3,647
|
|
Year ended 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for affiliate receivables
|
|
$
|
6,692
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,692
|
|
Deferred tax valuation allowance
|
|
$
|
3,647
|
|
|
$
|
120,389
|
|
|
$
|
—
|
|
|
$
|
124,036
|
|
|
(1)
|
Changes in the deferred tax valuation allowance which have
been charged to other accounts have been recorded in other comprehensive loss.
|
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Telesat Canada
(Formerly Telesat Holdings Inc.)
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Telesat Canada and subsidiaries (the “Company”) as
of December 31, 2017 and 2016, the related consolidated statements of income (loss), comprehensive income (loss), changes
in shareholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2017, and the related
notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly,
in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations
and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with International Financial
Reporting Standards as issued by the International Accounting Standards Board (IFRSs).
Change in Accounting Principle
As discussed in Note 3 to the financial statements, the Company
has changed its disclosure of the cause of the changes in liabilities arising from financing activities in the period ended December
31, 2017 due to adoption of the amendment to IAS 7, statement of Cash Flows.
Basis for Opinion
These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We
are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required
to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB. Further we are required, to be independent of the Company
in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada, and to fulfill
our other ethical responsibilities in accordance with these requirements.
We conducted our audits in accordance with the standards of
the PCAOB and Canadian generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As
part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we
express no such opinion.
Our audits included performing procedures to assess the risks
of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/ Deloitte LLP
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada
February 28, 2018
We have served as the Company’s auditor since 1993.
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Consolidated
Statements of Income (Loss)
For
the years ended December 31
(in
thousands of Canadian dollars)
|
|
Notes
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
6
|
|
|
$
|
927,407
|
|
|
$
|
930,854
|
|
|
$
|
954,907
|
|
Operating
expenses
|
|
|
7
|
|
|
|
(187,687
|
)
|
|
|
(174,923
|
)
|
|
|
(184,279
|
)
|
|
|
|
|
|
|
|
739,720
|
|
|
|
755,931
|
|
|
|
770,628
|
|
Depreciation
|
|
|
|
|
|
|
(221,058
|
)
|
|
|
(224,773
|
)
|
|
|
(207,835
|
)
|
Amortization
|
|
|
|
|
|
|
(26,330
|
)
|
|
|
(27,690
|
)
|
|
|
(27,902
|
)
|
Other
operating gains (losses), net
|
|
|
8
|
|
|
|
5,902
|
|
|
|
(2,565
|
)
|
|
|
(30
|
)
|
Operating income
|
|
|
|
|
|
|
498,234
|
|
|
|
500,903
|
|
|
|
534,861
|
|
Interest expense
|
|
|
9
|
|
|
|
(200,144
|
)
|
|
|
(198,815
|
)
|
|
|
(183,297
|
)
|
Loss on refinancing
|
|
|
24
|
|
|
|
—
|
|
|
|
(31,850
|
)
|
|
|
—
|
|
Interest and other
income
|
|
|
|
|
|
|
3,004
|
|
|
|
6,078
|
|
|
|
4,661
|
|
Gain on changes in
fair value of financial instruments
|
|
|
|
|
|
|
60,306
|
|
|
|
7,877
|
|
|
|
6,035
|
|
Gain
(loss) on foreign exchange
|
|
|
|
|
|
|
223,898
|
|
|
|
92,613
|
|
|
|
(540,470
|
)
|
Income (loss) before
tax
|
|
|
|
|
|
|
585,298
|
|
|
|
376,806
|
|
|
|
(178,210
|
)
|
Tax
expense
|
|
|
10
|
|
|
|
(80,245
|
)
|
|
|
(83,906
|
)
|
|
|
(88,729
|
)
|
Net
income (loss)
|
|
|
|
|
|
$
|
505,053
|
|
|
$
|
292,900
|
|
|
$
|
(266,939
|
)
|
See
accompanying notes to the consolidated financial statements
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Consolidated
Statements of Comprehensive Income (Loss)
For
the years ended December 31
(in
thousands of Canadian dollars)
|
|
Notes
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
|
|
|
|
$
|
505,053
|
|
|
$
|
292,900
|
|
|
$
|
(266,939
|
)
|
Other comprehensive
(loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Items that may be reclassified
into profit or loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments
|
|
|
|
|
|
|
(48,563
|
)
|
|
|
(1,765
|
)
|
|
|
44,740
|
|
Items that will not
be reclassified into profit or loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial (losses)
gains on employee benefit plans
|
|
|
29
|
|
|
|
(5,171
|
)
|
|
|
5,100
|
|
|
|
5,225
|
|
Tax recovery (expense)
|
|
|
|
|
|
|
673
|
|
|
|
(1,424
|
)
|
|
|
(1,425
|
)
|
Other comprehensive
(loss) income
|
|
|
|
|
|
|
(53,061
|
)
|
|
|
1,911
|
|
|
|
48,540
|
|
Total
comprehensive income (loss)
|
|
|
|
|
|
$
|
451,992
|
|
|
$
|
294,811
|
|
|
$
|
(218,399
|
)
|
See
accompanying notes to the consolidated financial statements
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Consolidated
Statements of Changes in Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands of Canadian dollars)
|
|
Notes
|
|
|
Common shares
|
|
|
Preferred shares
|
|
|
Total share capital
|
|
|
Accumulated earnings
|
|
|
Equity-settled employee benefits reserve
|
|
|
Foreign currency translation reserve
|
|
|
Total reserves
|
|
|
Total shareholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as at January 1, 2015
|
|
|
|
|
$
|
340,602
|
|
|
$
|
316,272
|
|
|
$
|
656,874
|
|
|
$
|
451,628
|
|
|
$
|
26,896
|
|
|
$
|
(4,230
|
)
|
|
$
|
22,666
|
|
|
$
|
1,131,168
|
|
Net loss
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(266,939
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(266,939
|
)
|
Dividends declared on preferred shares
|
|
25
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10
|
)
|
Other comprehensive income, net of tax expense of $1,425
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,800
|
|
|
|
—
|
|
|
|
44,740
|
|
|
|
44,740
|
|
|
|
48,540
|
|
Share-based compensation
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,369
|
|
|
|
—
|
|
|
|
5,369
|
|
|
|
5,369
|
|
Balance as at December 31, 2015
|
|
|
|
|
$
|
340,602
|
|
|
$
|
316,272
|
|
|
$
|
656,874
|
|
|
$
|
188,479
|
|
|
$
|
32,265
|
|
|
$
|
40,510
|
|
|
$
|
72,775
|
|
|
$
|
918,128
|
|
Balance as at January 1, 2016
|
|
|
|
|
$
|
340,602
|
|
|
$
|
316,272
|
|
|
$
|
656,874
|
|
|
$
|
188,479
|
|
|
$
|
32,265
|
|
|
$
|
40,510
|
|
|
$
|
72,775
|
|
|
$
|
918,128
|
|
Net income
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
292,900
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
292,900
|
|
Dividends declared on preferred shares
|
|
25
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10
|
)
|
Repurchase of stock options
|
|
28
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(15,913
|
)
|
|
|
(8,745
|
)
|
|
|
—
|
|
|
|
(8,745
|
)
|
|
|
(24,658
|
)
|
Issuance of share capital
|
|
25
|
|
|
|
—
|
|
|
|
1,861
|
|
|
|
1,861
|
|
|
|
(1,269
|
)
|
|
|
(592
|
)
|
|
|
—
|
|
|
|
(592
|
)
|
|
|
—
|
|
Other comprehensive income (loss), net of tax expense of $1,424
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,676
|
|
|
|
—
|
|
|
|
(1,765
|
)
|
|
|
(1,765
|
)
|
|
|
1,911
|
|
Share-based compensation
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,770
|
|
|
|
—
|
|
|
|
5,770
|
|
|
|
5,770
|
|
Balance as at December 31, 2016
|
|
|
|
|
$
|
340,602
|
|
|
$
|
318,133
|
|
|
$
|
658,735
|
|
|
$
|
467,863
|
|
|
$
|
28,698
|
|
|
$
|
38,745
|
|
|
$
|
67,443
|
|
|
$
|
1,194,041
|
|
Balance as at January 1, 2017
|
|
|
|
|
$
|
340,602
|
|
|
$
|
318,133
|
|
|
$
|
658,735
|
|
|
$
|
467,863
|
|
|
$
|
28,698
|
|
|
$
|
38,745
|
|
|
$
|
67,443
|
|
|
$
|
1,194,041
|
|
Net income
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
505,053
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
505,053
|
|
Dividends declared on preferred shares
|
|
25
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10
|
)
|
Return of capital
|
|
25
|
|
|
|
(314,022
|
)
|
|
|
(192,113
|
)
|
|
|
(506,135
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(506,135
|
)
|
Issuance of share capital on stock option exercise
|
|
25
|
|
|
|
—
|
|
|
|
82
|
|
|
|
82
|
|
|
|
—
|
|
|
|
(5
|
)
|
|
|
—
|
|
|
|
(5
|
)
|
|
|
77
|
|
Other comprehensive loss, net of tax recovery of $673
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,498
|
)
|
|
|
—
|
|
|
|
(48,563
|
)
|
|
|
(48,563
|
)
|
|
|
(53,061
|
)
|
Share-based compensation
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,856
|
|
|
|
—
|
|
|
|
2,856
|
|
|
|
2,856
|
|
Balance as at December 31, 2017
|
|
|
|
|
$
|
26,580
|
|
|
$
|
126,102
|
|
|
$
|
152,682
|
|
|
$
|
968,408
|
|
|
$
|
31,549
|
|
|
$
|
(9,818
|
)
|
|
$
|
21,731
|
|
|
$
|
1,142,821
|
|
See
accompanying notes to the consolidated financial statements
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
(in
thousands of Canadian dollars)
|
|
Notes
|
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and
cash equivalents
|
|
|
30
|
|
|
$
|
479,045
|
|
|
$
|
782,406
|
|
Trade and other receivables
|
|
|
11
|
|
|
|
64,986
|
|
|
|
55,639
|
|
Other current financial
assets
|
|
|
12
|
|
|
|
2,437
|
|
|
|
2,548
|
|
Prepaid
expenses and other current assets
|
|
|
13
|
|
|
|
8,503
|
|
|
|
61,107
|
|
Total
current assets
|
|
|
|
|
|
|
554,971
|
|
|
|
901,700
|
|
Satellites, property
and other equipment
|
|
|
6,
16
|
|
|
|
1,791,847
|
|
|
|
1,915,411
|
|
Deferred tax assets
|
|
|
10
|
|
|
|
4,617
|
|
|
|
2,844
|
|
Other long-term financial
assets
|
|
|
6,
14
|
|
|
|
83,531
|
|
|
|
35,687
|
|
Other long-term assets
|
|
|
6,
15
|
|
|
|
3,056
|
|
|
|
3,815
|
|
Intangible assets
|
|
|
6,
17
|
|
|
|
812,995
|
|
|
|
832,512
|
|
Goodwill
|
|
|
18
|
|
|
|
2,446,603
|
|
|
|
2,446,603
|
|
Total
assets
|
|
|
|
|
|
$
|
5,697,620
|
|
|
$
|
6,138,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade and other payables
|
|
|
19
|
|
|
$
|
37,919
|
|
|
$
|
44,107
|
|
Other current financial
liabilities
|
|
|
20
|
|
|
|
26,355
|
|
|
|
58,992
|
|
Other current liabilities
|
|
|
21
|
|
|
|
77,324
|
|
|
|
80,448
|
|
Current
indebtedness
|
|
|
24
|
|
|
|
14,486
|
|
|
|
21,931
|
|
Total
current liabilities
|
|
|
|
|
|
|
156,084
|
|
|
|
205,478
|
|
Long-term indebtedness
|
|
|
24
|
|
|
|
3,528,891
|
|
|
|
3,829,707
|
|
Deferred tax liabilities
|
|
|
10
|
|
|
|
445,114
|
|
|
|
471,233
|
|
Other long-term financial
liabilities
|
|
|
22
|
|
|
|
58,831
|
|
|
|
81,252
|
|
Other
long-term liabilities
|
|
|
23
|
|
|
|
365,879
|
|
|
|
356,861
|
|
Total
liabilities
|
|
|
|
|
|
|
4,554,799
|
|
|
|
4,944,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Share capital
|
|
|
25
|
|
|
|
152,682
|
|
|
|
658,735
|
|
Accumulated earnings
|
|
|
|
|
|
|
968,408
|
|
|
|
467,863
|
|
Reserves
|
|
|
|
|
|
|
21,731
|
|
|
|
67,443
|
|
Total
shareholders’ equity
|
|
|
|
|
|
|
1,142,821
|
|
|
|
1,194,041
|
|
Total
liabilities and shareholders’ equity
|
|
|
|
|
|
$
|
5,697,620
|
|
|
$
|
6,138,572
|
|
See
accompanying notes to the consolidated financial statements
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Consolidated
Statements of Cash Flows
For
the years ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of Canadian dollars)
|
|
Notes
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
$
|
505,053
|
|
|
$
|
292,900
|
|
|
$
|
(266,939
|
)
|
Adjustments to reconcile net income (loss) to cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
221,058
|
|
|
|
224,773
|
|
|
|
207,835
|
|
Amortization
|
|
|
|
|
|
26,330
|
|
|
|
27,690
|
|
|
|
27,902
|
|
Tax expense
|
|
10
|
|
|
|
80,245
|
|
|
|
83,906
|
|
|
|
88,729
|
|
Interest expense
|
|
9
|
|
|
|
200,144
|
|
|
|
198,815
|
|
|
|
183,297
|
|
Interest income
|
|
|
|
|
|
(6,024
|
)
|
|
|
(6,700
|
)
|
|
|
(4,543
|
)
|
(Gain) loss on foreign exchange
|
|
|
|
|
|
(223,898
|
)
|
|
|
(92,613
|
)
|
|
|
540,470
|
|
Gain on changes in fair value of financial instruments
|
|
|
|
|
|
(60,306
|
)
|
|
|
(7,877
|
)
|
|
|
(6,035
|
)
|
Share-based compensation
|
|
28
|
|
|
|
2,856
|
|
|
|
5,770
|
|
|
|
5,369
|
|
Loss on disposal of assets
|
|
8
|
|
|
|
269
|
|
|
|
2,565
|
|
|
|
30
|
|
Loss on refinancing
|
|
24
|
|
|
|
—
|
|
|
|
31,850
|
|
|
|
—
|
|
Other
|
|
|
|
|
|
(49,040
|
)
|
|
|
(36,966
|
)
|
|
|
(40,164
|
)
|
Income taxes paid, net of income taxes received
|
|
30
|
|
|
|
(62,991
|
)
|
|
|
(120,472
|
)
|
|
|
(155,023
|
)
|
Interest paid, net of capitalized interest and interest received
|
|
30
|
|
|
|
(195,248
|
)
|
|
|
(152,261
|
)
|
|
|
(161,914
|
)
|
Repurchase of stock options
|
|
28
|
|
|
|
—
|
|
|
|
(24,658
|
)
|
|
|
—
|
|
Operating assets and liabilities
|
|
30
|
|
|
|
48,252
|
|
|
|
100,637
|
|
|
|
3,348
|
|
Net cash from operating activities
|
|
|
|
|
|
486,700
|
|
|
|
527,359
|
|
|
|
422,362
|
|
Cash flows used in investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellite programs, including capitalized interest
|
|
|
|
|
|
(135,986
|
)
|
|
|
(236,834
|
)
|
|
|
(183,415
|
)
|
Purchase of property and other equipment
|
|
|
|
|
|
(10,616
|
)
|
|
|
(6,977
|
)
|
|
|
(10,445
|
)
|
Purchase of intangible assets
|
|
|
|
|
|
(18,011
|
)
|
|
|
(42,285
|
)
|
|
|
(5
|
)
|
Net cash used in investing activities
|
|
|
|
|
|
(164,613
|
)
|
|
|
(286,096
|
)
|
|
|
(193,865
|
)
|
Cash flows used in financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of indebtedness
|
|
|
|
|
|
(31,620
|
)
|
|
|
(4,008,356
|
)
|
|
|
(73,864
|
)
|
Proceeds from indebtedness
|
|
|
|
|
|
—
|
|
|
|
3,935,576
|
|
|
|
—
|
|
Payment of debt issue costs
|
|
|
|
|
|
(42,867
|
)
|
|
|
(58,141
|
)
|
|
|
—
|
|
Return of capital to shareholders
|
|
|
|
|
|
(506,135
|
)
|
|
|
—
|
|
|
|
—
|
|
Capital lease payments
|
|
|
|
|
|
(30
|
)
|
|
|
(30
|
)
|
|
|
—
|
|
Satellite performance incentive payments
|
|
|
|
|
|
(8,436
|
)
|
|
|
(8,934
|
)
|
|
|
(6,702
|
)
|
Settlement of derivatives
|
|
|
|
|
|
207
|
|
|
|
130
|
|
|
|
—
|
|
Proceeds from exercise of stock options
|
|
|
|
|
|
77
|
|
|
|
—
|
|
|
|
—
|
|
Dividends paid on preferred shares
|
|
|
|
|
|
(10
|
)
|
|
|
(10
|
)
|
|
|
(10
|
)
|
Net cash used in financing activities
|
|
|
|
|
|
(588,814
|
)
|
|
|
(139,765
|
)
|
|
|
(80,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of changes in exchange rates on cash and cash equivalents
|
|
|
|
|
|
(36,634
|
)
|
|
|
(9,818
|
)
|
|
|
45,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
|
|
|
(303,361
|
)
|
|
|
91,680
|
|
|
|
193,370
|
|
Cash and cash equivalents, beginning of year
|
|
|
|
|
|
782,406
|
|
|
|
690,726
|
|
|
|
497,356
|
|
Cash and cash equivalents, end of year
|
|
30
|
|
|
$
|
479,045
|
|
|
$
|
782,406
|
|
|
$
|
690,726
|
|
See
accompanying notes to the consolidated financial statements
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
1.
BACKGROUND OF THE COMPANY
On
January 1, 2017, Telesat Holdings Inc. completed a corporate reorganization, of companies under common control, pursuant to which
Telesat Holdings Inc. amalgamated with Telesat Interco Inc. and immediately thereafter the newly amalgamated company amalgamated
with Telesat Canada. The continuing entity, existing under the laws of Canada, is named Telesat Canada. The reorganization has
been accounted for as a continuation of Telesat Holdings Inc.
Telesat
Canada (the “Company” or “Telesat”) is a Canadian corporation. Telesat is a leading global satellite operator
providing reliable and secure satellite-delivered communication solutions worldwide to broadcast, telecom, corporate and government
customers. Headquartered in Ottawa, Canada, the Company’s state-of-the-art
fleet consists of 15 satellites, the Canadian payload on ViaSat-1, and two new geostationary satellites under construction. An
additional satellite has recently been launched into low earth orbit (“LEO”) as part of Telesat’s plans to deploy
an advanced, global LEO constellation.
As
at December 31, 2017, Loral Space and Communications Inc. (“Loral”) and Canada’s Public Sector Pension Investment
Board (“PSP Investments”) indirectly held economic interests in Telesat of approximately 63% and 36%, respectively,
with the remaining economic interest held by various individuals. Loral indirectly held a voting interest of 33% on all matters
including the election of directors. PSP Investments indirectly held a voting interest of 67% on all matters except for the election
of directors, and a 29% voting interest for the election of directors. The remaining voting interest of 38% for the election of
directors is held by shareholders of the Company’s Director Voting Preferred Shares.
Unless
the context states or requires otherwise, references herein to the “financial statements” or similar terms refer to
the audited consolidated financial statements of Telesat Canada.
On
February 28, 2018, these financial statements were approved by the Audit Committee of the Board of Directors and authorized for
issue.
2.
BASIS OF PRESENTATION
Statement
of Compliance
The
consolidated financial statements were prepared in accordance with International Financial Reporting Standards (“IFRS”)
as issued by the International Accounting Standards Board (“IASB”). The accounting policies described in Note 4 were
consistently applied to all the years presented.
Basis
of Consolidation
Subsidiaries
These
consolidated financial statements include the results of the Company and subsidiaries controlled by the Company. Control is achieved
when the Company has power over an entity, has exposure, or rights to variable returns from its involvement with an entity, and
has the ability to use the power over an entity to affect the amount of its return. The most significant subsidiaries are listed
in Note 32.
Joint
arrangements
A
joint operation is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to their
share of the assets and revenue, and obligations for the liabilities and expenses, relating to the arrangement.
The
Company’s consolidated financial statements include the Company’s share of the assets, liabilities, revenue and expenses
of its interest in joint operations.
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
3.
CHANGES IN ACCOUNTING POLICIES
IAS
7, Statement of Cash Flows
The
Company adopted the amendment to IAS 7,
Statement of Cash Flows
, with a date of initial adoption of January 1, 2017.
This
amendment requires disclosure of the cause of the changes in liabilities arising from financing activities. The incremental disclosure
has been added within Note 30.
4.
SIGNIFICANT ACCOUNTING POLICIES
The
consolidated financial statements have been prepared on an historical cost basis except for certain financial instruments which
were measured at their fair values, as explained in the accounting policies below. Historical cost is based on the fair value
of the consideration given or received in exchange for assets or liabilities.
Segment
Reporting
The
Company operates in a single industry segment, in which it provides satellite-based services to its broadcast, enterprise and
consulting customers around the world. Operating segments are reported in a manner consistent with the internal reporting provided
to the Company’s Chief Operating Decision Maker, who is the Company’s Chief Executive Officer. To be reported, a segment
is usually based on quantitative thresholds but can also encompass qualitative factors management deems significant.
Foreign
Currency Translation
Unless
otherwise specified, all figures reported in the consolidated financial statements and associated note disclosures are presented
in Canadian dollars, which is the functional and presentation currency of the Company. Each of the subsidiaries of the Company
determines its own functional currency and uses that currency to measure items on their separate financial statements.
For
the Company’s non-foreign operations, foreign currency non-monetary assets and liabilities are translated at their historical
exchange rates, foreign currency monetary assets and liabilities are translated at the year end exchange rates, and foreign denominated
revenue and expenses are translated at the average exchange rates of the month in which the transactions occurred. Gains or losses
on translation of these items are recognized as a component of net income (loss).
Upon
consolidation of the Company’s foreign operations that have a functional currency other than the Canadian dollar, assets
and liabilities are translated at the year end exchange rate, and revenue and expenses are translated at the average exchange
rates of the month in which the transactions occurred. Gains or losses on the translation of foreign subsidiaries are recognized
in other comprehensive income (loss).
Cash
and Cash Equivalents
All
highly liquid investments with an original maturity of three months or less, or which are available upon demand with no penalty
for early redemption, are classified as cash and cash equivalents. Cash and cash equivalents are comprised of cash on hand, demand
deposits, short-term investments and restricted cash expected to be used within the next twelve months.
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except
where otherwise noted)
4.
SIGNIFICANT ACCOUNTING POLICIES – (continued)
Revenue
Recognition
Telesat
recognizes revenue from satellite services when earned, as services are rendered or delivered to customers. Revenue is measured
at the fair value of the consideration received or receivable. There must be clear evidence that an arrangement exists, the amount
of revenue must be known or determinable and collectability must be reasonably assured.
Revenue
from a contract to sell consulting services is recognized as follows:
|
●
|
Consulting
revenue for cost plus contracts is recognized after the work has been completed and accepted by the customer.
|
|
●
|
The percentage of completion
method is used for fixed price consulting revenue contracts. Percentage of completion is measured by comparing actual cost
incurred to total cost expected.
|
Equipment
sales revenue is recognized when the equipment is delivered to and accepted by the customer. Only equipment sales are subject
to warranty or return and there is no general right of return. Historically, the Company has not incurred significant expenses
for warranties.
When
a transaction involves more than one product or service, revenue is allocated to each deliverable based on its relative fair value;
otherwise, revenue is recognized as products are delivered or as services are provided over the term of the customer contract.
Transactions are evaluated to determine whether the Company is the principal and if the transactions should be recorded on a gross
or net basis.
Deferred
Revenue
Deferred
revenue represents the Company’s liability for the provision of future services and is classified on the balance sheet in
other current and other long-term liabilities. Deferred revenue consists of remuneration received in advance of the provision
of service and in the majority of instances is recognized in income on a straight-line basis over the term of the related customer
contracts. In the case of certain deferred revenue for short-term services, balances are recognized into income upon the completion
or percentage completion of the related contract.
Borrowing
Costs
Borrowing
costs are incurred on the Company’s debt financing. Borrowing costs attributable to the acquisition, production or construction
of a qualifying asset are added to the cost of that asset. The Company has defined a qualifying asset as an asset that takes longer
than twelve months to be ready for its intended use or sale. Capitalization of borrowing costs continues until such time that
the asset is substantially ready for its intended use or sale. Borrowing costs are determined based on specific financing related
to the asset, or in the absence of specific financing, the borrowing costs are calculated on the basis of a capitalization rate
which is equal to the Company’s weighted average cost of debt. All other borrowing costs are expensed when incurred.
Satellites,
Property and Other Equipment
Satellites,
property and other equipment, which are carried at cost, less accumulated depreciation and any accumulated impairment losses,
include the contractual cost of equipment, capitalized engineering costs, capitalized borrowing costs during the construction
or production of qualifying assets, and with respect to satellites, the cost of launch services, and launch insurance.
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
4.
SIGNIFICANT ACCOUNTING POLICIES – (continued)
Depreciation
is calculated using the straight-line method over the respective estimated useful lives of the assets.
Below
are the estimated useful lives in years of satellites, property and other equipment as at December 31, 2017.
|
|
|
|
|
Years
|
Satellites
|
|
|
12
to 15
|
|
Property
and other equipment
|
|
|
3
to 30
|
|
Construction
in progress is not depreciated as depreciation only commences when the asset is ready for its intended use. For satellites, depreciation
commences on the day the satellite becomes available for service.
The
investment in each satellite will be removed from the accounts when the satellite is retired. When other property is retired from
operations at the end of its useful life, the cost of the asset and accumulated depreciation are removed from the accounts. Earnings
are credited with the amount of any net salvage value and charged with any net cost of removal. When an asset is sold prior to
the end of its useful life, the gain or loss is recognized immediately in other operating gains (losses), net.
In
the event of an unsuccessful launch or total in-orbit satellite failure, all unamortized costs that are not recoverable under
launch or in-orbit insurance are recorded in other operating gains (losses), net.
Liabilities
related to decommissioning and restoration of retiring property and other equipment are measured at fair value with a corresponding
increase to the carrying amount of the related asset. The liability is accreted over the period of expected cash flows with a
corresponding charge to interest expense. The liabilities recorded to date have not been significant and are reassessed at the
end of each reporting period. There are no decommissioning or restoration obligations for satellites.
Satellite
Performance Incentive Payments
Satellite
performance incentive payments are obligations payable to satellite manufacturers over the lives of certain satellites. The present
value of the payments are capitalized as part of the cost of the satellite and recognized as part of the depreciation of the satellite.
Impairment
of Long-Lived Assets
Tangible
fixed assets and finite life intangible assets are assessed for impairment on an annual basis or more frequently when events or
changes in circumstances indicate that the carrying value of an asset exceeds the recoverable amount. Tangible fixed assets and
finite life intangible assets are also assessed for indicators of impairment at each reporting period.
An
impairment test consists of assessing the recoverable amount of an asset, which is the higher of its fair value less costs of
disposal and its value in use. If it is not practicable to measure the recoverable amount for a particular asset, the Company
determines the recoverable amount of the cash generating unit (“CGU”) with which it is associated. A CGU is the smallest
identifiable group of assets that generates cash inflows which are largely independent of the cash inflows from other assets or
groups of assets.
The
Company measures value in use on the basis of the estimated future cash flows to be generated by an asset or CGU. These future
cash flows are based on the Company’s latest business plan information approved by senior management and are discounted
using rates that best reflect the time value of money and the specific risks associated with the underlying asset or assets in
the CGU.
The
fair value less costs of disposal is the price that would be received to sell an asset or CGU in an orderly transaction between
market participants at the measurement date. For the impairment assessment, the fair value is calculated on a recurring basis
and is calculated using level 3 of the fair value hierarchy.
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
4.
SIGNIFICANT ACCOUNTING POLICIES – (continued)
An
impairment loss is the amount by which the carrying amount of an asset or CGU exceeds its recoverable amount. When an impairment
loss subsequently reverses, the carrying amount of the asset (or a CGU) is increased to the revised measure of its recoverable
amount, so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment
loss been recognized for the asset (or CGU) in prior years. Impairment losses and reversals of impairment losses are recognized
in other operating gains (losses), net.
Goodwill
and Intangible Assets
The
Company accounts for business combinations using the acquisition method of accounting, which establishes specific criteria for
the recognition of intangible assets separately from goodwill. Goodwill represents the excess between the total of the consideration
transferred over the fair value of net assets acquired. After initial recognition at cost, goodwill is measured at cost less any
accumulated impairment losses.
The
Company distinguishes intangible assets between assets with finite and indefinite useful lives. Intangible assets with indefinite
useful lives are comprised of the Company’s trade name, intellectual property, and orbital slots. These assets are carried
at cost less any accumulated impairment losses. Finite life intangible assets, which are carried at cost less accumulated amortization
and any accumulated impairment losses, consist of revenue backlog, customer relationships, customer contracts, concession rights,
transponder rights and patents. Intangible assets with finite lives are amortized over their estimated useful lives using the
straight-line method of amortization, except for revenue backlog which is based on the expected period of recognition of the related
revenue.
Below
are the estimated useful lives in years of the finite life intangible assets as at December 31, 2017.
|
|
|
|
|
Years
|
Revenue
backlog
|
|
|
12
to 17
|
|
Customer
relationships
|
|
|
6
to 21
|
|
Customer
contracts
|
|
|
5
to 15
|
|
Concession
rights
|
|
|
2
to 15
|
|
Transponder
rights
|
|
|
17
|
|
Patents
|
|
|
18
|
|
Impairment
of Goodwill and Indefinite Life Intangible Assets
An
assessment for impairment of goodwill and indefinite life intangible assets is performed annually, or more frequently whenever
events or changes in circumstances indicate that the carrying amounts of these assets are likely to exceed their recoverable amount.
Goodwill is tested for impairment at the entity level as this represents the lowest level within the Company at which the goodwill
is monitored for internal management purposes, and is not larger than an operating segment. Indefinite life intangibles have not
been allocated to any CGU and are tested for impairment at the asset level.
Goodwill
and indefinite life intangible assets are also assessed for indicators of impairment at each reporting period.
An
impairment test consists of assessing the recoverable amount of an asset, which is the higher of its fair value less costs of
disposal and its value in use. For the impairment assessment, fair value is calculated on a recurring basis and is calculated
using level 2 or level 3 of the fair value hierarchy, depending upon the valuation approach being utilized.
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
4.
SIGNIFICANT ACCOUNTING POLICIES – (continued)
Orbital
Slots
In
performing the orbital slot impairment analysis, the Company determines, for each orbital slot, its fair value less costs of disposal,
and its value in use on an annual basis. The higher of these two amounts is determined to be the recoverable amount. To the extent
that the recoverable amount is less than the carrying value of the asset, an impairment exists and the asset is written down to
its recoverable amount.
The
key assumptions used in estimating the recoverable amounts of the orbital slots include:
|
i)
|
the market penetration leading
to revenue growth;
|
|
iii)
|
the duration and profile
of the build-up period;
|
|
iv)
|
the estimated start-up costs
and losses incurred during the build-up period; and
|
Fair
value less costs of disposal is the price that would be received to sell an asset in an orderly transaction between market participants
at the measurement date. In order to determine the fair value less costs of disposal, the Company uses either a market or income
approach. Under a market approach, the Company measures what an independent third party would pay to purchase the orbital slot
by looking to actual market transactions for similar assets. Under an income approach, the fair value is determined to be the
sum of the projected discounted cash flows over a discrete period of time in addition to the terminal value.
The
value in use amount is the present value of the future cash flows expected to be derived from the asset. The determination of
this amount includes projections of cash inflows from the continuing use of the asset and cash outflows that are required to generate
the associated cash inflows. These cash inflows are discounted at an appropriate discount rate.
Goodwill
In
performing the goodwill impairment analysis, the Company assesses the recoverable amount of goodwill using the income approach
as well as the market approach in the determination of the fair value of goodwill at the entity level.
Under
the income approach, the sum of the projected discounted cash flows for the next five years, or a longer period if justified by
the most recent financial plan approved by management, in addition to a terminal value are used to determine the fair value at
the entity level. In this model, significant assumptions used include: revenue, expenses, capital expenditures, working capital,
costs of disposal, terminal growth rate and discount rate.
Under
the market approach, the fair value at the entity level is determined based on market multiples derived from comparable public
companies. As part of this analysis, assumptions are made regarding the comparability of selected companies including revenue,
earnings before interest, taxes, depreciation and amortization multiples for valuation purposes, growth rates, size and overall
profitability.
Under
both approaches, all assumptions used are based on management’s best estimates. The discount rates are consistent with external
sources of information.
Trade
Name
For
the purposes of impairment testing, the fair value of the trade name is determined using an income approach, specifically the
relief from royalties method.
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
4.
SIGNIFICANT ACCOUNTING POLICIES – (continued)
The
relief from royalties method is comprised of two major steps:
|
i)
|
a determination of the hypothetical
royalty rate; and
|
|
ii)
|
the subsequent application
of the royalty rate to projected revenue.
|
In
determining the hypothetical royalty rate in the relief from royalties method, the Company considered comparable license agreements,
operating earnings benchmarks, an excess earnings analysis to determine aggregate intangible asset earnings, and other qualitative
factors. The key assumptions used include the tax and discount rates.
Intellectual
Property
In
performing the intellectual property impairment analysis, the Company determines its fair value less costs of disposal, and its
value in use on an annual basis. The higher of these two amounts is determined to be the recoverable amount. To the extent that
the recoverable amount is less than the carrying value of the asset, an impairment exists and the asset is written down to its
recoverable amount.
The
Company measures value in use on the basis of the estimated future cash flows to be generated by an asset. These future cash flows
are based on the Company’s latest business plan information approved by senior management and are discounted using rates
that best reflect the time value of money and the specific risks associated with the underlying asset.
Fair
value less costs of disposal is the price that would be received to sell an asset in an orderly transaction between market participants
at the measurement date. In order to determine the fair value less costs of disposal, the Company uses a market approach. Under
a market approach, the Company measures what an independent third party would pay to purchase the intellectual property.
Financial
Instruments
The
Company has used derivative financial instruments to manage its exposure to foreign exchange risk associated with debt denominated
in foreign currencies, as well as to reduce its exposure to interest rate risk associated with debt. Currently, the Company does
not designate any of its derivative financial instruments as hedging instruments for accounting purposes. All realized and unrealized
gains and losses on these derivative financial instruments are recorded in the consolidated statement of income (loss) as part
of gain on changes in fair value of financial instruments.
Financial
assets and financial liabilities that are classified as held-for-trading (“HFT”) are measured at fair value. The unrealized
gains and losses relating to HFT assets and liabilities are recorded in the consolidated statement of income (loss) in the gain
on changes in fair value of financial instruments. Loans and receivables and other liabilities are recorded at amortized cost
in accordance with the effective interest method.
Derivatives,
including embedded derivatives that must be separately accounted for, are recorded at fair value on the consolidated balance sheet
at inception and marked to market at each reporting period thereafter. Derivatives embedded in other financial instruments are
treated as separate derivatives when their risk and characteristics are not closely related to those of the host contract and
the host contract is measured separately according to its characteristics. The Company accounts for embedded foreign currency
derivatives and the related host contract as a single instrument where the contract requires payments denominated in the currency
that is commonly used in contracts to procure non-financial items in the economic environment in which the Company transacts.
Transaction
costs for financial instruments classified as HFT are expensed as incurred. Transaction costs that are directly attributable to
the acquisition of the financial assets and financial liabilities (other than HFT) are added or deducted from the fair value of
the financial asset and financial liability on initial recognition.
Financing
Costs
The
debt issuance costs related to the Senior Secured Credit Facility and the Senior Notes are included in current and long-term indebtedness
and are amortized to interest expense using the effective interest method. All other debt issuance costs are accounted for as
short-term and long-term deferred charges and are included in prepaid expenses and other current assets and other long-term assets.
The deferred charges are amortized to interest expense on a straight-line basis over the term of the indebtedness to which they
relate.
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
4.
SIGNIFICANT ACCOUNTING POLICIES – (continued)
Employee
Benefit Plans
Telesat
maintains one contributory and three non-contributory defined benefit pension plans which provide benefits based on length of
service and rate of pay. Two of these defined-benefit plans were closed to new members in 2013. Telesat is responsible for adequately
funding the defined benefit pension plans. Contributions are made based on actuarial cost methods that are permitted by pension
regulatory bodies and reflect assumptions about future investment returns, salary projections and future service benefits. Telesat
also provides other post-employment and retirement benefits, including health care and life insurance benefits on retirement and
various disability plans, worker’s compensation and medical benefits to former or inactive employees, their beneficiaries
and covered dependents, after employment but before retirement, under certain circumstances. In addition, Telesat provides defined
contribution pension plans, under certain circumstances, for employees who are not eligible for the defined benefit pension plans.
Costs for defined contribution pension plans are recognized as an expense during the year in which the employees have rendered
service entitling them to the Company’s contribution.
The
Company accrues the present value of its obligations under employee benefit plans and the related costs reduced by the fair value
of plan assets. Pension costs and other retirement benefits are determined using the projected unit credit method prorated on
service and management’s best estimate of expected investment performance, salary escalation, retirement ages of employees
and expected health care costs.
Pension
plan assets are valued at fair value. The discount rate is based on the market interest rate of high quality bonds and is consistent
with guidance described by the Canadian Institute of Actuaries in an Educational note dated September 2011 and as adjusted by
the Update on the Accounting Discount Rate Assumption for Pension and Post-employment Benefit Plans published in November 2016
by the Canadian Institute of Actuaries. Past service costs arising from plan amendments are recognized immediately to the extent
that the benefits are already vested, and otherwise are amortized on a straight-line basis over the average remaining vesting
period. A valuation is performed at least every three years to determine the present value of the accrued pension and other retirement
benefits.
Remeasurements
arising from defined benefit pension plans comprise actuarial gains and losses and the return on plan assets (excluding interest).
Telesat recognizes them immediately in other comprehensive income (loss), which is included in accumulated earnings, in the year
in which they occur.
The
current service costs and administration fees not related to asset management are included in operating expenses. The net interest
expense (income) on the net defined benefit liability (asset) for the period is calculated by applying the discount rate used
to measure the defined benefit obligation at the beginning of the year to the net defined benefit liability (asset) at the beginning
of the year while taking into account any changes in the net defined benefit liability (asset) during the year as a result of
contributions and benefit payments. The net interest expense (income) is included in interest expense.
The
pension expense for 2017 was determined based on membership data as at December 31, 2015. The accrued benefit obligation as
at December 31, 2017 was determined based on the membership data as at December 31, 2016, and extrapolated one year based on
December 31, 2017 assumptions. For certain Canadian post-retirement benefits, the expense and accrued benefit obligations for
2017 was based on membership and eligibility data as at September 30, 2016. For certain American post-retirement benefits,
the expense for 2017 was based on membership and eligibility data as at January 1, 2017. The accrued benefit obligation for
certain American post-retirement benefits as at December 31, 2017 was determined based on membership data as at January 1,
2017, and extrapolated, based on December 31, 2017 assumptions. The most recent valuation of the pension plans for funding
purposes was as of December 31, 2016. Valuations will be performed for both pension plans as of December 31, 2017.
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
4.
SIGNIFICANT ACCOUNTING POLICIES – (continued)
Telesat
also provides health care and life insurance benefits for certain retired employees. These benefits are funded primarily on a
pay-as-you-go basis, with the retiree paying a portion of the cost through contributions, deductibles and co-insurance provisions.
Commencing in 2015, as a result of an amendment to one of the plans, Telesat has contributed to a health reimbursement account
instead of providing the health care and life insurance benefits directly to certain retired employees.
Share-Based
Compensation Plans
The
Company offers an equity-settled share-based compensation plans for certain key employees under which it receives services from
employees in exchange for equity instruments of the Company. The expense is based on the fair value of the awards granted using
the Black-Scholes option pricing model. The expense is recognized over the vesting period, which is the period over which all
of the specified vesting conditions are satisfied, with a corresponding increase in equity. For awards with graded vesting, the
fair value of each tranche is recognized over the respective vesting period.
Income
Taxes
Income
tax expense, comprised of current and deferred income tax, is recognized in income except to the extent it relates to items recognized
in other comprehensive income (loss) or equity, in which case the income tax expense is recognized in other comprehensive income
(loss) or equity, respectively.
Current
income tax is measured at the amount expected to be paid to the taxation authorities, net of recoveries, based on the tax rates
and laws enacted or substantively enacted as at the balance sheet date.
Deferred
taxes are the result of temporary differences arising between the tax bases of assets and liabilities and their carrying amount.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period when the asset is realized
or the liability is settled, based on tax rates and laws that have been enacted or substantively enacted at the balance sheet
date. Deferred tax assets are recognized for all deductible temporary differences to the extent that it is probable that taxable
profit will be available against which the deductible temporary difference can be utilized.
The
carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable
that the deferred tax assets will be realized. Unrecognized deferred tax assets are reassessed at each balance sheet date and
recognized to the extent that it has become probable that future taxable profit will allow the deferred tax assets to be recovered.
Deferred
tax assets are netted against the deferred tax liabilities when they relate to income taxes levied by the same taxation authority
on either:
|
i)
|
the same taxable entity;
or
|
|
ii)
|
different taxable entities
which intend to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities
simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be
settled or recovered.
|
Deferred
tax liabilities are recognized for all taxable temporary differences except when the deferred tax liability arises from the initial
recognition of goodwill or the initial recognition of an asset or liability in a transaction which is not a business combination.
For taxable temporary differences associated with investments in subsidiaries, a deferred tax liability is recognized unless the
parent can control the timing of the reversal of the temporary difference and it is probable that the temporary difference will
not reverse in the foreseeable future.
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
4.
SIGNIFICANT ACCOUNTING POLICIES – (continued)
Future
Changes in Accounting Policies
The
IASB periodically issues new and amended accounting standards. The new and amended standards determined to be applicable to the
Company are disclosed below. The remaining new and amended standards have been excluded as they are not applicable.
Revenue
IFRS
15,
Revenue from Contracts with Customers
(“IFRS 15”) was issued by the IASB in May 2014, and will
replace IAS 18,
Revenue
, IAS 11,
Construction Contracts
, and related interpretations on revenue. IFRS
15 sets out the requirements for recognizing revenue that apply to all contracts with customers, except for contracts that are
within the scope of the standards on leases, insurance contracts and financial instruments. IFRS 15 uses a control based approach
to recognize revenue which is a change from the risk and reward approach under the current revenue standard. Companies can elect
to use either a full or modified retrospective approach when adopting this standard which is effective for annual periods beginning
on or after January 1, 2018. The Company has elected to use a modified retrospective approach when adopting this standard.
Based
on the evaluations to date, the Company has identified the following areas that will be affected:
|
·
|
A
material amount will be required to be recognized relating to the promised amount of
consideration for effects of the time value of money for prepayment on less than ten
contracts with a significant financing component. Telesat anticipates that this will
result in an increase to deferred revenue, a decrease to deferred tax liabilities and
a decrease to accumulated earnings on January 1, 2018. Going forward, this change will
result in a higher amount of annual revenue being recognized and a higher amount of interest
expense being recorded and an immaterial impact on net income.
|
|
·
|
Based
upon the analysis performed, for certain contracts it appears that Telesat would be considered
as an agent in the arrangement as opposed to the principal. This will result in a reclassification
between revenue and operating expenses, which will decrease both revenue and operating
expenses in future years. There is no impact on net income as a result of this change.
|
|
·
|
Additional
disclosures will be required as a result of the new standard.
|
The Company has not yet
finalized the quantification of the above noted impacts of this adoption as it continues to evaluate the impact of IFRS 15 and
emerging guidance.
Financial instruments
IFRS 9,
Financial
Instruments
(“IFRS 9”) was issued by the IASB in July 2014, and will replace IAS 39,
Financial Instruments:
Recognition and Measurement
(“IAS 39”). IFRS 9 uses a single approach to determine whether a financial asset
is measured at amortized cost or fair value, replacing multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity
manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial
assets. Impairments of financial assets are determined using a single impairment model that requires entities to recognize expected
credit losses without requiring a triggering event to occur. Financial liabilities are measured using one of three measurement
approaches (fair value through profit or loss (“FVTPL”), fair value through other comprehensive income (“FVTOCI”),
or amortized cost). Financial liabilities that are held-for-trading are measured at FVTPL, financial liabilities that are considered
available for sale are measured at FVTOCI unless the FVTPL option is elected, while all other financial liabilities are measured
at amortized cost unless the fair value option is elected. The treatment of embedded derivatives under the new standard is consistent
with IAS 39.
This standard is effective
for annual periods beginning on or after January 1, 2018. Based on the evaluations to date, the Company has identified the following
area which will be affected:
|
·
|
An
amount will be required to be recognized relating to the repricing of the Term Loan B
— U.S. Facility which reduced the applicable margin from 3.75% to 3.00% on February
1, 2017. Telesat estimates that the indebtedness will decrease, deferred tax liabilities
will increase and accumulated earnings will increase as a result of IFRS 9 on January
1, 2018. Going forward, this change will result in immaterial higher annual interest
expense being recorded.
|
The Company has not yet
finalized the quantification of the above noted impacts of this adoption as it continues to evaluate the impact of the changes
to IFRS 9 and emerging guidance.
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
4.
SIGNIFICANT ACCOUNTING POLICIES – (continued)
Leases
IFRS
16,
Leases
(“IFRS 16”) was issued by the IASB in January 2016, and will replace IAS 17,
Leases
and related
interpretations on leases. IFRS 16 will require a lessee to recognize a right-of-use asset and lease liability for all leases
with a term of more than 12 months. The standard will also require that the depreciation of the lease assets be recorded separately
from the interest on the lease liabilities in the statement of income. For lessors, IFRS 16 substantially carries forward the
requirements of IAS 17. IFRS 16 also aligns the definition of a lease with the control based approach in IFRS 15.
Companies
can elect to use either a retrospective approach with a restatement of comparative information or a retrospective approach with
the cumulative effect of initial application shown in retained earnings instead of the restatement of the comparative information.
This standard is effective for annual periods beginning on or after January 1, 2019. The Company is currently evaluating the impact
of IFRS 16 on its consolidated financial statements.
Share-based
payments
In
June 2016, amendments were issued by the IASB for IFRS 2,
Share-based Payments
. These amendments clarify the accounting
treatment and disclosure requirements for certain types of share-based payment transactions, including cash settled share-based
payment transactions, share-based payment transactions with a net settlement feature for withholding tax obligations, as well
as modifications of share-based payment transactions from cash settled to equity settled. These amendments are effective for annual
periods beginning on or after January 1, 2018. The Company does not anticipate that the amendment to this standard will have a
material impact on the consolidated financial statements.
Income
taxes
IFRIC
23,
Uncertainty over Income Taxes Treatments
was issued by the IASB in June 2017. The interpretation clarifies how to apply
the recognition and measurement requirements in IAS 12,
Income Taxes
when there is uncertainty over income tax treatments.
This interpretation is effective for annual reporting periods beginning on or after January 1, 2019. The Company is currently
evaluating the impact of this interpretation on its consolidated financial statements.
5.
CRITICAL ACCOUNTING JUDGMENTS AND ESTIMATES
Critical
judgments in applying accounting policies
The
following are the critical judgments made in applying the Company’s accounting policies which have the most significant
effect on the amounts reported in the financial statements:
Revenue
recognition
The
Company’s accounting policy relating to revenue recognition is described in Note 4. The percentage of completion method
is used for fixed price consulting revenue contracts and requires judgment by management to accurately determine costs incurred
and costs required to complete contracts.
Uncertain
income tax positions
The
Company operates in numerous jurisdictions and is subject to country-specific tax laws. Management uses significant judgment when
determining the worldwide provision for tax, and estimates provisions for uncertain tax positions as the amounts expected to be
paid based on a qualitative assessment of all relevant factors. In the assessment, management considers risk with respect to tax
matters under active discussion, audit, dispute or appeal with tax authorities, or which are otherwise considered to involve uncertainty.
Management reviews the provisions as at each balance sheet date.
Determining
whether an arrangement contains a lease
Management
uses significant judgment in assessing whether each new arrangement contains a lease based on IFRIC 4. The determination of whether
an arrangement is, or contains a lease, is based on the substance of the arrangement at inception date, and whether the fulfillment
of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.
If contracts contain a lease arrangement, the leases are classified as finance leases whenever the terms of the lease transfer
substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
5.
CRITICAL ACCOUNTING JUDGMENTS AND ESTIMATES – (continued)
Critical
accounting estimates and assumptions
The
Company makes accounting estimates and assumptions that affect the carrying value of assets and liabilities, reported net income
(loss) and disclosure of contingent assets and liabilities. Estimates and assumptions are based on historical experience, current
events and other relevant factors, therefore, actual results may differ and differences could be material.
The
accounting estimates and assumptions critical to the determination of the amounts reported in the financial statements were as
follows:
Derivative
financial instruments measured at fair value
Derivative
financial assets and liabilities measured at fair value were $64.9 million and $5.5 million, respectively, as at December 31,
2017 (December 31, 2016 — $14.9 million and $14.7 million, respectively).
Quoted
market values are unavailable for the Company’s financial instruments and, in the absence of an active market, the Company
determines fair value for financial instruments based on prevailing market rates (bid and ask prices, as appropriate) for instruments
with similar characteristics and risk profiles or internal or external valuation models, such as option pricing models and discounted
cash flow analysis, using observable market-based inputs. The determination of fair value is significantly impacted by the assumptions
used for the amount and timing of estimated future cash flows and discount rates. As a result, the fair value of financial assets
and liabilities and the amount of gain on changes in fair value of financial instruments recorded to net income (loss) could vary.
Impairment
of goodwill
Goodwill
represented $2,446.6 million of total assets as at December 31, 2017 and 2016. Determining whether goodwill is impaired requires
an estimation of the Company’s value which requires management to estimate the future cash flows expected to arise from
operations and to make assumptions regarding economic factors, tax rates and annual growth rates. Actual operating results and
the related cash flows of the Company could differ from the estimates used for the impairment analysis.
Impairment
of intangible assets
Intangible
assets represented $813.0 million of total assets as at December 31, 2017 (December 31, 2016 — $832.5 million).
Impairment of intangible assets is tested annually or more frequently if indicators of impairment or reversal of a prior impairment
loss exist. The impairment analysis requires the Company to estimate the future cash flows expected to arise from operations and
to make assumptions regarding economic factors, discount rates, tax rates and annual growth rates. Significant judgments are made
in establishing these assumptions. Actual operating results and the related cash flows of the Company could differ from the estimates
used for the impairment analysis.
Employee
benefits
The
cost of defined benefit pension plans and other post-employment benefits, and the present value of the pension obligation are
determined using actuarial valuations. An actuarial valuation involves making various assumptions which may differ from actual
developments in the future. These include the determination of the discount rate, future salary increases, mortality rates, future
pension increases and return on plan assets. Due to the complexity of the valuation, the underlying assumptions, and its long-term
nature, the defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed annually.
Determination
of useful life of satellites and finite life intangible assets
The
estimated useful life and depreciation method for satellites and finite life intangible assets are reviewed annually, with the
effect of any changes in estimate being accounted for on a prospective basis. Any change in these estimates may have a significant
impact on the amounts reported.
Income
taxes
Management
assesses the recoverability of deferred tax assets based upon an estimation of the Company’s projected taxable income using
enacted or substantially enacted tax laws, and its ability to utilize future tax deductions before they expire. Actual results
could differ from expectations.
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
6.
SEGMENT INFORMATION
Telesat
operates in a single reportable industry segment, in which it provides satellite-based services to its broadcast, enterprise and
consulting customers around the world.
The
Company derives revenue from the following services:
|
●
|
Broadcast
— Direct-to-home
television, video distribution and contribution, and occasional use services.
|
|
●
|
Enterprise
— Telecommunication
carrier and integrator, government, consumer broadband, resource, maritime and aeronautical, retail and satellite operator
services.
|
|
●
|
Consulting and other
— Consulting services related to space and earth segments, government studies, satellite control services,
and research and development.
|
Revenue
derived from the above services were as follows:
Years ended December 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Broadcast
|
|
$
|
472,751
|
|
|
$
|
486,434
|
|
|
$
|
492,633
|
|
Enterprise
|
|
|
430,343
|
|
|
|
420,138
|
|
|
|
434,555
|
|
Consulting and other
|
|
|
24,313
|
|
|
|
24,282
|
|
|
|
27,719
|
|
Revenue
|
|
$
|
927,407
|
|
|
$
|
930,854
|
|
|
$
|
954,907
|
|
Geographic
Information
Revenue
by geographic regions was based on the point of origin of the revenue, which was the destination of the billing invoice, and was
allocated as follows:
Years ended December 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Canada
|
|
$
|
415,575
|
|
|
$
|
426,193
|
|
|
$
|
431,005
|
|
United States
|
|
|
311,159
|
|
|
|
319,473
|
|
|
|
322,679
|
|
Europe, Middle East & Africa
|
|
|
80,532
|
|
|
|
64,624
|
|
|
|
84,877
|
|
Latin America & Caribbean
|
|
|
78,921
|
|
|
|
83,244
|
|
|
|
88,794
|
|
Asia & Australia
|
|
|
41,220
|
|
|
|
37,320
|
|
|
|
27,552
|
|
Revenue
|
|
$
|
927,407
|
|
|
$
|
930,854
|
|
|
$
|
954,907
|
|
The
Company’s satellites are in geosynchronous orbit. For disclosure purposes, the satellites, and the intangible assets have
been classified based on ownership. Satellites, property and other equipment, and intangible assets by geographic regions were
allocated as follows:
As at December 31,
|
|
2017
|
|
|
2016
|
|
Canada
|
|
$
|
976,349
|
|
|
$
|
1,152,337
|
|
Europe, Middle East & Africa
|
|
|
693,903
|
|
|
|
620,219
|
|
United States
|
|
|
118,512
|
|
|
|
139,064
|
|
All others
|
|
|
3,083
|
|
|
|
3,791
|
|
Satellites, property and other equipment
|
|
$
|
1,791,847
|
|
|
$
|
1,915,411
|
|
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except
where otherwise noted)
6.
SEGMENT INFORMATION – (continued)
As at December 31,
|
|
2017
|
|
|
2016
|
|
Canada
|
|
$
|
734,061
|
|
|
$
|
744,150
|
|
United States
|
|
|
39,190
|
|
|
|
42,471
|
|
Latin America & Caribbean
|
|
|
30,510
|
|
|
|
35,736
|
|
All others
|
|
|
9,234
|
|
|
|
10,155
|
|
Intangible assets
|
|
$
|
812,995
|
|
|
$
|
832,512
|
|
Other
long-term financial assets and other long-term assets by geographic regions were allocated as follows:
As at December 31,
|
|
2017
|
|
|
2016
|
|
Canada
|
|
$
|
72,395
|
|
|
$
|
25,176
|
|
Europe, Middle East & Africa
|
|
|
8,059
|
|
|
|
8,764
|
|
All others
|
|
|
3,077
|
|
|
|
1,747
|
|
Other long-term financial assets
|
|
$
|
83,531
|
|
|
$
|
35,687
|
|
As at December 31
|
|
2017
|
|
|
2016
|
|
Canada
|
|
$
|
2,885
|
|
|
$
|
3,372
|
|
Europe, Middle East & Africa
|
|
|
171
|
|
|
|
443
|
|
Other long-term assets
|
|
$
|
3,056
|
|
|
$
|
3,815
|
|
Goodwill
was not allocated to geographic regions.
Major
Customers
For
the years ended December 31, 2017, 2016 and 2015, there were three significant customers each representing more than 10% of consolidated
revenue.
7.
OPERATING EXPENSES
Years ended December 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Compensation and employee benefits
(a)
|
|
$
|
85,135
|
|
|
$
|
71,841
|
|
|
$
|
65,819
|
|
Other operating expenses
(b)
|
|
|
42,895
|
|
|
|
39,359
|
|
|
|
41,947
|
|
Cost of sales
(c)
|
|
|
59,657
|
|
|
|
63,723
|
|
|
|
76,513
|
|
Operating expenses
|
|
$
|
187,687
|
|
|
$
|
174,923
|
|
|
$
|
184,279
|
|
|
(a)
|
Compensation and employee
benefits included salaries, bonuses, commissions, post-employment benefits and charges arising from share-based compensation.
The balance for the year ended December 31, 2017 included $14.2 million of expenses associated with a special payment to stock
option holders, including associated benefit expenses. There were no expenses for the special payment recognized in the year
ended December 31, 2016 and 2015.
|
|
(b)
|
Other operating expenses
included general and administrative expenses, marketing expenses, in-orbit insurance expenses, professional fees and facility
costs.
|
|
(c)
|
Cost of sales included the
cost of third-party satellite capacity, the cost of equipment sales and other costs directly attributable to fulfilling the
Company’s obligations under customer contracts.
|
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
8.
OTHER OPERATING GAINS (LOSSES), NET
Years ended December 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Insurance proceeds
|
|
$
|
6,171
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Loss on disposal of assets
|
|
|
(269
|
)
|
|
|
(2,565
|
)
|
|
|
(30
|
)
|
Other operating gains (losses), net
|
|
$
|
5,902
|
|
|
$
|
(2,565
|
)
|
|
$
|
(30
|
)
|
9.
INTEREST EXPENSE
Years ended December 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Interest on indebtedness
|
|
$
|
209,136
|
|
|
$
|
195,523
|
|
|
$
|
182,506
|
|
Interest on derivative instruments
|
|
|
3,071
|
|
|
|
2,303
|
|
|
|
3,721
|
|
Interest on satellite performance incentive payments
|
|
|
4,750
|
|
|
|
5,548
|
|
|
|
4,362
|
|
Interest on employee benefit plans (Note 29)
|
|
|
1,511
|
|
|
|
1,733
|
|
|
|
1,976
|
|
Capitalized interest (Note 16)
|
|
|
(18,324
|
)
|
|
|
(6,292
|
)
|
|
|
(9,268
|
)
|
Interest expense
|
|
$
|
200,144
|
|
|
$
|
198,815
|
|
|
$
|
183,297
|
|
10.
INCOME TAXES
Years ended December 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Current tax expense
|
|
$
|
111,510
|
|
|
$
|
75,634
|
|
|
$
|
111,579
|
|
Deferred tax (recovery) expense
|
|
|
(31,265
|
)
|
|
|
8,272
|
|
|
|
(22,850
|
)
|
Tax expense
|
|
$
|
80,245
|
|
|
$
|
83,906
|
|
|
$
|
88,729
|
|
A
reconciliation of the statutory income tax rate, which is a composite of Canadian federal and provincial rates, to the effective
income tax rate was as follows:
Year ended December 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Income (loss) before tax
|
|
$
|
585,298
|
|
|
$
|
376,806
|
|
|
$
|
(178,210
|
)
|
Multiplied by the statutory income tax rates
|
|
|
26.60
|
%
|
|
|
26.61
|
%
|
|
|
26.53
|
%
|
|
|
|
155,689
|
|
|
|
100,268
|
|
|
|
(47,279
|
)
|
Income tax recorded at rates different from the Canadian tax rate
|
|
|
309
|
|
|
|
(6,410
|
)
|
|
|
1,887
|
|
Permanent differences
|
|
|
(46,383
|
)
|
|
|
15,594
|
|
|
|
62,025
|
|
Effect on deferred tax balances due to changes in income tax rates
|
|
|
(2,120
|
)
|
|
|
(140
|
)
|
|
|
1,554
|
|
Effect of temporary differences not recognized as deferred tax assets
|
|
|
(25,789
|
)
|
|
|
(27,286
|
)
|
|
|
76,009
|
|
Previously unrecognized tax losses and credits
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,392
|
)
|
Other
|
|
|
(1,461
|
)
|
|
|
1,880
|
|
|
|
(1,075
|
)
|
Tax expense
|
|
$
|
80,245
|
|
|
$
|
83,906
|
|
|
$
|
88,729
|
|
Effective income tax rate
|
|
|
13.71
|
%
|
|
|
22.27
|
%
|
|
|
(49.79
|
)%
|
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
10.
INCOME TAXES – (continued)
The
tax effects of temporary differences between the carrying amounts of assets and liabilities for accounting purposes and the amounts
used for tax purposes are presented below:
As at December 31,
|
|
2017
|
|
|
2016
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Foreign tax credits
|
|
$
|
8,639
|
|
|
$
|
11,447
|
|
Minimum tax credits
|
|
|
—
|
|
|
|
1,462
|
|
Financing charges
|
|
|
17,013
|
|
|
|
9,349
|
|
Deferred revenue
|
|
|
1,879
|
|
|
|
—
|
|
Loss carry forwards
|
|
|
52,911
|
|
|
|
23,873
|
|
Employee benefits
|
|
|
10,430
|
|
|
|
10,084
|
|
Other
|
|
|
13
|
|
|
|
250
|
|
Total deferred tax assets
|
|
$
|
90,885
|
|
|
$
|
56,465
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Capital assets
|
|
$
|
(244,569
|
)
|
|
$
|
(271,442
|
)
|
Intangibles
|
|
|
(241,731
|
)
|
|
|
(238,908
|
)
|
Finance charges
|
|
|
(17,889
|
)
|
|
|
(9,943
|
)
|
Unrealized foreign exchange gains
|
|
|
(27,193
|
)
|
|
|
(2,327
|
)
|
Deferred revenue
|
|
|
—
|
|
|
|
(2,234
|
)
|
Total deferred tax liabilities
|
|
$
|
(531,382
|
)
|
|
$
|
(524,854
|
)
|
Deferred tax liabilities, net
|
|
$
|
(440,497
|
)
|
|
$
|
(468,389
|
)
|
Deferred
tax assets of $4.6 million (December 31, 2016 — $2.8 million) on the balance sheet relate to the Brazil and United
Kingdom tax jurisdictions.
Losses
and tax credits
Foreign
tax credit
The
Company has $9.4 million of foreign tax credits which may only be used to offset taxes payable. The deferred tax assets not recognized
in respect of these credits was $0.8 million. These credits will begin to expire in 2018.
Loss
carry forwards
The
Company has Canadian capital losses carried forward of $647.4 million, with no expiration date. Of this total, $208.9 million
are considered more likely than not to be realized, resulting in a recognized deferred tax asset of $27.8 million.
The
Company has tax losses carried forward of $2.6 million in Brazil. The Company also has tax losses in the United Kingdom of $142.5
million, principally related to accelerated asset depreciation that can be carried forward indefinitely.
Investments
in subsidiaries
As
at December 31, 2017, the Company had temporary differences of $1.7 million associated with investments in subsidiaries for which
no deferred tax liabilities have been recognized, as the Company is able to control the timing of the reversal of these temporary
differences and it is not probable that these differences will reverse in the foreseeable future.
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
11.
TRADE AND OTHER RECEIVABLES
|
|
|
|
|
|
|
As at December 31,
|
|
2017
|
|
|
2016
|
|
Trade receivables
|
|
$
|
61,177
|
|
|
$
|
51,480
|
|
Trade receivables due from related parties (Note 33)
|
|
|
82
|
|
|
|
77
|
|
Less: Allowance for doubtful accounts
|
|
|
(2,662
|
)
|
|
|
(3,514
|
)
|
Net trade receivables
|
|
|
58,597
|
|
|
|
48,043
|
|
Other receivables
|
|
|
6,389
|
|
|
|
7,847
|
|
Other receivables due from related parties (Note 33)
|
|
|
—
|
|
|
|
(251
|
)
|
Trade and other receivables
|
|
$
|
64,986
|
|
|
$
|
55,639
|
|
Allowance
for doubtful accounts
The
movement in the allowance for doubtful accounts was as follows:
|
|
|
|
|
|
|
Years ended December 31,
|
|
2017
|
|
|
2016
|
|
Allowance for doubtful accounts, beginning of year
|
|
$
|
3,514
|
|
|
$
|
3,779
|
|
(Reversals) provisions for impaired receivables
|
|
|
(110
|
)
|
|
|
201
|
|
Receivables written off
|
|
|
(586
|
)
|
|
|
(628
|
)
|
Impact of foreign exchange
|
|
|
(156
|
)
|
|
|
162
|
|
Allowance for doubtful accounts, end of year
|
|
$
|
2,662
|
|
|
$
|
3,514
|
|
12.
OTHER CURRENT FINANCIAL ASSETS
|
|
|
|
|
|
|
As at December 31,
|
|
2017
|
|
|
2016
|
|
Security deposits
|
|
$
|
2,275
|
|
|
$
|
2,548
|
|
Derivative assets (Note 27)
|
|
|
162
|
|
|
|
—
|
|
Other current financial assets
|
|
$
|
2,437
|
|
|
$
|
2,548
|
|
13.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
|
|
|
|
|
|
|
As at December 31,
|
|
2017
|
|
|
2016
|
|
Prepaid expenses
(a)
|
|
$
|
3,848
|
|
|
$
|
4,534
|
|
Income tax recoverable
|
|
|
945
|
|
|
|
51,799
|
|
Inventory
(b)
|
|
|
2,998
|
|
|
|
3,917
|
|
Deferred charges
(c)
|
|
|
543
|
|
|
|
603
|
|
Other
|
|
|
169
|
|
|
|
254
|
|
Prepaid expenses and other current assets
|
|
$
|
8,503
|
|
|
$
|
61,107
|
|
|
(a)
|
Prepaid expenses were primarily
comprised of prepaid satellite in-orbit insurance, prepaid general liability insurance and prepaid license fees.
|
|
(b)
|
As at December 31, 2017,
inventory consisted of $2.3 million of finished goods (December 31, 2016 — $3.3 million) and $0.7 million
of work in process (December 31, 2016 — $0.6 million). During the year, $11.7 million was recognized as cost
of equipment sales and recorded as an operating expense (December 31, 2016 — $9.8 million, December 31, 2015 — $13.1
million).
|
|
(c)
|
Deferred charges included
deferred financing charges relating to the Revolving Credit Facility.
|
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
14.
OTHER LONG-TERM FINANCIAL ASSETS
|
|
|
|
|
|
|
As at December 31,
|
|
2017
|
|
|
2016
|
|
Long-term receivables
|
|
$
|
12,898
|
|
|
$
|
14,453
|
|
Security deposits
|
|
|
5,910
|
|
|
|
6,303
|
|
Derivative assets (Note 27)
|
|
|
64,723
|
|
|
|
14,931
|
|
Other long-term financial assets
|
|
$
|
83,531
|
|
|
$
|
35,687
|
|
15.
OTHER LONG-TERM ASSETS
|
|
|
|
|
|
|
As at December 31,
|
|
2017
|
|
|
2016
|
|
Prepaid expenses
|
|
$
|
245
|
|
|
$
|
645
|
|
Deferred charges
|
|
|
1,153
|
|
|
|
1,512
|
|
Income tax recoverable
|
|
|
1,356
|
|
|
|
1,356
|
|
Other
|
|
|
302
|
|
|
|
302
|
|
Other long-term assets
|
|
$
|
3,056
|
|
|
$
|
3,815
|
|
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
16.
SATELLITES, PROPERTY AND OTHER EQUIPMENT
|
|
Satellites
|
|
|
Property
and other
equipment
|
|
|
Assets under
construction
|
|
|
Total
|
|
Cost as at January 1, 2016
|
|
$
|
3,213,581
|
|
|
$
|
233,675
|
|
|
$
|
48,057
|
|
|
$
|
3,495,313
|
|
Additions
|
|
|
—
|
|
|
|
1,736
|
|
|
|
227,222
|
|
|
|
228,958
|
|
Disposals/retirements
|
|
|
—
|
|
|
|
(12,100
|
)
|
|
|
—
|
|
|
|
(12,100
|
)
|
Reclassifications and transfers from assets under construction
|
|
|
—
|
|
|
|
6,130
|
|
|
|
(6,130
|
)
|
|
|
—
|
|
Impact of foreign exchange
|
|
|
(10,478
|
)
|
|
|
(233
|
)
|
|
|
1,619
|
|
|
|
(9,092
|
)
|
Cost as at December 31, 2016 and January 1, 2017
|
|
|
3,203,103
|
|
|
|
229,208
|
|
|
|
270,768
|
|
|
|
3,703,079
|
|
Additions
|
|
|
—
|
|
|
|
3,270
|
|
|
|
139,212
|
|
|
|
142,482
|
|
Disposals/retirements
|
|
|
—
|
|
|
|
(2,982
|
)
|
|
|
—
|
|
|
|
(2,982
|
)
|
Reclassifications and transfers from assets under construction
|
|
|
—
|
|
|
|
11,816
|
|
|
|
(11,816
|
)
|
|
|
—
|
|
Impact of foreign exchange
|
|
|
(22,925
|
)
|
|
|
(2,092
|
)
|
|
|
(21,199
|
)
|
|
|
(46,216
|
)
|
Cost as at December 31, 2017
|
|
$
|
3,180,178
|
|
|
|
239,220
|
|
|
|
376,965
|
|
|
|
3,796,363
|
|
Accumulated depreciation and impairment as at January 1, 2016
|
|
$
|
(1,438,995
|
)
|
|
$
|
(131,053
|
)
|
|
$
|
—
|
|
|
$
|
(1,570,048
|
)
|
Depreciation
|
|
|
(209,804
|
)
|
|
|
(14,969
|
)
|
|
|
—
|
|
|
|
(224,773
|
)
|
Disposals/retirements
|
|
|
—
|
|
|
|
9,535
|
|
|
|
—
|
|
|
|
9,535
|
|
Impact of foreign exchange
|
|
|
(2,522
|
)
|
|
|
140
|
|
|
|
—
|
|
|
|
(2,382
|
)
|
Accumulated depreciation and impairment as at December 31, 2016 and January 1, 2017
|
|
|
(1,651,321
|
)
|
|
|
(136,347
|
)
|
|
|
—
|
|
|
|
(1,787,668
|
)
|
Depreciation
|
|
|
(206,439
|
)
|
|
|
(14,619
|
)
|
|
|
—
|
|
|
|
(221,058
|
)
|
Disposals/retirements
|
|
|
—
|
|
|
|
2,564
|
|
|
|
—
|
|
|
|
2,564
|
|
Impact of foreign exchange
|
|
|
568
|
|
|
|
1,078
|
|
|
|
—
|
|
|
|
1,646
|
|
Accumulated depreciation and impairment as at December 31, 2017
|
|
$
|
(1,857,192
|
)
|
|
$
|
(147,324
|
)
|
|
$
|
—
|
|
|
$
|
(2,004,516
|
)
|
Net carrying values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2016
|
|
$
|
1,551,782
|
|
|
$
|
92,861
|
|
|
$
|
270,768
|
|
|
$
|
1,915,411
|
|
As at December 31, 2017
|
|
$
|
1,322,986
|
|
|
$
|
91,896
|
|
|
$
|
376,965
|
|
|
$
|
1,791,847
|
|
Substantially
all of the Company’s satellites, property and other equipment have been pledged as security as a requirement of the Company’s
Senior Secured Credit Facilities as at December 31, 2017 and 2016 (Note 24).
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
16.
SATELLITES, PROPERTY AND OTHER EQUIPMENT – (continued)
Borrowing
costs
Borrowing
costs of $18.3 million were capitalized for the year ended December 31, 2017 (December 31,
2016 — $6.3 million, December 31, 2015 — $9.3 million). The average capitalization rate was
5% (5% in 2016 and 2015), representing the Company’s weighted average cost of debt.
Of
the total capitalized borrowing costs, $1.2 million was capitalized to intangible assets for the year ended December 31, 2017
(December 31, 2016 — $0.3 million, December 31, 2015- $nil) with the remaining balance capitalized to satellites,
property and other equipment.
Impairment
No
impairment was recognized for the years ended December 31, 2017, 2016 and 2015.
Joint
arrangements
Telesat
International Limited (“TIL”) and APT entered into agreements relating to the Telstar 18 VANTAGE satellite currently
under construction, which are accounted for as a joint operation, whereby TIL’s interest is 42.5%. Telesat (IOM) Limited
(“TIOM”) and ViaSat Inc. entered into agreements relating to the ViaSat-1 satellite, which are accounted for as a
joint operation, whereby TIOM owns the Canadian payload on the ViaSat-1 Satellite.
17.
INTANGIBLE ASSETS
The
intangible assets are split between assets with finite and indefinite lives.
The
indefinite life intangible assets are summarized below.
|
|
Orbital
slots
|
|
|
Trade
name
|
|
|
Intellectual
property
|
|
|
Total
indefinite
life intangibles
|
|
Cost
as at January 1, 2016
|
|
$
|
610,611
|
|
|
$
|
17,000
|
|
|
$
|
—
|
|
|
$
|
627,611
|
|
Additions
|
|
|
—
|
|
|
|
—
|
|
|
|
13,161
|
|
|
|
13,161
|
|
Disposals/retirements
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Impact
of foreign exchange
|
|
|
(1,214
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,214
|
)
|
Cost
as at December 31, 2016 and January 1, 2017
|
|
|
609,397
|
|
|
|
17,000
|
|
|
|
13,161
|
|
|
|
639,558
|
|
Additions
|
|
|
—
|
|
|
|
—
|
|
|
|
12,577
|
|
|
|
12,577
|
|
Disposals/retirements
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Impact
of foreign exchange
|
|
|
(2,654
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,654
|
)
|
Cost
as at December 31, 2017
|
|
$
|
606,743
|
|
|
$
|
17,000
|
|
|
$
|
25,738
|
|
|
$
|
649,481
|
|
Accumulated
impairment as at January 1, 2016
|
|
$
|
(1,100
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1,100
|
)
|
Impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Accumulated
impairment as at December 31, 2016 and January 1, 2017
|
|
|
(1,100
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,100
|
)
|
Impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Accumulated
impairment as at December 31, 2017
|
|
$
|
(1,100
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1,100
|
)
|
Net
carrying values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
at December 31, 2016
|
|
$
|
608,297
|
|
|
$
|
17,000
|
|
|
$
|
13,161
|
|
|
$
|
638,458
|
|
As
at December 31, 2017
|
|
$
|
605,643
|
|
|
$
|
17,000
|
|
|
$
|
25,738
|
|
|
$
|
648,381
|
|
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
17.
INTANGIBLE ASSETS – (continued)
The
finite life intangible assets are summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
backlog
|
|
|
Customer
relationships
|
|
|
Customer
contracts
|
|
|
Transponder
rights
|
|
|
Concession
rights
|
|
|
Other
|
|
|
Total finite life
intangibles
|
|
Cost as at January 1, 2016
|
|
$
|
245,989
|
|
|
$
|
198,807
|
|
|
$
|
23,142
|
|
|
$
|
16,718
|
|
|
$
|
1,154
|
|
|
$
|
59
|
|
|
$
|
485,869
|
|
Additions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
31,479
|
|
|
|
—
|
|
|
|
31,479
|
|
Disposals/retirements
|
|
|
(9,974
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(9,974
|
)
|
Impact of foreign exchange
|
|
|
(119
|
)
|
|
|
(155
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
5,942
|
|
|
|
—
|
|
|
|
5,668
|
|
Cost as at December 31, 2016 and January 1, 2017
|
|
|
235,896
|
|
|
|
198,652
|
|
|
|
23,142
|
|
|
|
16,718
|
|
|
|
38,575
|
|
|
|
59
|
|
|
|
513,042
|
|
Additions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
155
|
|
|
|
—
|
|
|
|
155
|
|
Disposals/retirements
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
Impact of foreign exchange
|
|
|
(261
|
)
|
|
|
(337
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,140
|
)
|
|
|
—
|
|
|
|
(3,738
|
)
|
Cost as at December 31, 2017
|
|
$
|
235,635
|
|
|
$
|
198,314
|
|
|
$
|
23,142
|
|
|
$
|
16,718
|
|
|
$
|
35,590
|
|
|
$
|
59
|
|
|
$
|
509,458
|
|
Accumulated amortization and impairment as at January 1, 2016
|
|
$
|
(190,346
|
)
|
|
$
|
(97,422
|
)
|
|
$
|
(3,615
|
)
|
|
$
|
(9,093
|
)
|
|
$
|
(480
|
)
|
|
$
|
(27
|
)
|
|
$
|
(300,983
|
)
|
Amortization
|
|
|
(10,647
|
)
|
|
|
(11,437
|
)
|
|
|
(2,720
|
)
|
|
|
(924
|
)
|
|
|
(1,959
|
)
|
|
|
(3
|
)
|
|
|
(27,690
|
)
|
Disposals/retirements
|
|
|
9,974
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,974
|
|
Impact of foreign exchange
|
|
|
102
|
|
|
|
9
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(400
|
)
|
|
|
—
|
|
|
|
(289
|
)
|
Accumulated amortization and impairment as at December 31, 2016 and January 1, 2017
|
|
|
(190,917
|
)
|
|
|
(108,850
|
)
|
|
|
(6,335
|
)
|
|
|
(10,017
|
)
|
|
|
(2,839
|
)
|
|
|
(30
|
)
|
|
|
(318,988
|
)
|
Amortization
|
|
|
(8,749
|
)
|
|
|
(11,434
|
)
|
|
|
(2,890
|
)
|
|
|
(925
|
)
|
|
|
(2,329
|
)
|
|
|
(3
|
)
|
|
|
(26,330
|
)
|
Disposals/retirements
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
Impact of foreign exchange
|
|
|
243
|
|
|
|
141
|
|
|
|
—
|
|
|
|
—
|
|
|
|
89
|
|
|
|
—
|
|
|
|
473
|
|
Accumulated amortization and impairment as at December 31, 2017
|
|
$
|
(199,423
|
)
|
|
$
|
(120,142
|
)
|
|
$
|
(9,225
|
)
|
|
$
|
(10,942
|
)
|
|
$
|
(5,079
|
)
|
|
$
|
(33
|
)
|
|
$
|
(344,844
|
)
|
Net carrying values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2016
|
|
$
|
44,979
|
|
|
$
|
89,802
|
|
|
$
|
16,807
|
|
|
$
|
6,701
|
|
|
$
|
35,736
|
|
|
$
|
29
|
|
|
$
|
194,054
|
|
As at December 31, 2017
|
|
$
|
36,212
|
|
|
$
|
78,172
|
|
|
$
|
13,917
|
|
|
$
|
5,776
|
|
|
$
|
30,511
|
|
|
$
|
26
|
|
|
$
|
164,614
|
|
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
17.
INTANGIBLE ASSETS – (continued)
The
total combined indefinite and finite life intangible assets are summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2017
|
|
|
As at December 31, 2016
|
|
|
|
Cost
|
|
|
Accumulated
amortization
and impairment
|
|
|
Net carrying
value
|
|
|
Cost
|
|
|
Accumulated
amortization
and impairment
|
|
|
Net carrying
value
|
|
Indefinite life intangibles
|
|
$
|
649,481
|
|
|
$
|
(1,100
|
)
|
|
$
|
648,381
|
|
|
$
|
639,558
|
|
|
$
|
(1,100
|
)
|
|
$
|
638,458
|
|
Finite life intangibles
|
|
|
509,458
|
|
|
|
(344,844
|
)
|
|
|
164,614
|
|
|
|
513,042
|
|
|
|
(318,988
|
)
|
|
|
194,054
|
|
Total intangibles
|
|
$
|
1,158,939
|
|
|
$
|
(345,944
|
)
|
|
$
|
812,995
|
|
|
$
|
1,152,600
|
|
|
$
|
(320,088
|
)
|
|
$
|
832,512
|
|
The
orbital slots represent a right to operate satellites in a given longitudinal coordinate in space, where geostationary orbit may
be achieved. They are limited in availability and represent a scarce resource. Usage of orbital slots is licensed through the
International Telecommunications Union. Satellite operators can generally expect, with a relatively high level of certainty, continued
occupancy of an assigned orbital slot either during the operational life of an existing orbiting satellite or upon replacement
by a new satellite once the operational life of the existing orbiting satellite is over. As a result of the expectancy right to
maintain the once awarded orbital slots, an indefinite life is typically associated with orbital slots.
The
Company’s trade name has a long and established history, a strong reputation and has been synonymous with quality and growth
within the satellite industry. It has been assigned an indefinite life because of expected ongoing future use.
The
Company’s intellectual property relates to development relating to its planned LEO constellation. It has been assigned an
indefinite life because of anticipated ongoing future use.
The
following are the remaining useful lives of the intangible assets:
|
|
Years
|
|
Revenue backlog
|
|
|
2 to 7
|
|
Customer relationships
|
|
|
1 to 11
|
|
Customer contracts
|
|
|
3 to 9
|
|
Transponder rights
|
|
|
7
|
|
Concession rights
|
|
|
1 to 13
|
|
Patent
|
|
|
8
|
|
All
of the Company’s intangible assets have been pledged as security as a requirement of the Company’s Senior Secured
Credit Facilities as at December 31, 2017 and 2016 (Note 24).
Impairment
Finite
life intangible assets are assessed for impairment at the Company’s CGU level. Indefinite life intangible assets are tested
for impairment at the individual asset level. The annual impairment tests for these assets were performed in the fourth quarters
of 2017, 2016 and 2015 in accordance with the policy described in Note 4.
No
impairment loss was recognized in the years ended December 31, 2017, 2016 and 2015.
The
recoverable amount, for indefinite life intangible assets valued using the income approach, which is equal to the fair value less
costs of disposal, was calculated using the following assumptions:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Discount rate
|
|
|
10.00
|
%
|
|
|
10.25% to 10.75%
|
|
|
|
10.00
|
%
|
Some
of the more sensitive assumptions used, including the forecasted cash flows and the discount rate, could have yielded different
estimates of the recoverable amount. Actual operating results and the related cash flows of the Company could differ from the
estimated operating results and related cash flows used in the impairment analysis, and had different estimates been used, it
could have resulted in a different fair value.
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
18.
GOODWILL
The
Company carries goodwill at its cost of $2,446.6 million with no accumulated impairment losses since acquisition.
Impairment
Goodwill
is tested for impairment at the entity level because that represents the lowest level at which goodwill supports the Company’s
operations and is monitored internally. The annual impairment test on goodwill was performed in the fourth quarters of 2017, 2016,
and 2015 in accordance with the policy described in Note 4. The Company’s recoverable amount exceeded the carrying value
therefore, no impairment was recognized. The most significant assumptions used in the impairment test were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Discount
rate
|
|
|
10.0
|
%
|
|
|
10.75
|
%
|
|
|
10.0
|
%
|
Terminal year growth
rate
|
|
|
2.0
|
%
|
|
|
2.0
|
%
|
|
|
2.5
|
%
|
Some
of the more sensitive assumptions used, including the forecasted cash flows and discount rate, could have yielded different estimates
of the recoverable amount. Actual operating results and the related cash flows of the Company could differ from the estimated
operating results and related cash flows used in the impairment analysis, and had different estimates been used, it could have
resulted in a different fair value.
19.
TRADE AND OTHER PAYABLES
|
|
|
|
|
|
|
As at December 31,
|
|
2017
|
|
|
2016
|
|
Trade payables
|
|
$
|
2,659
|
|
|
$
|
2,502
|
|
Other payables and accrued liabilities
(a)
|
|
|
35,260
|
|
|
|
41,605
|
|
Trade and other payables
|
|
$
|
37,919
|
|
|
$
|
44,107
|
|
|
(a)
|
Other payables and accrued
liabilities included payables that are not trade in nature as well as various operating and capital accruals.
|
20.
OTHER CURRENT FINANCIAL LIABILITIES
|
|
|
|
|
|
|
As at December 31,
|
|
2017
|
|
|
2016
|
|
Derivative liabilities (Note 27)
|
|
$
|
1
|
|
|
$
|
761
|
|
Security deposits
|
|
|
1,944
|
|
|
|
2,664
|
|
Satellite performance incentive payments
|
|
|
10,452
|
|
|
|
10,031
|
|
Interest payable
(a)
|
|
|
8,929
|
|
|
|
28,235
|
|
Tax indemnification payable
|
|
|
—
|
|
|
|
10,973
|
|
Other
|
|
|
5,029
|
|
|
|
6,328
|
|
Other current financial liabilities
|
|
$
|
26,355
|
|
|
$
|
58,992
|
|
|
(a)
|
Interest payable included
interest payable on indebtedness, satellite performance incentive payments, and other current financial liabilities.
|
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
21.
OTHER CURRENT LIABILITIES
|
|
|
|
|
|
|
As at December 31,
|
|
2017
|
|
|
2016
|
|
Deferred revenue
|
|
$
|
66,449
|
|
|
$
|
73,900
|
|
Decommissioning liabilities (Note 23)
|
|
|
1,205
|
|
|
|
114
|
|
Uncertain tax positions
|
|
|
1,315
|
|
|
|
1,315
|
|
Income taxes payable
|
|
|
4,121
|
|
|
|
2,135
|
|
Other
|
|
|
4,234
|
|
|
|
2,984
|
|
Other current liabilities
|
|
$
|
77,324
|
|
|
$
|
80,448
|
|
22.
OTHER LONG-TERM FINANCIAL LIABILITIES
|
|
|
|
|
|
|
As at December 31,
|
|
2017
|
|
|
2016
|
|
Derivative liabilities (Note 27)
|
|
$
|
5,527
|
|
|
$
|
13,952
|
|
Security deposits
|
|
|
328
|
|
|
|
472
|
|
Satellite performance incentive payments
|
|
|
52,509
|
|
|
|
65,954
|
|
Other
|
|
|
467
|
|
|
|
874
|
|
Other long-term financial liabilities
|
|
$
|
58,831
|
|
|
$
|
81,252
|
|
23.
OTHER LONG-TERM LIABILITIES
|
|
|
|
|
|
|
As at December 31,
|
|
2017
|
|
|
2016
|
|
Deferred revenue
|
|
$
|
323,709
|
|
|
$
|
317,907
|
|
Accrued benefit liabilities (Note 29)
|
|
|
40,065
|
|
|
|
36,718
|
|
Uncertain tax positions
|
|
|
175
|
|
|
|
175
|
|
Decommissioning liabilities
(a)
|
|
|
1,590
|
|
|
|
1,669
|
|
Other
|
|
|
340
|
|
|
|
392
|
|
Other long-term liabilities
|
|
$
|
365,879
|
|
|
$
|
356,861
|
|
|
(a)
|
The current and long-term
decommissioning liabilities on property and equipment were $2.8 million (December 31, 2016 — $1.8 million).
The decommissioning liabilities are for the restoration of leased buildings and teleports. During the years ended December
31, 2017 and 2016, $0.1 million was recorded as interest expense with no decommissioning liabilities derecognized. It is expected
that the decommissioning liabilities will mature between 2018 and 2062.
|
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
24.
INDEBTEDNESS
As at December 31,
|
|
2017
|
|
|
2016
|
|
Senior Secured Credit Facilities
(a)
|
|
|
|
|
|
|
|
|
Revolving Credit Facility
|
|
$
|
—
|
|
|
$
|
—
|
|
Term Loan B – U.S. Facility (December 31, 2017 – USD$2,399,686, December 31, 2016 – USD$2,423,925)
|
|
|
3,016,645
|
|
|
|
3,257,998
|
|
8.875% Senior Notes (USD$500,000)
(c)
|
|
|
628,550
|
|
|
|
672,050
|
|
|
|
|
3,645,195
|
|
|
|
3,930,048
|
|
Less: deferred financing costs, interest rate floors and prepayment options
(d)
|
|
|
(101,818
|
)
|
|
|
(78,410
|
)
|
|
|
|
3,543,377
|
|
|
|
3,851,638
|
|
Less: current indebtedness
|
|
|
(14,486
|
)
|
|
|
(21,931
|
)
|
Long-term indebtedness
|
|
$
|
3,528,891
|
|
|
$
|
3,829,707
|
|
On
November 17, 2016, Telesat Canada entered into a new amended and restated Credit Agreement with a syndicate of banks which provides
for the extension of credit under the Senior Secured Credit Facilities of USD$2,430.0 million and revolving credit borrowings
of up to USD$200.0 million (or Canadian dollar equivalent). All obligations under the Credit Agreement are guaranteed by the Company
and certain of Telesat Canada’s existing subsidiaries (“Guarantors”). The obligations under the Credit Agreement
and the guarantees of those obligations are secured, subject to certain exceptions, by first priority liens and security interest
in the assets of Telesat Canada and the Guarantors. If the Revolving Credit Facility is drawn, the Credit Agreement requires Telesat
Canada to comply with a first lien net leverage ratio of 5.75:1.00, tested quarterly, and failure to comply will result in an
event of default. The Credit Agreement contains total leverage ratio covenants that restrict, with certain exceptions, the ability
of Telesat Canada and the Guarantors to take specified actions, including, among other things and subject to certain significant
exceptions: creating liens, incurring indebtedness, making investments, engaging in mergers, selling property, paying dividends,
entering into sale-leaseback transactions, creating subsidiaries, repaying subordinated debt or amending organizational documents.
The maximum total leverage ratio is 4.50:1.00.
On
November 17, 2016, Telesat Canada issued, through a private placement, USD$500 million of 8.875% Senior Notes which mature on
November 17, 2024. The 8.875% Senior Notes are subordinated to Telesat Canada’s existing and future secured indebtedness,
including obligations under its Senior Secured Credit Facilities, and are governed under the 8.875% Senior Notes Indenture.
With
the net proceeds from the 8.875% Senior Notes offering and the Senior Secured Credit Facilities, along with available cash on
hand, all outstanding amounts on the 6.0% Senior Notes and the former senior secured credit facilities were repaid on November
17, 2016. In addition, at this time, any unamortized balances of the deferred financing costs, interest rate floors, prepayment
option and premiums were written off resulting in a net loss on refinancing of $31.9 million.
On
February 1, 2017, Telesat amended its Senior Secured Credit Facilities. The amendment to the Senior Secured Credit Facilities
reduced the applicable margin on the Term Loan B – U.S. Facility from 3.75% to 3.00%. Additional debt issue costs of $38.4
million were incurred in connection with this amendment.
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
24.
INDEBTEDNESS – (continued)
|
(a)
|
The Senior Secured Credit Facilities are secured
by substantially all of Telesat’s assets. The Credit Agreement requires Telesat Canada and the Guarantors to comply
with a First Lien Net Leverage Ratio. As at December 31, 2017 and 2016, Telesat was in compliance with this covenant.
|
Each
tranche of the Senior Secured Credit Facilities is subject to mandatory principal repayment requirements. Up to February 1, 2017,
this repayment was equal to one quarter of 1% of the initial aggregate principal amount and is payable on a quarterly basis. As
at February 1, 2017, the repayment is equal to one quarter of 1% of the value of the loan at the time of the amendment and is
payable on a quarterly basis.
The
Senior Secured Credit Facilities have several tranches which are described below:
|
(i)
|
A Revolving Credit Facility (“Revolving
Facility”) of up to $200 million U.S. dollars (or Canadian dollar equivalent) is available to Telesat. This Revolving
Facility matures on November 17, 2021 and is available to be drawn at any time in U.S. funds or Canadian dollar equivalent
funds. Loans under the Revolving Facility bear interest at a floating interest rate. For Canadian Prime Rate and Alternative
Base Rate (“ABR”) loans, an applicable margin ranging from 1.5% to 2.00% is applied to the Prime Rate and ABR
as these interest rates are defined in the Senior Credit Facilities. For Bankers Acceptance (“BA”) Loans
and Eurodollar Loans, an applicable margin ranging from 2.50% to 3.00% is applied to either the BA interest rate or LIBOR.
The rates on the Revolving Facility vary depending upon the results of the first lien leverage ratio. The Revolving Facility
has an unused commitment fee of 40 basis points. As at December 31, 2017, other than $0.2 million (December 31, 2016 –
$0.1 million) in drawings related to letters of credit, there were no borrowings under this facility.
|
|
(ii)
|
The U.S. TLB Facility is a USD$2,430 million
facility maturing on November 17, 2023. The outstanding borrowings under the U.S. TLB Facility bear interest at a floating
rate of either: (i) LIBOR as periodically determined for interest rate periods selected by Telesat in accordance with the
terms of the Senior Secured Credit Facilities, but not less than 0.75%, plus an applicable margin of 3.00%; or (ii) Alternative
Base Rate as determined in accordance with the terms of the Senior Secured Credit Facilities plus an applicable margin of
2.00%. The weighted average effective interest rate was 4.86% for the year ended December 31, 2017 (44-day period ended December
31, 2016 – 4.94%). On February 1, 2017, we amended the Senior Secured Credit Facilities to reduce the applicable margin
to 3.00% from 3.75% on the then outstanding USD$2,424 million.
|
The
former senior secured credit facilities, which was fully repaid on November 17, 2016, had several tranches which are described
below:
|
(i)
|
The former Revolving Facility was a borrowing
facility of up to $140 million Canadian dollars (or U.S. dollars equivalent). The drawn loans bore interest at a floating
rate plus an applicable margin of 2.00% for prime rate and ABR loans and 3.00% for BA and Eurodollar loans. Undrawn amounts
under the facility were subject to a commitment fee of 50 basis points.
|
|
(ii)
|
The Term Loan A Facility (“TLA Facility”)
was initially a $500 million facility. Loans under this facility bore interest at a floating rate of the BA plus an applicable
margin of 3.00%.
|
|
(iii)
|
The former U.S. TLB Facility was initially a
USD$1,746 million facility. Borrowings under the U.S. TLB Facility bore interest at a floating rate of LIBOR, but not less
than 0.75%, plus an applicable margin of 2.75%.
|
|
(iv)
|
The Canadian TLB Facility was initially a $140
million facility. Borrowings under the Canadian TLB Facility bore interest at a floating rate of the BA borrowing, but not
less than 1.00%, plus an applicable margin of 3.25%.
|
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
24.
INDEBTEDNESS – (continued)
|
(b)
|
The 6.0% Senior Notes bore interest at an annual
rate of 6.0%. The total balance of the Senior Notes was USD$900 million, with USD$700 million issued in May 2012, and an additional
USD$200 million issued in October 2012. The Senior Notes were repaid in full to the indenture trustee on November 17, 2016.
|
|
(c)
|
The Senior Notes bear interest at an annual
rate of 8.875% and are due November 17, 2024. The total balance of the Senior Notes is USD$500 million. The Senior Notes include
covenants or terms that restrict the Company’s ability to, among other things: (i) incur or guarantee additional indebtedness,
or issue disqualified stock or preferred shares, (ii) incur liens, (iii) pay dividends, or make certain restricted payments
or investments, (iv) enter into certain transactions with affiliates, (v) modify or cancel satellite insurance, (vi) consolidate,
merge, sell or otherwise dispose of substantially all assets, (vii) create restrictions on the ability to pay dividends, make
loans, and sell assets, and (viii) designate subsidiaries as unrestricted subsidiaries. The weighted average effective interest
rate for the year ended December 31, 2017 was 8.80% (44-day period ended December 31, 2016 – 8.80%).
|
|
(d)
|
The Senior Secured Credit Facilities and 8.875%
Senior Notes included the following deferred financing costs, interest rate floor and prepayment option:
|
|
(i)
|
The U.S. TLB Facility and 8.875% Senior Notes
were presented on the balance sheet net of related deferred financing costs of $87.7 million as at December 31, 2017 (December
31, 2016 – $61.8 million). The deferred financing costs are amortized using the effective interest method.
|
|
(ii)
|
The indenture agreement for the 8.875% Senior
Notes contained provisions for certain prepayment options (Note 27) which were fair valued at the time of debt issuance. The
initial fair value impact of the prepayment option related to the 8.875% Senior Notes was an $8.7 million increase to the
indebtedness at their inception date. This liability is subsequently amortized using the effective interest method and had
a carrying amount of $7.8 million as at December 31, 2017 (December 31, 2016 – $8.6 million).
|
|
(iii)
|
The initial fair value impact, in November 2016,
of the interest rate floor on the U.S. TLB Facility was a decrease to the indebtedness of $25.6 million. This asset is subsequently
amortized using the effective interest method and had a carrying amount of $21.9 million as at December 31, 2017 (December
31, 2016 – $25.2 million).
|
The
former senior secured credit facilities and 6.0% Senior Notes included the following deferred financing costs, interest rate floors,
prepayment option and premiums:
|
(i)
|
The TLA Facility, former U.S. TLB Facility,
Canadian TLB Facility and 6% Senior Notes were presented on the balance sheet net of related deferred financing costs. Any
unamortized deferred financing costs as at November 17, 2016, were written off against loss on refinancing upon repayment
of the indebtedness.
|
|
(ii)
|
The indenture agreement
for the 6.0% Senior Notes contained provisions for certain prepayment options which were fair valued at the time of debt issuance.
The fair value of the prepayment option related to the 6.0% Senior Notes was allocated to the indebtedness at their inception
date. Any unamortized prepayment option as at November 17, 2016, were written off against loss on refinancing upon repayment
of the indebtedness.
|
|
(iii)
|
The initial fair
value impact of the premiums on the 6.0% Senior Notes was an increase to the indebtedness of $7.0 million. This liability
was subsequently amortized using the effective interest method. Any unamortized premiums as at November 17, 2016, were written
off against loss on refinancing upon repayment of the indebtedness.
|
|
(iv)
|
The initial fair
value impact, in March 2012, of the interest rate floors on the former U.S. TLB Facility was a decrease to the indebtedness
of $44.3 million. This asset was subsequently amortized using the effective interest method. Any unamortized interest rate
floors as at November 17, 2016, were written off against loss on refinancing upon repayment of the indebtedness.
|
|
(v)
|
The initial fair
value impact, in March 2012, of the interest rate floors on the Canadian TLB Facility was a decrease to the indebtedness of
$1.7 million. This asset was subsequently amortized using the effective interest method. Any unamortized interest rate floors
as at November 17, 2016, were written off against loss on refinancing upon repayment of the indebtedness.
|
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
24.
INDEBTEDNESS – (continued)
The
short-term and long-term portions of deferred financing costs, interest rate floor and prepayment option were as follows:
As at December 31,
|
|
2017
|
|
|
2016
|
|
Short-term deferred financing costs
|
|
$
|
13,435
|
|
|
$
|
8,224
|
|
Long-term deferred financing costs
|
|
|
74,278
|
|
|
|
53,570
|
|
|
|
$
|
87,713
|
|
|
$
|
61,794
|
|
Short-term interest rate floor
|
|
$
|
3,413
|
|
|
$
|
3,297
|
|
Long-term interest rate floor
|
|
|
18,483
|
|
|
|
21,900
|
|
|
|
$
|
21,896
|
|
|
$
|
25,197
|
|
Short-term prepayment option
|
|
$
|
(863
|
)
|
|
$
|
(790
|
)
|
Long-term prepayment option
|
|
|
(6,928
|
)
|
|
|
(7,791
|
)
|
|
|
$
|
(7,791
|
)
|
|
$
|
(8,581
|
)
|
Deferred financing costs, interest rate floor and prepayment option
|
|
$
|
101,818
|
|
|
$
|
78,410
|
|
The
outstanding principal balance of indebtedness, excluding deferred financing costs, interest rate floor and prepayment option will
be repaid as follows (in millions of Canadian dollars):
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
Thereafter
|
|
Total
|
$
|
30.5
|
|
|
$
|
30.5
|
|
|
$
|
30.5
|
|
|
$
|
30.5
|
|
|
$
|
30.5
|
|
|
$
|
3,492.7
|
|
|
$
|
3,645.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
25.
SHARE CAPITAL
The
number of shares and stated value of the outstanding shares were as follows:
|
|
2017
|
|
|
2016
|
|
As at December 31,
|
|
Number of
shares
|
|
|
Stated
value
|
|
|
Number of
shares
|
|
|
Stated
value
|
|
Common Shares
|
|
|
74,252,460
|
|
|
$
|
26,580
|
|
|
|
74,252,460
|
|
|
$
|
340,602
|
|
Voting Participating Preferred Shares
|
|
|
7,034,444
|
|
|
|
48,246
|
|
|
|
7,034,444
|
|
|
|
77,995
|
|
Non-Voting Participating Preferred Shares
|
|
|
38,391,823
|
|
|
|
77,846
|
|
|
|
38,384,823
|
|
|
|
240,128
|
|
Director Voting Preferred Shares
|
|
|
1,000
|
|
|
|
10
|
|
|
|
1,000
|
|
|
|
10
|
|
Share capital
|
|
|
|
|
|
$
|
152,682
|
|
|
|
|
|
|
$
|
658,735
|
|
In
November 2017, 2016 and 2015, dividends were declared and paid on the Director Voting Preferred Shares.
In
2016, a former employee exercised 178,642 stock options, on a net settlement basis, in exchange for 129,400 Non-Voting Participating
Preferred Shares with a stated value of $1.9 million.
In
January 2017, the Board of Directors approved a cash distribution to shareholders, as a reduction of stated capital, in the amount
of approximately $387.2 million U.S. dollars. These distributions were made during the first quarter of 2017.
In
January 2017, 7,000 stock options granted under the Company’s stock incentive plan were exercised for 7,000 Non-Voting Participating
Preferred Shares in exchange for $0.1 million.
There
were no changes to the rights, privileges or conditions associated to each class of shares.
The
authorized share capital of the Company is comprised of: (i) an unlimited number of Common Shares, Voting Participating Preferred
Shares, Non-Voting Participating Preferred Shares, Redeemable Common Shares, and Redeemable Non-Voting Participating Preferred
Shares, (ii) 1,000 Director Voting Preferred Shares, and (iii) 325,000 Senior Preferred Shares. None of the Redeemable Common
Shares, Redeemable Non-Voting Participating Preferred Shares or Senior Preferred Shares have been issued as at December 31, 2017
or 2016. The Company’s share-based compensation plans have authorized the grant of up to 13,273,779 options to purchase
Non-Voting Participating Preferred Shares (Note 28).
Common
Shares
The
holders of the Common Shares are entitled to receive notice of and to attend all annual and special meetings of the shareholders
of the Company and to one vote in respect of each common share held on all matters at all such meetings, except in respect of
a class vote applicable only to the shares of any other class, in respect of which the common shareholders shall have no right
to vote. The holders of the Common Shares are entitled to receive dividends as may be declared by the Board of Directors of the
Company, and are entitled to share in the distribution of the assets of the Company upon liquidation, winding-up or dissolution,
subject to the rights, privileges and conditions attaching to any other class of shares ranking in order of priority. The Common
Shares are convertible at the holders’ option, at any time, into Voting Participating Preferred Shares or Non-Voting Participating
Preferred Shares, on a one-for-one basis. The Common Shares have no par value.
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
25.
SHARE CAPITAL – (continued)
Voting
Participating Preferred Shares
The
rights, privileges and conditions of the Voting Participating Preferred Shares are identical in all respects to those of the Common
Shares, except for the following:
|
●
|
The holders of Voting Participating Preferred
Shares are not entitled to vote at meetings of the shareholders of the Company on resolutions electing directors.
|
|
●
|
For all other meetings of the shareholders of
the Company, the holders of Voting Participating Preferred Shares are entitled to a variable number of votes per Voting Participating
Preferred Share based on the number of Voting Participating Preferred Shares, Non-Voting Participating Preferred Shares and
Redeemable Non-Voting Participating Preferred Shares outstanding on the record date of the given meeting of the shareholders
of the Company.
|
|
●
|
The Voting Participating Preferred Shares are
convertible, at any time, at the holders’ option into Common Shares or Non-Voting Participating Preferred Shares on
a one-for-one basis as long as the result of such conversion does not cause the Company to cease to be a “qualified
corporation” within the meaning of the Canadian Telecommunication Common Carrier Ownership and Control Regulations pursuant
to the Telecommunications Act (Canada).
|
The
Voting Participating Preferred Shares have no par value.
Non-Voting
Participating Preferred Shares
The
rights, privileges and conditions of the Non-Voting Participating Preferred Shares are identical in all respects to those of the
Common Shares, except for the following:
|
●
|
The holders of Non-Voting
Participating Preferred Shares are not entitled to vote on any matter at meetings of the shareholders of the Company, except
in respect of a class vote applicable only to the Non-Voting Participating Preferred Shares.
|
|
●
|
The Non-Voting
Participating Preferred Shares are convertible, at any time, at the holders’ option into Common Shares or Voting Participating
Preferred Shares on a one-for-one basis as long as the result of such conversion does not cause the Company to cease to be
a “qualified corporation” within the meaning of the Canadian Telecommunication Common Carrier Ownership and Control
Regulations pursuant to the Telecommunications Act (Canada).
|
The
Non-Voting Participating Preferred Shares have no par value.
Director
Voting Preferred Shares
The
rights, privileges and conditions of the Director Voting Preferred Shares are identical in all respects to those of the Common
Shares, except for the following:
|
●
|
The holders of Director Voting
Preferred Shares are entitled to receive notice of and to attend all meetings of the shareholders of the Company at which
directors of the Company are to be elected. The holders of the Director Voting Preferred Shares are not entitled to attend
meetings of the shareholders of the Company and have no right to vote on any matter other than the election of directors of
the Company.
|
|
●
|
The holders of Director Voting
Preferred Shares are entitled to receive annual non-cumulative dividends of $10 per share if declared by the Board of Directors
of the Company, in priority to the payment of dividends on the Common Shares, Voting Participating Preferred Shares, Non-Voting
Participating Preferred Shares, Redeemable Common Shares, and Redeemable Non-Voting Participating Preferred Shares, but after
payment of any accrued dividends on the Senior Preferred Shares.
|
|
●
|
In the event of liquidation,
wind-up or dissolution, the holders of Director Voting Preferred Shares are entitled to receive $10 per share in priority
to the payment of dividends on the Common Shares, Voting Participating Preferred Shares,
|
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
25.
SHARE CAPITAL – (continued)
|
|
Non-Voting Participating
Preferred Shares, Redeemable Common Shares, and Redeemable Non-Voting Participating Preferred Shares, but after payment of
any accrued dividends on the Senior Preferred Shares.
|
|
●
|
The Director Voting Preferred
Shares are redeemable at the option of the Company, at any time, at a redemption price of $10 per share.
|
The
Director Voting Preferred Shares have a nominal stated value.
26.
CAPITAL DISCLOSURES
Telesat
is a privately held company. The Company’s financial strategy is designed to maintain compliance with the financial covenant
under its Senior Secured Credit Facilities (Note 24), and to maximize returns
to its shareholders and other stakeholders. The Company meets these objectives through regular monitoring of the financial covenant
and operating results on a quarterly basis. The Company’s overall financial strategy remains unchanged from 2016.
The
Company defines its capital as shareholders’ equity (comprising issued share capital, accumulated earnings and
excluding reserves) and debt financing (comprising indebtedness and excluding deferred financing costs, prepayment option and
interest rate floor as detailed in Note 24).
The
Company’s capital at the end of the year was as follows:
As
at December 31,
|
|
2017
|
|
2016
|
Shareholders’
equity (excluding reserves)
|
|
$
|
1,121,090
|
|
|
$
|
1,126,598
|
|
Debt
financing (excluding deferred financing costs, prepayment option and interest rate floor)
|
|
$
|
3,645,195
|
|
|
$
|
3,930,048
|
|
If
the Revolving Facility is drawn, the Senior Secured Credit Facilities require Telesat Canada to comply with a first lien net leverage
ratio test. As at December 31, 2017, the first lien net leverage ratio was 3.74:1.00 (December 31, 2016 – 4.05:1.00), which
was less than the maximum test ratio of 5.75:1.00.
The
Company’s operating results are tracked against budget on a monthly basis, and this analysis is reviewed by senior management.
The Company partly manages its interest rate risk due to variable interest rate debt through the use of interest rate swaps (Note
27).
27.
FINANCIAL INSTRUMENTS
Measurement
of Risks
The
Company, through its financial assets and liabilities, is exposed to various risks. The following analysis provides a measurement
of risks as at December 31, 2017.
Credit
risk
Credit
risk is the risk that a counterparty to a financial asset will default, resulting in the Company incurring a financial loss. As
at December 31, 2017, the maximum exposure to credit risk is equal to the carrying value of the financial assets which totaled
$630.0 million (December 31, 2016 — $876.3 million).
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
27.
FINANCIAL INSTRUMENTS – (continued)
Cash
and cash equivalents are invested with high quality investment grade financial institutions and are governed by the Company’s
corporate investment policy, which aims to reduce credit risk by restricting investments to high-grade, mainly U.S. dollar and
Canadian dollar denominated investments.
The
Company has credit evaluation, approval and monitoring processes intended to mitigate potential credit risks related to trade
accounts receivable. The Company’s standard payment terms are 30 days with interest typically charged on balances remaining
unpaid at the end of standard payment terms. The Company’s historical experience with customer defaults has been minimal.
As at December 31, 2017, North American and International customers made up 39% and 61% of the outstanding trade receivable balance,
respectively (December 31, 2016 — 38% and 62%, respectively). Anticipated bad debt losses have been provided for
in the allowance for doubtful accounts. The allowance for doubtful accounts as at December 31, 2017 was $2.7 million (December
31, 2016 — $3.5 million).
The
Company mitigates the credit risk associated with derivative instruments by entering into them with only high quality financial
institutions.
Foreign
exchange risk
The
Company’s operating results are subject to fluctuations as a result of exchange rate variations to the extent that
transactions are made in currencies other than Canadian dollars. The Company’s main currency exposures lie in its U.S.
dollar denominated cash and cash equivalents, trade and other receivables, trade and other payables and indebtedness with the
most significant impact being on the U.S. dollar denominated indebtedness. As at December 31, 2017 and 2016, the entire
indebtedness was denominated in U.S. dollars. The Canadian dollar equivalent of the U.S. dollar denominated indebtedness was
$3,645.2 million and $3,930.0 million, respectively (before netting of deferred financing costs, interest rate floor
and prepayment option).
In
July 2016, Telesat entered into four forward foreign exchange contracts which require the Company to pay $7.0 million Canadian
dollars to receive 4.2 million British Pounds Sterling. All forward foreign exchange contracts matured by October 31, 2017.
As
at December 31, 2017, the impact of a 5 percent increase (decrease) in the value of the Canadian dollar against the U.S. dollar
on financial assets and liabilities would have (decreased) increased net income (loss) by $162.0 million (December 31, 2016 — $163.5
million) and increased (decreased) other comprehensive income (loss) by $0.2 million (December 31, 2016 — $nil
million). This analysis assumes that all other variables, in particular interest rates, remain constant.
Interest
rate risk
The
Company is exposed to interest rate risk on its cash and cash equivalents and its indebtedness. The interest rate risk on the
indebtedness is from a portion of the indebtedness having a variable interest rate. Changes in the interest rates could impact
the amount of interest that the Company is required to pay or receive.
In
October 2017, the Company entered into four interest rate swaps to hedge the interest rate risk associated with the variable interest
rate on $1,800.0 million of the U.S. denominated Term Loan B at fixed interest rates, excluding applicable margins, ranging from
1.72% to 2.04%. These contracts mature between September 2019 and September 2022. As at December 31, 2016, the Company had no
outstanding interest rate swaps.
If
the interest rates on the unhedged variable rate indebtedness change by 0.25%, excluding the potential impact of interest rate
floors, the result would be an increase or decrease to net income (loss) of $6.5 million for the year ended December 31, 2017
(December 31, 2016 — $5.9 million).
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
27.
FINANCIAL INSTRUMENTS – (continued)
Liquidity
risk
The
Company maintains credit facilities to ensure it has sufficient funds available to meet current and foreseeable financial requirements.
The
contractual maturities of financial liabilities as at December 31, 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
amount
|
|
Contractual
cash flows
(undiscounted)
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
Thereafter
|
Trade
and other payables
|
|
$
|
37,919
|
|
|
$
|
37,919
|
|
|
$
|
37,919
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Customer and other
deposits
|
|
|
2,272
|
|
|
|
2,272
|
|
|
|
2,026
|
|
|
|
17
|
|
|
|
9
|
|
|
|
220
|
|
|
|
—
|
|
|
|
—
|
|
Satellite performance
incentive payments
|
|
|
64,074
|
|
|
|
83,168
|
|
|
|
13,240
|
|
|
|
12,677
|
|
|
|
10,551
|
|
|
|
9,180
|
|
|
|
8,259
|
|
|
|
29,261
|
|
Other financial
liabilities
|
|
|
5,527
|
|
|
|
5,599
|
|
|
|
4,798
|
|
|
|
458
|
|
|
|
343
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Indebtedness
(1)
|
|
|
3,652,980
|
|
|
|
4,861,554
|
|
|
|
230,933
|
|
|
|
229,012
|
|
|
|
227,945
|
|
|
|
225,986
|
|
|
|
223,650
|
|
|
|
3,724,028
|
|
|
|
$
|
3,762,772
|
|
|
$
|
4,990,512
|
|
|
$
|
288,916
|
|
|
$
|
242,164
|
|
|
$
|
238,848
|
|
|
$
|
235,386
|
|
|
$
|
231,909
|
|
|
$
|
3,753,289
|
|
|
|
(1)
|
Indebtedness excludes deferred
financing costs, interest rate floor and prepayment option.
|
The
interest payable and interest payments included in the carrying value and contractual cash flows, respectively, in the above table,
were as follows:
|
|
|
|
|
|
|
|
Interest
payable
|
|
Interest
payments
|
|
Satellite
performance incentive payments
|
|
$
|
1,113
|
|
$
|
19,394
|
|
Other financial
liabilities
|
|
$
|
31
|
|
$
|
103
|
|
Indebtedness
|
|
$
|
7,785
|
|
$
|
1,216,359
|
|
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
27.
FINANCIAL INSTRUMENTS – (continued)
Financial
assets and liabilities recorded on the balance sheets and the fair value hierarchy levels used to calculate those values were
as follows:
As at December 31, 2017
|
|
Loans and
receivables
|
|
|
FVTPL
|
|
|
Other
financial
liabilities
|
|
|
Total
|
|
|
Fair value
|
|
|
Fair value
hierarchy
|
|
Cash and cash equivalents
|
|
$
|
479,045
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
479,045
|
|
|
$
|
479,045
|
|
|
|
Level 1
|
|
Trade and other receivables
|
|
|
64,986
|
|
|
|
—
|
|
|
|
—
|
|
|
|
64,986
|
|
|
|
64,986
|
|
|
|
(3)
|
|
Other current financial assets
(1)
|
|
|
2,275
|
|
|
|
162
|
|
|
|
—
|
|
|
|
2,437
|
|
|
|
2,437
|
|
|
|
Level 1, Level 2
|
|
Other long-term financial assets
(1)
|
|
|
18,808
|
|
|
|
64,723
|
|
|
|
—
|
|
|
|
83,531
|
|
|
|
83,531
|
|
|
|
Level 1, Level 2
|
|
Trade and other payables
|
|
|
—
|
|
|
|
—
|
|
|
|
(37,919
|
)
|
|
|
(37,919
|
)
|
|
|
(37,919
|
)
|
|
|
(3)
|
|
Other current financial liabilities
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
(26,354
|
)
|
|
|
(26,355
|
)
|
|
|
(27,791
|
)
|
|
|
Level 2
|
|
Other long-term financial liabilities
|
|
|
—
|
|
|
|
(5,527
|
)
|
|
|
(53,304
|
)
|
|
|
(58,831
|
)
|
|
|
(59,648
|
)
|
|
|
Level 2
|
|
Indebtedness
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,645,195
|
)
|
|
|
(3,645,195
|
)
|
|
|
(3,723,474
|
)
|
|
|
Level 2
|
|
|
|
$
|
565,114
|
|
|
$
|
59,357
|
|
|
$
|
(3,762,772
|
)
|
|
$
|
(3,138,301
|
)
|
|
$
|
(3,218,833
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2016
|
|
Loans and
receivables
|
|
|
FVTPL
|
|
|
Other
financial
liabilities
|
|
|
Total
|
|
|
Fair value
|
|
|
Fair value
hierarchy
|
|
Cash and cash equivalents
|
|
$
|
782,406
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
782,406
|
|
|
$
|
782,406
|
|
|
|
Level 1
|
|
Trade and other receivables
|
|
|
55,639
|
|
|
|
—
|
|
|
|
—
|
|
|
|
55,639
|
|
|
|
55,639
|
|
|
|
(3)
|
|
Other current financial assets
|
|
|
2,548
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,548
|
|
|
|
2,548
|
|
|
|
Level 1
|
|
Other long-term financial assets
(1)
|
|
|
20,756
|
|
|
|
14,931
|
|
|
|
—
|
|
|
|
35,687
|
|
|
|
35,687
|
|
|
|
Level 1, Level 2
|
|
Trade and other payables
|
|
|
—
|
|
|
|
—
|
|
|
|
(44,107
|
)
|
|
|
(44,107
|
)
|
|
|
(44,107
|
)
|
|
|
(3)
|
|
Other current financial liabilities
|
|
|
—
|
|
|
|
(761
|
)
|
|
|
(58,231
|
)
|
|
|
(58,992
|
)
|
|
|
(61,368
|
)
|
|
|
Level 2
|
|
Other long-term financial liabilities
|
|
|
—
|
|
|
|
(13,952
|
)
|
|
|
(67,300
|
)
|
|
|
(81,252
|
)
|
|
|
(82,781
|
)
|
|
|
Level 2
|
|
Indebtedness
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,930,048
|
)
|
|
|
(3,930,048
|
)
|
|
|
(3,992,467
|
)
|
|
|
Level 2
|
|
|
|
$
|
861,349
|
|
|
$
|
218
|
|
|
$
|
(4,099,686
|
)
|
|
$
|
(3,238,119
|
)
|
|
$
|
(3,304,443
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Other current and long-term
financial assets classified as fair value through profit or loss were calculated using level 2 of the fair value hierarchy.
All other balances were calculated using level 1 of the fair value hierarchy.
|
|
(2)
|
Indebtedness excludes deferred
financing costs, interest rate floor and prepayment option.
|
|
(3)
|
Trade and other receivables
and trade and other payables approximate fair value due to the short-term maturity of these instruments.
|
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
27.
FINANCIAL INSTRUMENTS – (continued)
Assets
pledged as security
The
Senior Secured Credit Facilities are secured by substantially all of Telesat’s assets excluding the assets of unrestricted
subsidiaries.
Fair
Value
Fair
value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants in the principal market under current market conditions at the measurement date. Where possible, fair values are
based on the quoted market values in an active market. In the absence of an active market, the Company determines fair values
based on prevailing market rates (bid and ask prices, as appropriate) for instruments with similar characteristics and risk profiles
or internal or external valuation models, such as option pricing models and discounted cash flow analysis, using observable market-based
inputs.
The
fair value hierarchy is as follows:
Level
1 is based on quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company can access at
the measurement date.
Level
2 is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices
in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially
all of the full term of the assets or liabilities.
Level
3 is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value
of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose values are determined using pricing
models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair
value requires significant management judgment or estimation.
Estimates
of fair values are affected significantly by the assumptions for the amount and timing of estimated future cash flows and discount
rates, which all reflect varying degrees of risk. Potential income taxes and other expenses that would be incurred on disposition
of these financial instruments are not reflected in the fair values. As a result, the fair values are not necessarily the net
amounts that would be realized if these instruments were actually settled.
The
carrying amounts of cash and cash equivalents, trade and other receivables, and trade and other payables approximate fair value
due to the short-term maturity of these instruments. As at December 31, 2017, cash and cash equivalents included $90.7 million
(December 31, 2016 — $324.7 million) of short-term investments.
The
fair value of the satellite performance incentive payments, included in other current and other long-term financial liabilities,
was determined using a discounted cash flow methodology. The calculation is performed on a recurring basis. As at December 31,
2017, the discount rate used was 5.7% (December 31, 2016 — 5.5%).
The
fair value of the indebtedness was based on transactions and quotations from third parties considering market interest rates and
excluding deferred financing costs, interest rate floor and prepayment option. The calculation of the fair value of the indebtedness
is performed on a recurring basis. The rates used were as follows:
|
|
|
|
|
|
|
As at December 31,
|
|
2017
|
|
|
2016
|
|
Senior Secured Credit Facilities
|
|
|
|
|
|
|
|
|
Term Loan B – U.S. Facility
|
|
|
100.13
|
%
|
|
|
101.00
|
%
|
8.875% Senior Notes
|
|
|
111.83
|
%
|
|
|
104.44
|
%
|
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
27.
FINANCIAL INSTRUMENTS – (continued)
Fair
value of derivative financial instruments
Derivatives,
with the exception of the forward foreign exchange contracts, were valued using a discounted cash flow methodology. The calculations
of the fair value of the derivatives are performed on a recurring basis.
Interest
rate swap future cash flows were determined based on current yield curves and exchange rates and then discounted based on discount
curves.
Prepayment
option cash flows were calculated with a third party option valuation model which is based on the current price of the debt instrument
and discounted based on a discount curve.
Interest
rate floor cash flows were calculated using the Black Scholes option valuation model in Bloomberg and discounted based on discount
curves.
The
discount rates used to discount cash flows as at December 31, 2017 ranged from 1.56% to 2.31% (December 31, 2016 — 0.77%
to 2.15%).
The
fair value of the forward foreign exchange contracts was calculated using the forward foreign exchange rates against British Pound
Sterling for the same transactions at the valuation date. The forward foreign exchange rates as at December 31, 2016 ranged from
1.6501 to 1.6509. All forward foreign exchange contracts matured by October 2017.
The
fair value of the derivative assets and liabilities was calculated based on the level 2 of the fair value hierarchy. The current
and long-term portions of the fair value of the Company’s derivative assets and liabilities, as at each balance sheet date,
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2017
|
|
Other current financial assets
|
|
|
Other long-term financial assets
|
|
|
Other current financial liabilities
|
|
|
Other long-term financial liabilities
|
|
|
Total
|
|
Interest rate floors
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
(5,527
|
)
|
|
$
|
(5,528
|
)
|
Interest rate swaps
|
|
|
162
|
|
|
|
18,945
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,107
|
|
Prepayment option
|
|
|
—
|
|
|
|
45,778
|
|
|
|
—
|
|
|
|
—
|
|
|
|
45,778
|
|
|
|
$
|
162
|
|
|
$
|
64,723
|
|
|
$
|
(1
|
)
|
|
$
|
(5,527
|
)
|
|
$
|
59,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2016
|
|
Other
long-term
financial
assets
|
|
|
Other
current
financial
liabilities
|
|
|
Other
long-term
financial
liabilities
|
|
|
Total
|
|
Interest rate floors
|
|
$
|
—
|
|
|
$
|
(728
|
)
|
|
$
|
(13,952
|
)
|
|
$
|
(14,680
|
)
|
Forward foreign exchange contracts
|
|
|
—
|
|
|
|
(33
|
)
|
|
|
—
|
|
|
|
(33
|
)
|
Prepayment option
|
|
|
14,931
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,931
|
|
|
|
$
|
14,931
|
|
|
$
|
(761
|
)
|
|
$
|
(13,952
|
)
|
|
$
|
218
|
|
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
27.
FINANCIAL INSTRUMENTS – (continued)
The
reconciliation of the fair value of derivative assets and liabilities was as follows:
|
|
|
|
Fair value, December 31, 2015 and January 1, 2016
|
|
$
|
8,822
|
|
Derivatives recognized at inception
|
|
|
|
|
Interest rate floors
|
|
|
(25,581
|
)
|
Prepayment option
|
|
|
8,671
|
|
Realized losses on derivatives
|
|
|
|
|
Forward foreign exchange contract
|
|
|
(130
|
)
|
Unrealized gains (losses) on derivatives
|
|
|
|
|
Interest rate floors
|
|
|
18,781
|
|
Prepayment option
|
|
|
(13,108
|
)
|
Interest rate swaps
|
|
|
2,237
|
|
Forward foreign exchange contracts
|
|
|
97
|
|
Impact of foreign exchange
|
|
|
429
|
|
Fair value, December 31, 2016 and January 1, 2017
|
|
|
218
|
|
Realized losses on derivatives
|
|
|
|
|
Forward foreign exchange contract
|
|
|
(207
|
)
|
Unrealized gains on derivatives
|
|
|
|
|
Interest rate floors
|
|
|
7,861
|
|
Prepayment option
|
|
|
33,018
|
|
Interest rate swaps
|
|
|
19,394
|
|
Forward foreign exchange contracts
|
|
|
240
|
|
Impact of foreign exchange
|
|
|
(1,167
|
)
|
Fair value, December 31, 2017
|
|
$
|
59,357
|
|
28.
SHARE-BASED COMPENSATION PLANS
Telesat
Canada Stock Incentive Plans
In
September 2008 and April 2013, Telesat adopted share-based compensation plans (the “stock incentive plans”) for certain
key employees of the Company and its subsidiaries. The stock incentive plans provide for the grant of up to 13,273,779 options,
8,824,646 authorized in 2008, 4,036,729 authorized in 2013, 62,404 authorized in 2015 and an additional 350,000 authorized in
2017, to purchase Non-Voting Participating Preferred Shares of Telesat Canada, convertible into Common Shares.
Under
the stock incentive plans, two different types of stock options can be granted: time-vesting options and performance-vesting options.
The time-vesting options generally become vested and exercisable over a five-year period by 20% annual increments. The performance-vesting
options become vested and exercisable over a five-year period, provided that the Company has achieved or exceeded an annual or
cumulative target consolidated EBITDA established by the Board of Directors. The exercise period of the stock options expires
10 years from the grant date. The exercise price of each share underlying the options will be the higher of a fixed price, established
by the Board of Directors on the grant date, and the fair market value of a Non-Voting Participating Preferred Share on the grant
date. Both plans authorize the Board of Directors to grant tandem SARs, at their discretion.
In
August 2017, Telesat authorized the exchange of 805,835 performance-vesting options for 805,835 time-vesting options. The exchanged
amounts included 715,383 unvested performance-vesting options which were exchanged for an equal amount of unvested time-vesting
options. A portion of the new unvested time-vesting options will vest upon the next anniversary date of the option holder with
the remainder vesting evenly over a three-year period commencing on the sixth anniversary date.
The
Company expenses the fair value of stock options that are expected to vest over the vesting period using the Black-Scholes option
pricing model. The share-based compensation expense is included in operating expenses.
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
28.
SHARE-BASED COMPENSATION PLANS – (continued)
In
January 2016, the Board approved the purchase for cancellation of up to 25% of the currently outstanding stock options. In March
2016, a total of 1,253,477 vested stock options were repurchased at fair value from key management personnel and other employees
or former employees for a total cash consideration of $24.7 million.
In
connection with the $387 million U.S. dollars cash distribution to the Company’s shareholders (Note 25), effective January
25, 2017, a special payment was authorized to option holders of $12.8 million U.S. dollars. Of this balance, $10.0 million U.S.
dollars has been recorded as an operating expense in 2017, of which $8.0 million U.S. dollars has been paid. The remaining payments
will be made in subsequent periods subject to certain conditions being met.
The
stock options granted in the current and prior years, and their weighted average fair value were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Number of stock options granted
|
|
|
—
|
|
|
|
—
|
|
|
|
418,606
|
|
Weighted average fair value of options granted
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14.80
|
|
The
movement in the number of stock options outstanding and their weighted average exercise price were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time vesting option plans
|
|
|
Performance vesting
option plans
|
|
|
|
Number of
options
|
|
|
Weighted
average
exercise
price
|
|
|
Number of
options
|
|
|
Weighted
average
exercise
price
|
|
Outstanding at December 31, 2015 and January 1, 2016
|
|
|
3,763,671
|
|
|
$
|
23.65
|
|
|
|
1,825,324
|
|
|
$
|
19.38
|
|
Granted
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Forfeited
|
|
|
(143,440
|
)
|
|
|
|
|
|
|
(32,684
|
)
|
|
|
|
|
Exercised (Note 25)
|
|
|
(86,116
|
)
|
|
|
|
|
|
|
(92,526
|
)
|
|
|
|
|
Repurchased
|
|
|
(857,096
|
)
|
|
|
|
|
|
|
(396,381
|
)
|
|
|
|
|
Expired
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Outstanding at December 31, 2016 and January 1, 2017
|
|
|
2,677,019
|
|
|
$
|
24.54
|
|
|
|
1,303,733
|
|
|
$
|
20.16
|
|
Granted
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Forfeited
|
|
|
(15,507
|
)
|
|
|
|
|
|
|
(17,638
|
)
|
|
|
|
|
Exercised (Note 25)
|
|
|
(3,150
|
)
|
|
|
|
|
|
|
(3,850
|
)
|
|
|
|
|
Exchanged
|
|
|
805,835
|
|
|
|
|
|
|
|
(805,835
|
)
|
|
|
|
|
Expired
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
3,464,197
|
|
|
$
|
24.85
|
|
|
|
476,410
|
|
|
$
|
11.07
|
|
The
quantity of stock options that are exercisable and the weighted average remaining life were as follows:
|
|
|
|
|
|
|
As at December 31,
|
|
2017
|
|
|
2016
|
|
Time vesting option plans
|
|
|
2,612,679
|
|
|
|
1,779,707
|
|
Performance vesting option plans
|
|
|
476,413
|
|
|
|
582,854
|
|
Weighted average remaining life
|
|
|
4 years
|
|
|
|
6 years
|
|
The
share-based compensation expense included in the consolidated statements of income (loss) was as follows:
|
|
|
|
|
|
|
|
Years
ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
|
Operating
expenses
|
|
$
|
2,856
|
|
$
|
5,770
|
|
$
|
5,369
|
|
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
28.
SHARE-BASED COMPENSATION PLANS – (continued)
The
weighted average assumptions used to determine the share-based compensation expense for stock options using the
Black-Scholes option pricing model were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Dividend yield
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
Expected volatility
|
|
|
24.6
|
%
|
|
|
24.6
|
%
|
|
|
24.6
|
%
|
Risk-free interest rate
|
|
|
1.83
|
%
|
|
|
1.83
|
%
|
|
|
1.81
|
%
|
Expected life (years)
|
|
|
10
|
|
|
|
10
|
|
|
|
10
|
|
The
expected volatility is based on the historical volatility.
29.
EMPLOYEE BENEFIT PLANS
The
expenses included on the consolidated statements of income (loss) and the consolidated statements of comprehensive income (loss)
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension plans
|
|
|
Other post-employment benefit plans
|
|
Years ended December 31,
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2015
|
|
Consolidated statements of income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
$
|
6,239
|
|
|
$
|
6,235
|
|
|
$
|
7,659
|
|
|
$
|
243
|
|
|
$
|
221
|
|
|
$
|
494
|
|
Interest expense
|
|
$
|
650
|
|
|
$
|
875
|
|
|
$
|
933
|
|
|
$
|
861
|
|
|
$
|
858
|
|
|
$
|
1,043
|
|
Consolidated statements of comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial losses (gains) on employee benefit plans
|
|
$
|
3,761
|
|
|
$
|
(4,376
|
)
|
|
$
|
(1,140
|
)
|
|
$
|
1,410
|
|
|
$
|
(724
|
)
|
|
$
|
(4,085
|
)
|
In
October 2013, the Company ceased allowing new employees to join certain of the defined benefit plans, except under certain circumstances,
and commenced a defined contribution pension plan for new employees.
The
Company made contributions of $0.8 million for various defined contribution arrangements during 2017 (December 31, 2016 — $0.8
million).
The
Company’s funding policy is to make contributions to its defined benefit pension funds based on actuarial cost methods as
permitted by pension regulatory bodies. Contributions reflect actuarial assumptions concerning future investment returns, salary
projections and future service benefits. Plan assets are represented primarily by Canadian and foreign equity securities, fixed
income instruments and short-term investments.
The
Company provides certain health care and life insurance benefits for some of its retired employees and their dependents. Participants
are eligible for these benefits generally when they retire from active service and meet the eligibility requirements for the pension
plan. These benefits are funded primarily on a pay-as-you-go basis, with the retiree generally paying a portion of the cost through
contributions, deductibles and coinsurance provisions.
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
29.
EMPLOYEE BENEFIT PLANS – (continued)
The
balance sheet obligations, distributed between pension and other post-employment benefits, included in other long-term liabilities
(Note 23) were as follows:
|
|
|
|
|
|
|
As at December 31,
|
|
2017
|
|
|
2016
|
|
Pension benefits
|
|
$
|
16,169
|
|
|
$
|
14,330
|
|
Other post-employment benefits
|
|
|
23,896
|
|
|
|
22,388
|
|
Accrued benefit liabilities
|
|
$
|
40,065
|
|
|
$
|
36,718
|
|
The
amounts recognized in the balance sheets and the funded statuses of the benefit plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
As at December 31,
|
|
Pension
|
|
|
Other
|
|
|
Pension
|
|
|
Other
|
|
Present value of funded obligations
|
|
$
|
306,660
|
|
|
$
|
—
|
|
|
$
|
279,428
|
|
|
$
|
—
|
|
Fair value of plan assets
|
|
|
(291,612
|
)
|
|
|
—
|
|
|
|
(266,255
|
)
|
|
|
—
|
|
|
|
|
15,048
|
|
|
|
—
|
|
|
|
13,173
|
|
|
|
—
|
|
Present value of unfunded obligations
|
|
|
1,121
|
|
|
|
23,896
|
|
|
|
1,157
|
|
|
|
22,388
|
|
Accrued benefit liabilities
|
|
$
|
16,169
|
|
|
$
|
23,896
|
|
|
$
|
14,330
|
|
|
$
|
22,388
|
|
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
29.
EMPLOYEE BENEFIT PLANS – (continued)
The
changes in the benefit obligations and in the fair value of plan assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Other
|
|
|
Total
|
|
Change in benefit obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, January 1, 2017
|
|
$
|
280,585
|
|
|
$
|
22,388
|
|
|
$
|
302,973
|
|
Current service cost
|
|
|
5,741
|
|
|
|
243
|
|
|
|
5,984
|
|
Interest expense
|
|
|
10,992
|
|
|
|
861
|
|
|
|
11,853
|
|
Remeasurements
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial losses arising from plan experience
|
|
|
2,748
|
|
|
|
138
|
|
|
|
2,886
|
|
Actuarial losses from change in demographic assumptions
|
|
|
—
|
|
|
|
13
|
|
|
|
13
|
|
Actuarial losses from changes in financial assumptions
|
|
|
16,244
|
|
|
|
1,259
|
|
|
|
17,503
|
|
Benefits paid
|
|
|
(9,769
|
)
|
|
|
(750
|
)
|
|
|
(10,519
|
)
|
Contributions by plan participants
|
|
|
1,168
|
|
|
|
—
|
|
|
|
1,168
|
|
Foreign exchange
|
|
|
—
|
|
|
|
(246
|
)
|
|
|
(246
|
)
|
Other
|
|
|
72
|
|
|
|
(10
|
)
|
|
|
62
|
|
Benefit obligation, December 31, 2017
|
|
|
307,781
|
|
|
|
23,896
|
|
|
|
331,677
|
|
Change in fair value of plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, January 1, 2017
|
|
|
(266,255
|
)
|
|
|
—
|
|
|
|
(266,255
|
)
|
Contributions by plan participants
|
|
|
(1,168
|
)
|
|
|
—
|
|
|
|
(1,168
|
)
|
Contributions by employer
|
|
|
(8,883
|
)
|
|
|
(750
|
)
|
|
|
(9,633
|
)
|
Interest income
|
|
|
(10,342
|
)
|
|
|
—
|
|
|
|
(10,342
|
)
|
Benefits paid
|
|
|
9,769
|
|
|
|
750
|
|
|
|
10,519
|
|
Remeasurements
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on plan assets, excluding interest income
|
|
|
(15,231
|
)
|
|
|
—
|
|
|
|
(15,231
|
)
|
Administrative costs
|
|
|
498
|
|
|
|
—
|
|
|
|
498
|
|
Fair value of plan assets, December 31, 2017
|
|
|
(291,612
|
)
|
|
|
—
|
|
|
|
(291,612
|
)
|
Accrued benefit liabilities, December 31, 2017
|
|
$
|
16,169
|
|
|
$
|
23,896
|
|
|
$
|
40,065
|
|
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except
where otherwise noted)
29.
EMPLOYEE BENEFIT PLANS – (continued)
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Other
|
|
|
Total
|
|
Change in benefit obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, January 1, 2016
|
|
$
|
269,236
|
|
|
$
|
22,861
|
|
|
$
|
292,097
|
|
Current service cost
|
|
|
5,776
|
|
|
|
221
|
|
|
|
5,997
|
|
Interest expense
|
|
|
10,834
|
|
|
|
858
|
|
|
|
11,692
|
|
Remeasurements
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial gains arising from plan experience
|
|
|
(1,415
|
)
|
|
|
(981
|
)
|
|
|
(2,396
|
)
|
Actuarial losses from change in demographic assumptions
|
|
|
—
|
|
|
|
28
|
|
|
|
28
|
|
Actuarial losses from changes in financial assumptions
|
|
|
3,823
|
|
|
|
229
|
|
|
|
4,052
|
|
Benefits paid
|
|
|
(8,837
|
)
|
|
|
(640
|
)
|
|
|
(9,477
|
)
|
Contributions by plan participants
|
|
|
1,242
|
|
|
|
—
|
|
|
|
1,242
|
|
Foreign exchange
|
|
|
—
|
|
|
|
(149
|
)
|
|
|
(149
|
)
|
Other
|
|
|
(74
|
)
|
|
|
(39
|
)
|
|
|
(113
|
)
|
Benefit obligation, December 31, 2016
|
|
|
280,585
|
|
|
|
22,388
|
|
|
|
302,973
|
|
Change in fair value of plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, January 1, 2016
|
|
|
(249,335
|
)
|
|
|
—
|
|
|
|
(249,335
|
)
|
Contributions by plan participants
|
|
|
(1,242
|
)
|
|
|
—
|
|
|
|
(1,242
|
)
|
Contributions by employer
|
|
|
(8,231
|
)
|
|
|
(640
|
)
|
|
|
(8,871
|
)
|
Interest income
|
|
|
(9,959
|
)
|
|
|
—
|
|
|
|
(9,959
|
)
|
Benefits paid
|
|
|
8,837
|
|
|
|
640
|
|
|
|
9,477
|
|
Remeasurements
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on plan assets, excluding interest income
|
|
|
(6,784
|
)
|
|
|
—
|
|
|
|
(6,784
|
)
|
Administrative costs
|
|
|
459
|
|
|
|
—
|
|
|
|
459
|
|
Fair value of plan assets, December 31, 2016
|
|
|
(266,255
|
)
|
|
|
—
|
|
|
|
(266,255
|
)
|
Accrued benefit liabilities, December 31, 2016
|
|
$
|
14,330
|
|
|
$
|
22,388
|
|
|
$
|
36,718
|
|
The
weighted average duration of the defined benefit obligation as at December 31, 2017 is 16 years for the defined benefit pension
plans and 14 years for the other post-employment benefit plans. The weighted average duration of the current service cost as at
December 31, 2017 is 23 years for the defined benefit pension plans and 25 years for the other post-employment benefit plans.
The
estimated future benefit payments for the defined benefit pension plans and other post-employment benefit plans until 2027 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Other
|
|
2018
|
|
|
$
|
10,552
|
|
|
$
|
882
|
|
2019
|
|
|
$
|
11,194
|
|
|
$
|
919
|
|
2020
|
|
|
$
|
11,662
|
|
|
$
|
960
|
|
2021
|
|
|
$
|
12,173
|
|
|
$
|
1,001
|
|
2022
|
|
|
$
|
12,644
|
|
|
$
|
1,044
|
|
2023 to 2027
|
|
|
$
|
73,263
|
|
|
$
|
6,862
|
|
Benefit
payments include obligations to 2027 only as obligations beyond this date are not quantifiable.
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
29.
EMPLOYEE BENEFIT PLANS – (continued)
The
fair value of the plan assets were allocated as follows between the various types of investments:
|
|
|
|
|
|
|
As at December 31,
|
|
2017
|
|
|
2016
|
|
Equity securities
|
|
|
|
|
|
|
|
|
Canada
|
|
|
22.3
|
%
|
|
|
23.3
|
%
|
United States
|
|
|
14.1
|
%
|
|
|
14.6
|
%
|
International (other than United States)
|
|
|
18.9
|
%
|
|
|
18.9
|
%
|
Fixed income instruments
|
|
|
|
|
|
|
|
|
Canada
|
|
|
42.6
|
%
|
|
|
40.7
|
%
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
Canada
|
|
|
2.1
|
%
|
|
|
2.6
|
%
|
Plan
assets are valued at the measurement date of December 31 each year.
The
investments are made in accordance with the Statement of Investment Policies and Procedures. The Statement of Investment Policies
and Procedures is reviewed on an annual basis by the Management Level Pension Fund Investment Committee with approval of the policy
being provided by the Audit Committee.
The
following are the significant assumptions adopted in measuring the Company’s pension and other benefit obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Other
|
|
|
Pension
|
|
|
Other
|
|
As at December 31,
|
|
2017
|
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
Actuarial benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
3.50
|
%
|
|
|
3.25% to 3.50%
|
|
|
|
3.90
|
%
|
|
|
3.75% to 3.80%
|
|
Benefit costs for the year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.00
|
%
|
|
|
3.75% to 4.00%
|
|
|
|
4.20
|
%
|
|
|
4.00% to 4.10%
|
|
Future salary growth
|
|
|
2.50
|
%
|
|
|
N/A
|
|
|
|
2.50
|
%
|
|
|
N/A
|
|
Health care cost trend rate
|
|
|
N/A
|
|
|
|
4.50
|
%
|
|
|
N/A
|
|
|
|
4.50
|
%
|
Other medical trend rates
|
|
|
N/A
|
|
|
|
4.50
|
%
|
|
|
N/A
|
|
|
|
4.50
|
%
|
For
certain Canadian post-retirement benefits, the medical trend rate for drugs was assumed to be 6.50% in 2018, decreasing by 0.25%
per annum, to a rate of 4.50% in 2026 and thereafter.
Sensitivity
of assumptions
The
calculation of the defined benefit obligation is sensitive to the assumptions set out above. The following table summarizes how
the impact on the defined benefit obligation as at December 31, 2017 and 2016 would have increased or decreased as a result of
the change in the respective assumptions by one percent.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Other
|
|
As at December 31, 2017
|
|
1% increase
|
|
|
1% decrease
|
|
|
1% increase
|
|
|
1% decrease
|
|
Discount rate
|
|
$
|
(42,092
|
)
|
|
$
|
53,148
|
|
|
$
|
(2,786
|
)
|
|
$
|
3,588
|
|
Future salary growth
|
|
$
|
7,988
|
|
|
$
|
(7,457
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
Medical and dental trend rates
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
2,165
|
|
|
$
|
(1,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Other
|
|
As at December 31, 2016
|
|
1% increase
|
|
|
1% decrease
|
|
|
1% increase
|
|
|
1% decrease
|
|
Discount rate
|
|
$
|
(37,649
|
)
|
|
$
|
47,853
|
|
|
$
|
(2,618
|
)
|
|
$
|
3,345
|
|
Future salary growth
|
|
$
|
8,028
|
|
|
$
|
(7,076
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
Medical and dental trend rates
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
1,856
|
|
|
$
|
(1,444
|
)
|
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
29.
EMPLOYEE BENEFIT PLANS – (continued)
The
above sensitivities are hypothetical and should be used with caution. Changes in amounts based on a one percent variation in assumptions
generally cannot be extrapolated because the relationship of the change in assumption to the change in amounts may not be linear.
The sensitivities have been calculated independently of changes in other key variables. Changes in one factor may result in changes
in another, which could amplify or reduce certain sensitivities.
The
Company expects to make contributions of $8.0 million to the defined benefit plans and $0.2 million to the defined contribution
plan of Telesat Canada during the next fiscal year.
30.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash
and cash equivalents were comprised of the following:
|
|
|
|
|
|
|
|
|
|
As at December 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Cash
|
|
$
|
388,372
|
|
|
$
|
457,686
|
|
|
$
|
476,700
|
|
Short-term investments
(1)
|
|
|
90,673
|
|
|
|
324,720
|
|
|
|
214,026
|
|
Cash and cash equivalents
|
|
$
|
479,045
|
|
|
$
|
782,406
|
|
|
$
|
690,726
|
|
(1)
|
Consisted of short-term investments
with an original maturity of three months or less or which are available on demand with no penalty for early redemption.
|
Income
taxes paid, net of income taxes received was comprised of the following:
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Income taxes paid
|
|
$
|
(85,503
|
)
|
|
$
|
(122,401
|
)
|
|
$
|
(159,256
|
)
|
Income taxes received
|
|
|
22,512
|
|
|
|
1,929
|
|
|
|
4,233
|
|
|
|
$
|
(62,991
|
)
|
|
$
|
(120,472
|
)
|
|
$
|
(155,023
|
)
|
Interest
paid, net of capitalized interest and interest received was comprised of the following:
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Interest paid
|
|
$
|
(219,773
|
)
|
|
$
|
(165,173
|
)
|
|
$
|
(176,312
|
)
|
Interest received
|
|
|
6,201
|
|
|
|
6,620
|
|
|
|
5,130
|
|
Capitalized interest
|
|
|
18,324
|
|
|
|
6,292
|
|
|
|
9,268
|
|
|
|
$
|
(195,248
|
)
|
|
$
|
(152,261
|
)
|
|
$
|
(161,914
|
)
|
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
30.
SUPPLEMENTAL CASH FLOW INFORMATION – (continued)
The
reconciliation of the liabilities arising from financing activities was as follows:
|
|
Indebtedness
|
|
|
Satellite
performance
incentive
payments
|
|
|
Capital leases
|
|
Balance as at January 1, 2017
(1)
|
|
$
|
3,856,097
|
|
|
$
|
75,985
|
|
|
$
|
422
|
|
Debt issue costs
|
|
|
(42,867
|
)
|
|
|
—
|
|
|
|
—
|
|
Cash outflows
|
|
|
(31,620
|
)
|
|
|
(8,436
|
)
|
|
|
(30
|
)
|
Amortization of deferred financing costs, interest rate floor and prepayment option
|
|
|
14,988
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
18
|
|
|
|
2
|
|
Impact of foreign exchange
|
|
|
(253,221
|
)
|
|
|
(4,606
|
)
|
|
|
(25
|
)
|
Balance as at December 31, 2017
|
|
$
|
3,543,377
|
|
|
$
|
62,961
|
|
|
$
|
369
|
|
(1)
Balance
of the indebtedness as at January 1, 2017, included $4,459 of accrued debt issue costs associated with the November 2016 refinancing
which were paid in 2017.
|
|
|
Indebtedness
|
|
|
Satellite
performance
incentive
payments
|
|
|
Capital leases
|
|
Balance as at January 1, 2016
|
|
$
|
4,063,221
|
|
|
$
|
87,026
|
|
|
$
|
—
|
|
Cash outflows
|
|
|
(4,008,356
|
)
|
|
|
(8,934
|
)
|
|
|
(30
|
)
|
Cash inflows
|
|
|
3,935,576
|
|
|
|
—
|
|
|
|
—
|
|
Amortization of deferred financing costs, interest rate floors, prepayment option and premiums
|
|
|
12,971
|
|
|
|
—
|
|
|
|
—
|
|
Debt issue costs
|
|
|
(58,141
|
)
|
|
|
—
|
|
|
|
—
|
|
Accrued debt issue costs
|
|
|
(4,459
|
)
|
|
|
—
|
|
|
|
—
|
|
Write off of debt issue costs, interest rate floors, prepayment option and premiums
|
|
|
41,183
|
|
|
|
—
|
|
|
|
—
|
|
Non-cash additions
(1)
|
|
|
(16,910
|
)
|
|
|
—
|
|
|
|
474
|
|
Other
|
|
|
(150
|
)
|
|
|
573
|
|
|
|
(2
|
)
|
Impact of foreign exchange
|
|
|
(113,297
|
)
|
|
|
(2,680
|
)
|
|
|
(20
|
)
|
Balance as at December 31, 2016
|
|
$
|
3,851,638
|
|
|
$
|
75,985
|
|
|
$
|
422
|
|
(1)
Non-cash
additions
for the indebtedness includes $(25,581) relating to the interest rate floors on the Senior Secured Credit Facilities and
$8,671 relating to the prepayment option on the Senior Notes.
|
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except
where otherwise noted)
30.
SUPPLEMENTAL CASH FLOW INFORMATION – (continued)
|
|
Indebtedness
|
|
|
Satellite
performance
incentive
payments
|
|
Balance as at January 1, 2015
|
|
$
|
3,545,679
|
|
|
$
|
57,728
|
|
Non-cash additions
|
|
|
—
|
|
|
|
24,003
|
|
Cash outflows
|
|
|
(73,864
|
)
|
|
|
(6,702
|
)
|
Amortization of deferred financing costs, interest rate floors, prepayment option and premiums
|
|
|
13,051
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
627
|
|
Impact of foreign exchange
|
|
|
578,355
|
|
|
|
11,370
|
|
Balance as at December 31, 2015
|
|
$
|
4,063,221
|
|
|
$
|
87,026
|
|
The
net change in operating assets and liabilities was comprised of the following:
As at December 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Trade and other receivables
|
|
$
|
(13,272
|
)
|
|
$
|
(8,347
|
)
|
|
$
|
4,944
|
|
Financial assets
|
|
|
3,975
|
|
|
|
(2,521
|
)
|
|
|
(4,590
|
)
|
Other assets
|
|
|
12,848
|
|
|
|
1,260
|
|
|
|
(12,346
|
)
|
Trade and other payables
|
|
|
6,947
|
|
|
|
6,076
|
|
|
|
(4,722
|
)
|
Financial liabilities
|
|
|
(13,748
|
)
|
|
|
551
|
|
|
|
8,396
|
|
Other liabilities
|
|
|
51,502
|
|
|
|
103,618
|
|
|
|
11,666
|
|
|
|
$
|
48,252
|
|
|
$
|
100,637
|
|
|
$
|
3,348
|
|
Non-cash
investing activities were comprised of:
Years ended December 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Satellites, property and other equipment
|
|
$
|
9,515
|
|
|
$
|
13,776
|
|
|
$
|
51,587
|
|
Intangible assets
|
|
$
|
(128
|
)
|
|
$
|
2,350
|
|
|
$
|
11,569
|
|
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
31.
COMMITMENTS AND CONTINGENT LIABILITIES
The
following were the Company’s off-balance sheet contractual obligations as at December 31, 2017:
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
Thereafter
|
|
|
Total
|
|
Operating property leases
|
|
$
|
6,190
|
|
|
$
|
3,859
|
|
|
$
|
3,628
|
|
|
$
|
3,768
|
|
|
$
|
3,186
|
|
|
$
|
21,120
|
|
|
$
|
41,751
|
|
Capital commitments
|
|
|
51,511
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
51,511
|
|
Other operating commitments
|
|
|
14,391
|
|
|
|
10,348
|
|
|
|
9,596
|
|
|
|
8,269
|
|
|
|
3,131
|
|
|
|
10,444
|
|
|
|
56,179
|
|
|
|
$
|
72,092
|
|
|
$
|
14,207
|
|
|
$
|
13,224
|
|
|
$
|
12,037
|
|
|
$
|
6,317
|
|
|
$
|
31,564
|
|
|
$
|
149,441
|
|
Operating
property leases consisted of off-balance sheet contractual obligations for land or building usage, while capital commitments included
commitments for capital projects. Other operating commitments consisted of third party satellite capacity arrangements as well
as other commitments that are not categorized as operating property leases or capital commitments. The Company’s off-balance
sheet obligations included the future minimum payments for the non-cancellable period of each respective obligation, which have
various terms and expire between 2018 to 2043. The aggregate expense related to operating property lease commitments for the year
ended December 31, 2017 was $6.4 million (December 31, 2016 — $6.5 million, December 31, 2015 — $7.4
million).
The
Company has entered into contracts for the construction and launch of satellites, and other capital expenditures. The total outstanding
commitments as at December 31, 2017 were included in capital commitments.
The
Company has agreements with various customers for prepaid revenue on several service agreements which take effect when the satellite
is placed in service. The Company is responsible for operating and controlling these satellites. As at December 31, 2017, customer
prepayments of $390.2 million (December 31, 2016 — $391.8 million), a portion of which is refundable under certain
circumstances, were reflected in other current and other long-term liabilities.
In
the normal course of business, the Company has executed agreements that provide for indemnification and guarantees to counterparties
in various transactions. These indemnification undertakings and guarantees may require the Company to compensate the counterparties
for costs and losses incurred as a result of certain events including, without limitation, loss or damage to property, change
in the interpretation of laws and regulations (including tax legislation), claims that may arise while providing services, or
as a result of litigation that may be suffered by the counterparties. The nature of substantially all of the indemnification undertakings
prevents the Company from making a reasonable estimate of the maximum potential amount the Company could be required to pay counterparties
as the agreements do not specify a maximum amount and the amounts are dependent upon the outcome of future contingent events,
the nature and likelihood of which cannot be determined at this time. Historically, the Company has not made any significant payments
under such indemnifications.
Telesat
and Loral have entered into an indemnification agreement whereby Loral will indemnify Telesat for tax liabilities for taxation
years prior to 2007 related to Loral Skynet operations. Likewise, Telesat will indemnify Loral for the settlement of tax receivables
for taxation years prior to 2007.
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
31.
COMMITMENTS AND CONTINGENT LIABILITIES – (continued)
Legal
Proceedings
The
Company frequently participates in proceedings before national telecommunications regulatory authorities. In addition, the Company
may also become involved from time to time in other legal proceedings arising in the normal course of its business.
The
Company is subject to audits by taxing authorities in the various jurisdictions in which it operates.
The
Company is currently involved in a number of disputes with the Brazilian tax authorities who have alleged that additional taxes
are owed on revenue earned by the Company for the period 2003 to 2012. The disputes relate to the Brazilian tax authorities’
characterization of the Company’s revenue. Additional taxes and interest of approximately $40.2 million have been assessed
by Brazilian tax authorities and the Company has challenged those assessments. The Company believes the likelihood of an unfavorable
outcome in these disputes is remote and, as such, no reserve has been established.
Other
than the legal proceedings disclosed above, the Company is not aware of any proceedings outstanding or threatened as of the date
hereof by or against it or relating to its business which may have, or have had in the recent past, significant effects on the
Company’s financial position or profitability.
32.
SUBSIDIARIES
The
list of significant companies included in the scope of consolidation as at December 31, 2017 was as follows:
Company
|
|
Country
|
|
Method
of Consolidation
|
|
%
voting rights
|
Infosat
Communications LP
|
|
Canada
|
|
Fully
consolidated
|
|
100
|
Telesat
Spectrum General Partnership
|
|
Canada
|
|
Fully
consolidated
|
|
100
|
Skynet
Satellite Corporation
|
|
United
States
|
|
Fully
consolidated
|
|
100
|
Telesat
Network Services, Inc.
|
|
United
States
|
|
Fully
consolidated
|
|
100
|
The
SpaceConnection Inc.
|
|
United
States
|
|
Fully
consolidated
|
|
100
|
Telesat
Satellite LP
|
|
United
States
|
|
Fully
consolidated
|
|
100
|
Infosat
Able Holdings, Inc.
|
|
United
States
|
|
Fully
consolidated
|
|
100
|
Telesat
Brasil Capacidade de Satélites Ltda.
|
|
Brazil
|
|
Fully
consolidated
|
|
100
|
Telesat
(IOM) Limited
|
|
Isle
of Man
|
|
Fully
consolidated
|
|
100
|
Telesat
International Limited
|
|
United
Kingdom
|
|
Fully
consolidated
|
|
100
|
The
percentage of voting rights and method of consolidation were the same as at December 31, 2016.
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
33.
RELATED PARTY TRANSACTIONS
The
Company’s immediate shareholders are Red Isle Private Investment Inc. (“Red Isle”), a company incorporated in
Canada, Loral Holdings Corporation (“Loral Holdings”), a company incorporated in the United States and various individuals.
Red Isle is wholly-owned by PSP Investments, a Canadian Crown corporation. Loral Holdings is a wholly-owned subsidiary of Loral,
a United States publicly listed company.
Transactions
with subsidiaries
The
Company and its subsidiaries regularly engage in inter-group transactions. These transactions include the purchase and sale of
satellite services and communications equipment, providing and receiving network and call centre services, access to orbital slots
and management services. The transactions have been entered into over the normal course of operations. Balances and transactions
between the Company and its subsidiaries have been eliminated on consolidation and therefore have not been disclosed.
Special
cash distribution
Effective
January 25, 2017, the Board of Directors approved a special cash distribution to shareholders, as a reduction of stated capital,
in the amount of approximately $387.2 million U.S. dollars. Of this balance, $138.5 million U.S. dollars were paid to Red Isle,
$242.7 million U.S. dollars were paid to Loral Holdings, with the remainder paid to various individuals. These distributions were
made during the first quarter of 2017.
Special
payment to stock option holders
In
connection with the cash distribution to the Company’s shareholders, in January 2017, a special payment was authorized to
stock option holders of $12.8 million U.S. dollars, of which $11.3 million U.S. dollars related to key management personnel. Of
this balance, $8.8 million U.S. dollars has been recorded as an operating expense in 2017, of which $6.9 million U.S. dollars
has been paid with the remaining payments to be made in subsequent periods subject to certain conditions being met.
Compensation
of executives and Board level directors
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Short-term benefits (including salaries)
|
|
$
|
10,037
|
|
|
$
|
6,751
|
|
|
$
|
7,132
|
|
Special payments
(1)
|
|
|
9,006
|
|
|
|
—
|
|
|
|
—
|
|
Post-employment benefits
|
|
|
2,458
|
|
|
|
2,344
|
|
|
|
3,268
|
|
Share-based payments
(2)
|
|
|
2,820
|
|
|
|
5,482
|
|
|
|
4,674
|
|
|
|
$
|
24,321
|
|
|
$
|
14,577
|
|
|
$
|
15,074
|
|
|
(1)
|
Balance relates to the special
cash distribution effective January 25, 2017.
|
|
(2)
|
During 2015, the Board authorized
the grant of stock options to certain key management personnel pursuant to the stock incentive plan. A total of 348,606 stock
options were granted to key management personnel in 2015. Share-based payments also included all expenses associated with
stock options previously issued under the 2008 and stock incentive plans.
|
Key
management personnel — stock options
In
March 2016, a total of 1,253,477 vested stock options were repurchased at fair value from key management personnel and other employees
or former employees for a total cash consideration of $24.7 million, of which $18.7 million was paid to key management personnel.
Telesat
Canada
(Formerly
Telesat Holdings Inc.)
Notes to the 2017 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except
where otherwise noted)
33.
RELATED PARTY TRANSACTIONS – (continued)
In
August 2017, Telesat authorized the exchange of 805,835 performance-vesting options for 805,835 time-vesting options, of which
682,550 options related to key management personnel. The exchanged amounts included 715,383 unvested performance-vesting options
which were exchanged for an equal amount of unvested time-vesting options, of which 613,316 unvested options related to key management
personnel. A portion of the new unvested time-vesting options will vest upon the next anniversary date of the option holder with
the remainder vesting evenly over a three-year period commencing on the sixth anniversary date.
Transactions
with related parties
The
Company and certain of its subsidiaries regularly engage in transactions with related parties. The Company’s related parties
include Loral and Red Isle. The transactions have been entered into over the normal course of operations. There were no transactions
or balances with Red Isle during any of the years presented.
During
the years presented below, the Company and its subsidiaries entered into the following transactions with Loral.
|
|
Sale of goods and services,
interest income
|
|
|
Purchase of goods and services,
interest expense
|
|
Years ended December 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
$
|
128
|
|
|
$
|
133
|
|
|
$
|
129
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Operating expenses
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,518
|
|
|
$
|
6,627
|
|
|
$
|
7,547
|
|
Interest and other expenses
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The
following balances were outstanding with Loral at the end of the years presented below:
|
|
Amounts owed by
related parties
|
|
|
Amounts owed to
related parties
|
|
At December 31,
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Current receivables/payables
|
|
|
$
|
|
|
|
82
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
174
|
|
The
amounts outstanding are unsecured and will be settled in cash.
Other
related party transactions
The
Company funds certain defined benefit pension plans. Contributions made to the plans for the year ended December 31, 2017 were
$8.9 million (December 31, 2016 — $8.2 million).
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