UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2015 | |
| OR | |
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 1-14180
LORAL SPACE & COMMUNICATIONS INC.
(Exact name of registrant specified in the charter)
Jurisdiction of incorporation: Delaware
IRS identification number: 87-0748324
565 Fifth Avenue
New York, New York 10017
(Address of principal executive offices)
Telephone: (212) 697-1105
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
| Common stock, $.01 par value | NASDAQ |
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, and accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Ruler 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer þ | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ |
| (Do not check if a smaller reporting company) | |||
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 February 16, 2016, 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, 2015, 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 $828,380,884
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 ¨
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for its 2016 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.
LORAL SPACE AND COMMUNICATIONS INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 2015
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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 through its 62.8% economic interest in Telesat Holdings Inc. (“Telesat Holdco”), which owns Telesat Canada (“Telesat”), a leading global fixed satellite services (“FSS”) operator, with offices and facilities around the world. Telesat owns and leases a satellite fleet that operates in geosynchronous 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.
At December 31, 2015, Telesat provided satellite services to customers from its fleet of 15 in-orbit satellites, including Telstar 12 VANTAGE which was successfully launched in the fourth quarter of 2015. In addition, Telesat owns the Canadian Ka-band payload on the ViaSat-1 satellite and has two additional satellites under construction. 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.
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 52% of its revenue for the year ended December 31, 2015. 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. Major 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.
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Enterprise
Telesat’s enterprise services provided approximately 45% of its revenue for the year ended December 31, 2015. 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 (i) connectivity and voice circuits to remote locations in Canada for customers such as Bell Canada and Northwestel and (ii) space segment services and terrestrial facilities for internet backhaul, cellular backhaul and services such as rural telephone and internet access to telecommunications carriers and network services integrators around the world.
Government services. The U.S. government is the largest single consumer of fixed satellite services in the world and a significant user of Telesat’s international satellites. Over the course of several years, Telesat has implemented a successful strategy to sell through government service integrators, rather than directly to U.S. government agencies. Telesat is also a significant provider of satellite services to the Canadian Government, providing a variety of services from a maritime network for a Canadian Government entity to satellite services to the Department of National Defence.
Two-way internet services. Telesat provides Ka-band satellite capacity to Xplornet Communications Inc. and other resellers in Canada who use it to provide two-way broadband internet services in Canada. Telesat also provides Ka-band satellite capacity to ViaSat/WildBlue which uses it to provide similar services in the United States.
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 including cruise and working ships.
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.
Consulting and Other
Telesat’s consulting and other category provided approximately 3% of its revenues for the year ended December 31, 2015. 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, having provided services to businesses and governments in over 42 countries across six continents. In 2015, Telesat’s international consulting business provided satellite-related services in approximately 15 countries.
Competitive Strengths
Telesat’s business is characterized by the following key competitive strengths:
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Leading Global FSS Operator
Telesat is the fourth largest FSS operator in the world 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 2.4 million subscribers, as well as to EchoStar (DISH Network) in the United States, which has approximately 13.9 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. Telstar 11N provides service to American, European and African regions and aeronautical and maritime markets of the Atlantic Ocean Region. Telesat’s recently launched Telstar 12 VANTAGE satellite provides a high level of flexibility with coverage of Europe, the Americas, the Middle East and Africa, as well as the Caribbean, North Sea, Mediterranean and South Atlantic regions. Telstar 14R/Estrela do Sul 2 offers high powered coverage of the Americas, the Gulf of Mexico, the Caribbean and the North Atlantic Ocean Region. Telstar 18 delivers video distribution and contribution throughout Asia and offers connectivity to the U.S. mainland via Hawaiian teleport facilities. Telesat’s current enterprise services customers include leading telecommunications service providers as well as a range of network service providers and integrators, which provide services to enterprises, governments and international agencies and multiple ISPs.
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 television broadcasters, cable programmers, DTH service providers, ISPs, 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. 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 a leading position in many of 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 high barriers to entry in those markets. Telesat is licensed by the Department of Innovation, Science and Economic Development Canada (“DISED”) (formerly Industry Canada) to occupy a number of key orbital positions that are well-suited to serve the Americas and maintain 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 Ka-band and reverse DBS band at certain existing orbital locations, as well as a global low-earth-orbital constellation in Ka-band.
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. Telesat continues to benefit from growth in both the broadcast and enterprise services markets, including government services, due to its strong presence in each.
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.
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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’s focus is 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 produces a strong combination of ongoing revenue from backlog and continuing revenue growth that provides 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, (i) in the broadcast services market, from broadcast video applications, including DTH services, HDTV, and expansion in the number of channels and (ii) in the enterprise services market, from developing market requirements, maritime and aeronautical requirements, government services and enterprise network demand.
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 12 VANTAGE, a powerful, multi-mission satellite launched in November 2015, replaces and expands on the services Telesat provides on its Telstar 12 satellite at 15 degrees West. This new state-of-the-art satellite utilizes high throughput capabilities that offer superior performance to meet the growing needs of broadcast, government and enterprise users, including demand for aeronautical and maritime services. The satellite offers a high level of flexibility with coverage of Europe, the Americas, the Middle East and Africa, as well as the Caribbean, North Sea, Mediterranean and South Atlantic regions.
Telstar 18 VANTAGE, a powerful, state-of-the-art, multi-mission satellite currently under construction, will replace Telstar 18 at 138 degrees East. 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.
Telstar 19 VANTAGE, a powerful, multi-mission, high throughput satellite currently under construction, will bring additional capacity to the 63 degree West orbital location where Telesat operates its Telstar 14R/Estrela do Sul 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.
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 sales of satellite capacity. Thus, Telesat anticipates that over time it can increase its revenues without proportional increases in its operating expenses, allowing for expansion of its margins. Telesat expects to continually review all aspects of its business to contain operating costs and to maintain and potentially improve operating efficiency. To further enhance liquidity, Telesat has a $140 million revolving credit facility that can be used for general corporate purposes including working capital and capital expenditures of which no amount was outstanding at December 31, 2015.
Market and 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”), Inmarsat and O3b. 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.
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Regional and domestic providers: Telesat also competes against regional FSS operators, including:
| • | in North America: Ciel, ViaSat/WildBlue, HNS/EchoStar and Hispasat; |
| • | in Europe, Middle East, Africa: Arabsat, Nilesat, Hellas Sat, RSCC, Yahsat, Turksat and Spacecom; |
| • | in Asia: AsiaSat, Measat, Thaicom, APT, PT Telkom, Optus 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 2016, approximately 93 non-Canadian FSS satellites are listed as having been approved for use in Canada. Three of these are Telesat satellites licensed by other administrations and one is a satellite on which Telesat owns the Canadian-coverage capacity. The growth in satellite service providers using or planning to use Ka-band, including Avanti Communications, O3b, ViaSat/WildBlue, Eutelsat, HNS/EchoStar, Inmarsat, SES, Yahsat and others, will result in increased competition.
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 recently began offering a high throughput Ka-band service using a global constellation of three geostationary satellites.
In 2015, three global low-earth-orbit satellite systems were announced and are now in various stages of development.
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. This includes Intelsat’s ‘‘Epic’’ satellites, the first of which was launched in the first quarter of 2016. In addition, second generation HTS systems now in development purport to be capable of throughput that substantially exceeds the throughput of first generation HTS. This may result in a significant increase in satellite capacity which may further increase competition.
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 FSS operators.
Consulting Services
The market for satellite consulting services is generally comprised of a few companies qualified to provide services in specific areas of expertise. Telesat’s competitors are primarily United States- and European-based companies.
Satellite Fleet & Ground Resources
As of December 31, 2015, Telesat had 15 in-orbit satellites. In addition, Telesat owns the Canadian Ka-band payload on the ViaSat-1 satellite.
Telesat also has ground facilities located around the world, providing both control services to its satellite fleet, as well as to the satellites of other operators as part of its consulting services offerings. Telesat’s primary satellite control center (“SCC”) is located at its headquarters in Ottawa, Ontario, with a second SCC located in Allan Park, Ontario. Other SCCs are located in Rio de Janeiro, Brazil (used to operate Telstar 14R/Estrela do Sul 2) and Mount Jackson, Virginia (backup SCC for Telstar satellites). In addition, Telesat leases other technical facilities that provide customers with a host of teleport and hub services.
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.
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The table below summarizes selected data relating to Telesat’s owned in-orbit satellite capacity as of December 31, 2015:
Orbital Location Regions |
Launch |
Manufacturer’s End-of-Service |
Expected End-of- Orbital |
|||||||||
| Covered | Date | Life | Maneuver Life(1) | Frequency(2) | Model | |||||||
| Anik F1 | 107.3°WL South America |
November 2000 | 2016 | 2022 | C/Ku | BSS702 (Boeing) | ||||||
| Anik F1R | 107.3° WL North America | September 2005 | 2020 | 2023 | C/Ku/L | E3000 (EADS Astrium) | ||||||
| Anik F2 | 111.1° WL Canada, Continental United States |
July 2004 | 2019 | 2027 | C/Ku/Ka | BSS702 (Boeing) | ||||||
| Anik F3 | 118.7° WL Canada, Continental United States |
April 2007 | 2022 | 2026 | C/Ku/Ka | E3000 (EADS Astrium) | ||||||
| Anik G1 | 107.3° WL Canada, South America | April 2013 | 2028 | 2039 | C/Ku/X | SS/L 1300 | ||||||
| Nimiq 1 | Not Applicable (3) | May 1999 | 2011 | 2021 | Ku | A2100 AX (Lockheed Martin) | ||||||
| Nimiq 2 | Not Applicable (3) | December 2002 | 2015 | 2021 | Ku/Ka | A2100 AX (Lockheed Martin) | ||||||
| Nimiq 4 | 82° WL Canada | September 2008 | 2023 | 2027 | Ku/Ka | E3000 (EADS Astrium) | ||||||
| Nimiq 5 | 72.7° WL Canada, Continental United States |
September 2009 | 2024 | 2035 | Ku | SS/L 1300 | ||||||
| Nimiq 6 | 91.1º WL Canada | May 2012 | 2027 | 2048 | Ku | SS/L 1300 | ||||||
| Telstar 11N | 37.55° WL North and Central America, Europe, Africa and the maritime Atlantic Ocean region |
February 2009 | 2024 | 2026 | Ku | SS/L 1300 | ||||||
| Telstar 12 | 15°WL Eastern United States, SE Canada, Europe, Russia, Middle East, South Africa, portions of South and Central America |
October 1999 | 2012 | 2017 | Ku | SS/L 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 | 2031 | Ku/Ka | E3000 (Airbus) | ||||||
| Telstar 14R/Estrela do Sul 2 |
63°WL Brazil and portions of Latin America, North America, Atlantic Ocean |
May 2011 | 2026 | 2024 | Ku | SS/L 1300 | ||||||
| Telstar 18(4) | 138° EL India, South East Asia, China, Australia and Hawaii |
June 2004 | 2017 | 2018 | C/Ku | SS/L 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) | Includes the direct broadcast satellite (“DBS”) Ku-Band, extended C-band and extended Ku-band in certain cases. |
| (3) | Nimiq 1 and Nimiq 2 are currently located in non-Telesat orbital slots. |
| (4) | Includes 16.6 MHz of C-band capacity provided to the Government of Tonga in lieu of a cash payment for the use of the orbital location. The satellite carries additional transponders (the “APT transponders”), as to which APT has a prepaid lease 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. |
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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.
In November 2015, Telesat entered into contractual arrangements with Space Systems/Loral, LLC (formerly known as Space Systems/Loral, Inc.) (“SS/L”) for the construction of Telstar 19 VANTAGE, which it anticipates will be launched in the first half of 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. Also in 2015, Telesat entered into a long-term satellite service arrangement with Hughes Network Systems LLC for services using the high throughput Ka-band capacity of Telstar 19 VANTAGE in South America.
In December 2015, Telesat entered into contractual arrangements with SS/L for the construction of Telstar 18 VANTAGE, which it anticipates will be launched in the first half of 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. Telesat also entered into agreements with APT under which its partner, APT, will use certain capacity on the Telstar 18 VANTAGE satellite and fund a portion of the satellite’s cost.
Satellite Services Performance(1)
Loral holds a 62.8% economic interest and a 32.7% voting interest in Telesat Holdco. We use the equity method of accounting for our investment in Telesat Holdco, 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 (loss) income 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, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (In thousands) | ||||||||||||
| Revenue: | ||||||||||||
| Total segment revenues | $ | 751,684 | $ | 837,440 | $ | 867,914 | ||||||
| Affiliate eliminations(2) | (751,684 | ) | (837,440 | ) | (867,914 | ) | ||||||
| Revenues from satellite services as reported | $ | — | $ | — | $ | — | ||||||
| Operating income: | ||||||||||||
| Total segment operating income | $ | 419,969 | $ | 443,371 | $ | 435,294 | ||||||
| Affiliate eliminations(2) | (419,969 | ) | (443,371 | ) | (435,294 | ) | ||||||
| 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 $4.0 billion, $4.6 billion and $4.9 billion as of December 31, 2015, 2014 and 2013, respectively. The decrease in total assets from December 31, 2014 to December 31, 2015 and December 31, 2013 to December 31, 2014 is primarily the result of the change in foreign exchange rates. Backlog was approximately $3.5 billion and $3.9 billion as of December 31, 2015 and 2014, respectively. The decrease in backlog is due to revenues recognized and exchange rate changes, partially offset by new orders. It is expected that approximately 15% of the backlog at December 31, 2015 will be recognized as revenue by Telesat in 2016.
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Sale of SS/L
On November 2, 2012, Loral completed the sale (the “Sale”) of its wholly-owned subsidiary, SS/L, 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, SS/L, 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, Inc. (“ViaSat”) against Loral and SS/L. In September 2014, Loral, SS/L 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 SS/L in September 2013 were settled. Loral was also released by MDA, MDA Holdings and SS/L from indemnification claims relating to the ViaSat lawsuits under the Purchase Agreement. The terms of the Settlement Agreement provide, among other things, for payment by Loral and SS/L 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. As of December 31, 2015 and December 31, 2014, the total principal and accrued interest amount payable by Loral and SS/L to ViaSat, on a joint and several basis, was $32.4 million and $55.2 million, respectively.
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 will be responsible for $45 million, and MDA and SS/L will be responsible for $55 million, of the $100 million litigation settlement with ViaSat.
As of December 31, 2015, Loral has paid $32.0 million, including interest, toward the ViaSat settlement. Pursuant to the Allocation Agreement, Loral paid ViaSat $2.8 million in January 2016 and is obligated to make four additional equal quarterly payments to ViaSat through January 2017 totaling $11.2 million inclusive of interest at 3.25% per year (see Note 14 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 29o E.L., 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 on the Spainsat satellite located at 30o W.L. 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 X-band services to the U.S. Department of Defense, U.S. Department of State and various agencies of the Spanish Government. 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 and orbital location 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 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.
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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. Under the current regulatory regime, Telesat has pricing flexibility subject to a price ceiling on certain full period FSS services offered in Canada under minimum five-year arrangements, and otherwise Telesat is not required to file tariffs for approvals. Telesat’s DBS services offered within Canada are also subject to CRTC regulation, but have been treated as distinct from its FSS services and facilities. Telesat requires CRTC approval of customer agreements relating to the sale of DBS capacity in Canada, including the rates, terms and conditions of service set out therein. 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. In 2015, the CRTC conducted a regulatory proceeding to review Telesat’s pricing for C-band FSS services. A decision by the CRTC is pending.
Telesat’s operations are also subject to regulation and licensing by DISED (formerly Industry Canada) pursuant to the Radiocommunication Act (Canada). DISED 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 DISED has broad discretion in exercising this authority to issue licenses, fix and amend conditions of licenses and to suspend or even revoke them. Telesat’s licenses to operate the Anik and Nimiq satellites require it to comply with research and development and other industrial and public benefit commitments, to pay annual radio authorization fees and to provide all-Canada satellite coverage.
DISED traditionally licensed satellite radio spectrum using a competitive licensing process. In 2012, DISED 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. DISED may, however, issue licenses with a shorter term. DISED is also reviewing the license fees it will charge spectrum license holders and in December 2014 published a notice seeking public comments on its fee proposal. Telesat, other satellite operators and satellite associations supported the DISED proposal. DISED is proceeding with the changes, subject to Ministerial approval, that will come into effect in the 2016 fiscal year.
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., retail internet and paging revenues, 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 2015 was 0.55%, and an interim rate of 0.56% has been established by the CRTC for 2016.
United States Regulatory Environment
The Federal Communications Commission (“FCC”) regulates the provision of satellite services to, from, or within the United States.
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Telesat has chosen to operate its U.S.-authorized 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 FCC for interstate/international telecommunications, and contribution charges to the FCC’s Universal Service Fund (“USF”) based on eligible United States telecom revenues are paid on a quarterly and annual basis. The USF contribution rate is adjusted quarterly and is currently set at 18.2% for the first quarter of 2016. 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 USF eligible are currently small and its USF payments are not material.
Telesat also owns and operates the portion of the ViaSat-1 satellite (115o WL) payload that is capable of providing service within Canada. The ViaSat-1 satellite is licensed by the United States.
The FCC currently grants satellite authorizations on a first-come, first-served basis to applicants who demonstrate that they are legally, technically and financially qualified, and that the public interest will be served by the grant. Under licensing rules, a bond must be posted for up to $3 million when an FSS geostationary satellite authorization is granted. Some or the entire amount of the bond may be forfeited if there is a failure to meet any of the milestones for satellite contracting, design, construction, launch and commencement of operations. 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.
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. Telesat’s Anik Fl, Anik FlR, Anik F2, Anik F3 and Telstar 14R/Estrela do Sul 2 satellites are currently on this list.
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 have had 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.
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Regulation Outside Canada and the United States
The Brazilian national telecommunications agency, 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. The associated 15-year Concession Agreements are expected to be signed in the first quarter of 2016.
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 orbital filings are filed with the ITU-BR by OFCOM. ManSat Ltd. has been granted exclusive rights by the Isle of Man Government to manage all aspects of Isle of Man satellite orbital 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, are also filed with the ITU by ManSat on behalf of Telesat.
Landing Rights and Other Regulatory Requirements
In addition to regulatory requirements governing the use of orbital locations, many countries regulate 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 body 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 at orbital locations 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 at orbital locations and time limits for bringing the frequencies into use. Other frequencies at specified orbital locations have been reserved in perpetuity for individual administrations’ use.
The Canadian, United States and other member states have rights to use certain frequencies at orbital locations. Telesat has been authorized by its ITU filing administrators (Canada, USA, Brazil and United Kingdom) to use certain frequencies at orbital locations. 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 orbital locations that must be brought into use within specified time limits.
The ITU Radio Regulations also 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 at associated orbital locations with the ITU. The filing and registration process is administered by the ITU Radiocommunications Bureau (the “ITU-BR”).
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Once a member state has filed with the ITU-BR its proposed use of frequencies at a given orbital location, 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 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 at their orbital locations. 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.
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 orbital locations and frequency information within the ITU process described above.
PATENTS AND PROPRIETARY RIGHTS
As of December 31, 2015, Telesat had seven patents, all in the United States. These patents expire between 2018 and 2027. 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 also includes the development of innovative and cost effective satellite applications for the various customer segments it serves.
FOREIGN OPERATIONS
Telesat’s revenues from non-U.S. customers, primarily in Canada, Asia, Europe and Latin America represented 66%, 68% and 69% of its consolidated revenues for the years ended December 31, 2015, 2014 and 2013, respectively. At December 31, 2015, 2014 and 2013, substantially all of its 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.”)
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EMPLOYEES
As of December 31, 2015, Loral had 20 full time employees.
As of December 31, 2015, Telesat and its subsidiaries had approximately 405 full-time and part-time employees, approximately 3.5% 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.
OTHER
Loral, a Delaware corporation, was formed on June 24, 2005, to succeed to the business conducted by its predecessor registrant, Loral Space & Communications Ltd. (“Old Loral”), which emerged from chapter 11 of the federal bankruptcy laws on November 21, 2005 pursuant to the terms of the fourth amended joint plan of reorganization, as modified.
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, 565 Fifth Avenue, New York, NY 10017. 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.
| 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, 2015, Telesat had outstanding indebtedness of CAD 4.1 billion, which matures between 2017 and 2019, and additional borrowing capacity of CAD 140 million under its revolving facility, based on a U.S. dollar/Canadian dollar exchange rate of $1.00/CAD 1.3839. Approximately CAD 3.0 billion of this total borrowing capacity is debt that 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.
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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 CAD 5 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, 2015, Telesat’s debt denominated in U.S. dollars was $2.6 billion, all of which was unhedged with respect to foreign exchange rates. 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 US-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 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, expenses and 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, 2015 lie in its U.S. dollar denominated cash and short term investments and debt financing. In addition, approximately 51% of Telesat’s revenues, 42% of its operating expenses and a majority of its capital expenditures for 2015 were denominated in U.S. dollars. As a result of a significant decrease in the value of the Canadian dollar during 2015, Telesat recorded a mainly non-cash foreign exchange loss of approximately $427 million. As of December 31, 2015, a five percent increase (decrease) in the Canadian dollar against the U.S. dollar would have increased (decreased) Telesat’s net income by approximately $115.5 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 2015, the exchange rate moved from US$1.00/CAD 1.1621 at December 31, 2014 to US$1.00/CAD 1.3839 at December 31, 2015.
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While we own 62.8% 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 62.8% 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 Holdco, which do not allow us to own more voting stock of Telesat Holdco 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 31.06% and 6.82% 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 from our sale of SS/L.
In the fourth quarter of 2012, we completed the sale of our subsidiary, SS/L, to MDA. Under the terms of the purchase agreement related to the SS/L sale, we are obligated to indemnify MDA and its affiliates for (1) certain pre-closing taxes; and (2) Covered Litigation Costs and Covered Litigation Damages (as such terms are defined in the Purchase Agreement) relating to the ViaSat lawsuit, subject to certain sharing formulas and caps. Although the ViaSat lawsuit has been settled and we have been released by MDA, MDA Holdings and SS/L from any further indemnification obligations relating thereto, we remain obligated to indemnify MDA for certain pre-closing taxes. The amounts of indemnification claims relating to certain 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.
We are jointly and severally liable together with MDA and SS/L for the ViaSat litigation settlement payments, and, if MDA and SS/L were to default on their share of the payments, we may not have sufficient liquidity to fund the missed payments.
In September 2014, we, SS/L and ViaSat settled the lawsuit brought in February 2012 by ViaSat against us and SS/L and an additional lawsuit brought in September 2013 by ViaSat against SS/L. The terms of the settlement agreement provide, among other things, for payment by Loral and SS/L 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 to be paid quarterly from October 15, 2014 through January 15, 2017 with interest. Loral and MDA have agreed that Loral will be responsible for $45 million, and MDA and SS/L will be responsible for $55 million, of the $100 million due ViaSat. Pursuant to our agreement with MDA, as of January 31, 2016, Loral, on the one hand, and MDA and SS/L, on the other hand, is each obligated to make additional payments to ViaSat through January 2017 totaling $11.2 million and $16.2 million, respectively, including interest. Although we expect to have sufficient liquidity to fund our share of the payments due ViaSat, because the payment obligations to ViaSat are on a joint and several basis with MDA and SS/L, if MDA and SS/L were to default on all or part of their payment obligations to ViaSat, Loral would be obligated to pay ViaSat any amounts not paid by MDA and SS/L. In such event, and depending on the extent and timing of the default by MDA and SS/L, we may not have sufficient liquidity to fund the payments not made by MDA and SS/L; if so, we would have to raise the shortfall through one or a combination of the following: proceeds from a strategic transaction, a rights offering or other equity or debt financing. There can be no assurance whether or when any strategic transaction may occur, and the future cost of raising funds through the capital markets may be expensive or those markets may be unavailable. Inability to raise the necessary funds could have a material adverse effect on our financial condition 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.
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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 62.8% 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.
Loral earns a consulting fee of $5.0 million a year from Telesat. Telesat’s loan documents generally permit this consulting fee from Telesat to be paid to Loral in cash except if the senior secured leverage ratio under Telesat’s credit and note agreements is greater than 5.25 to 1.0. When the ratio is greater than 5.25 to 1.0, the consulting fee is paid through the issuance of promissory notes to Loral with an annual interest rate of 7% and a maturity date of October 31, 2018. Whether Telesat meets the financial performance criteria to enable payment is dependent upon, among other things, foreign exchange rates which are constantly fluctuating. As of December 31, 2015 and 2014, we had no notes receivable from Telesat related to payment of consulting fees. It is uncertain at this time whether Telesat will be permitted to continue to pay the consulting fee in cash in the future.
Although our equity in Telesat Holdco has substantial value, our shareholders agreement with PSP regarding Telesat limits our ability to pledge our shares in Telesat Holdco 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 Holdco 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’s take-up rate in its service has been slower than anticipated, and, in fact, in recent years revenues have been declining. For example, XTAR’s revenues declined by approximately 11% from 2014 to 2015 and 17% from 2013 to 2014. 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. These lease obligations were $26 million in 2015 with increases thereafter to a maximum of $28 million per year through the end of the useful life of the satellite, which is estimated to be in 2020. 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. Approximately $4.8 million of the $5 million payment due during 2015 for the past due balance and $12.9 million of the $25 million payment due during 2015 for the current lease obligation were deferred as of December 31, 2015, with interest on the deferred amounts capitalized. XTAR’s lease and other obligations to Hisdesat, which will aggregate in excess of $150 million over the remaining life of the satellite as of December 31, 2015, 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, 2015, $6.8 million was due to Loral from XTAR.
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.
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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 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 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 our satellite services segment 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.
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| 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.
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.
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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 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.
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, 2015, the total net book value of Telesat’s six in-orbit satellites for which it does not have insurance is approximately CAD 56 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 secured credit facilities and the indenture governing Telesat’s 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.
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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, where required, 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, where required, to purchase replacement satellites, it could have a material adverse effect on Telesat’s results of operations, business prospects and financial condition.
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. A trend toward consolidation of major FSS providers has resulted in the creation of 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.
As a condition of Telesat’s licenses for certain satellites, it is required by DISED, the governmental department overseeing Canadian investment, innovation and economic development, to invest in research and development related to satellite communication activities. Telesat’s global competitors may not face this additional financial burden.
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.
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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. Given the number of new satellites launched over the past year and the number of satellites presently under construction, many of which contain high throughput payloads, unless Telesat experiences a corresponding increase in demand, the next several years may be characterized by an oversupply of capacity. To the extent Telesat were to experience another period of oversupply of capacity, it may be forced to decrease the prices it charges for services which would adversely affect its results.
Developments that Telesat expects to support the growth in demand for satellite services, such as continued growth in corporate data and internet traffic, the continued proliferation of HDTV and economic growth in Latin America may fail to materialize or may not occur in the manner or to the extent Telesat anticipates.
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.
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 HTS, such as ViaSat-1, Jupiter 1 and the recently launched Intelsat 29e, the first of Intelsat’s “Epic” line of HTS, which are able to transmit substantially more content than pre-existing satellites, may decrease demand and/or prices for traditional satellite capacity. Additional HTS are currently under construction, including second generation HTS that 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 global low-earth-orbit satellite projects have recently been announced which, if implemented successfully, could have significant advantages over geostationary satellite systems, in particular for latency sensitive applications. 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 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.
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, 2015, Telesat’s top five customers together accounted for approximately 52% of its revenues. At December 31, 2015, Telesat’s top five backlog customers together accounted for approximately 81% of its backlog. If any of Telesat’s major customers chooses to not 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 revenue, operating margins and cash flows. If Telesat’s contracted revenue backlog is reduced due to the financial difficulties of its customers, Telesat’s revenue, operating margins and cash flows would be further negatively impacted.
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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 revenue.
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. Telesat believes that DTH has certain cost, quality and efficiency advantages over terrestrial delivery systems, including fiber, for the consumption of linear television programming (i.e. traditional television viewing where the consumer receives a broad array of channels from their provider and views programming which is delivered at a scheduled time via a specified channel) either live or at a later time using a recording device such as a personal video recorder or PVR. However, for various reasons, the consumption of traditional linear television programming via DTH has recently been challenged in various regions, including North America.
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 a two way (i.e. non-linear) platform that provides on demand 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.
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 and other countries in which it operates.
In Canada, Telesat’s operations are subject to regulation and licensing by DISED pursuant to the Radiocommunication Act (Canada) and by the CRTC, under the Telecommunications Act (Canada). DISED 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 DISED 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 2015, the CRTC conducted a regulatory proceeding to review the pricing of Telesat’s C-band FSS services. The results of that proceeding may have an adverse impact on Telesat’s ability to earn revenue from these services.
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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 placed on the FCC’s Permitted Space Station List. Telesat’s Anik Fl, Anik FlR, Anik F2, Anik F3 and Telstar 14R/Estrela do Sul 2 satellites are currently on this list. 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, 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. 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 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 orbital location in the geostationary 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, which take place typically every three to four years. 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.
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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 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 orbital 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 orbital (“GSO”) locations for which it has obtained regulatory authorizations. In some cases, the Telesat satellite that occupies an orbital 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 non-geostationary orbits (“NGSO”) that are not yet occupied.
In accordance with the ITU Radio Regulations, governments have rights to use certain GSO locations and NGSO orbits and the associated radio frequencies. Certain of these governments have in turn authorized Telesat to use GSO 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 GSO 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 GSO 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 GSO 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.
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.
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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.
Market conditions may make it difficult for Telesat to extend the maturity of or refinance its existing indebtedness, and any failure to do so could have a material adverse effect on its business.
As of December 31, 2015, Telesat had outstanding senior secured credit facilities consisting of: a CAD 375 million term loan A maturing in March 2017; a CAD 136 million term loan B maturing in March 2019; and a $1.698 billion term loan B maturing in March 2019. Together with Telesat’s CAD 140 million revolving credit facility, the U.S. term loan B is subject to a springing maturity which will occur on February 13, 2017, if Telesat’s senior notes are not refinanced by that date. Telesat will need to refinance all or a portion of this indebtedness on or before maturity. Disruptions in the financial markets have occurred in the past and are likely to reoccur in the future, which could make it more difficult to renew or extend the facilities at current commitment levels, on similar terms or at all. A reduced commitment from the lenders, increased borrowing costs or modification to the financial covenant would result in an increase in Telesat’s financing costs and/or a decrease in its liquidity, which could adversely affect Telesat’s growth, its financial condition, its results of operations and its ability to make debt payments, including repayments on the senior notes when they become due.
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, its main earth station and back up satellite control facility at Allan Park, 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 communication 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.
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Telesat’s dependence on outside contractors could result in delays related to the design, manufacture and launch of its new satellites, which could in turn 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 SS/L. 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 in the future, which could have an adverse impact on Telesat’s business.
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.
A natural disaster could diminish Telesat’s ability to provide communications service.
Natural disasters could damage or destroy Telesat’s ground stations resulting in a disruption of service to its customers. Telesat has in place certain operational procedures designed to protect its antennas and ground stations during natural disasters such as a hurricane, but these procedures may not be sufficient and the collateral effects of such disasters such as flooding may impair the functioning of its ground equipment and its ability to control its satellites. If a future natural disaster impairs or destroys any of Telesat’s ground facilities, Telesat may be unable to provide service to its customers in the affected area for a period of time.
Telesat’s future reported net income could be adversely affected by impairments of the value of certain intangible assets.
The assets on Telesat’s consolidated balance sheet as of December 31, 2015 include goodwill valued at approximately CAD 2.4 billion and other intangible assets valued at approximately CAD 315 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 (loss) income. 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.
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.
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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.
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.
III. Other Risks
We have been pursuing and will continue to pursue a strategic transaction with respect to our interest in Telesat Holdco; 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 Holdco. In an effort to maximize shareholder value, we have been exploring potential strategic transactions to alter the status quo in our ownership of Telesat Holdco, including monetizing our interest through the sale of Loral or through the combination of Loral and Telesat into one public company. The initiative to monetize our interest in Telesat Holdco through the sale of Loral terminated in early 2015, and PSP has informed us that it does not wish to proceed with a combination transaction. In 2015, we exercised our rights under the Telesat Holdco Shareholders Agreement (the “Shareholders Agreement”) to require Telesat Holdco to conduct an initial public offering of the equity shares of Telesat Holdco. See “The initial public offering of Telesat Holdco and related governance changes that we have requested may not occur or may proceed in a manner contrary to our requests” below. In addition, we have been and are continuing to explore a cash distribution to Telesat Holdco shareholders (and, in turn, a cash distribution to our stockholders), either in conjunction with a strategic transaction or Telesat initial public offering or on a stand-alone basis. While we remain interested in and plan to continue to pursue a strategic transaction, there can be no assurance as to when or whether we will be able to conclude any such transaction or that any strategic initiatives or transaction or cash distribution involving Telesat, Telesat Holdco or Loral may occur, or that any particular economic, tax, structural or other objectives or benefits with respect to any initiative, transaction or distribution involving Telesat, Telesat Holdco or Loral’s interest therein will be achieved.
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The initial public offering of Telesat Holdco 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 Holdco (a “Telesat IPO”). In connection with our exploration of strategic initiatives to alter the status quo in our ownership of Telesat Holdco, in July 2015, we exercised our rights under the Shareholders Agreement to require Telesat Holdco to conduct a Telesat IPO. Specifically, we requested that Telesat Holdco issue not more than 25 million newly issued shares of Telesat Holdco voting common stock. We also requested the termination of the Shareholders Agreement and the elimination of certain provisions in Telesat Holdco’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 Holdco 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 the Telesat IPO and subject to the receipt of any necessary regulatory approvals, to obtain majority voting control of Telesat Holdco. Telesat Holdco has selected two co-managing underwriters and has informed us that it is working to implement the Telesat IPO. In addition, we are in discussions with PSP to attempt to agree on our requests regarding the Shareholders Agreement and Telesat Holdco’s Articles of Incorporation. If we are unable to reach agreement with PSP on these matters, the advice of the lead underwriters selected for the Telesat IPO will be sought to assist resolution. There can be no assurance as to whether, when or on what terms the Telesat IPO, termination or modification of the Shareholders Agreement or any requested changes to Telesat Holdco’s Articles of Incorporation may occur. If the Telesat IPO proceeds under unfavorable terms or at an unfavorable price, we may withdraw our demand for the Telesat IPO or otherwise seek to enforce our rights. There can be no assurance that the Telesat IPO will occur, or that any particular economic, tax, structural or other objectives or benefits with respect to the Telesat IPO will be achieved.
A public offering of stock in Telesat Holdco 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 Holdco, 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 62.8% 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 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.
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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 data. Although we and Telesat take steps to secure information 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, 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, 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, 2015, various funds affiliated with MHR and Dr. Rachesky held approximately 38.0% 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 57.1% of the outstanding common equity of Loral as of December 31, 2015. As of February 16, 2016, 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 55,000 shares per day for the year ended December 31, 2015. 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.
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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, 2015, 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. As of December 31, 2015, 1,315,618 shares of our voting common stock were available for future grants under our stock incentive plan. We may further amend our stock incentive plan in the future to provide for additional increases in the number of shares available for grant thereunder.
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. For example, if, MDA and SS/L were to default on their share of the ViaSat litigation settlement payments, we will be obligated to fund the shortfall and may have to do so by raising proceeds through a rights offering or other equity financing (see “We are jointly and severally liable together with MDA and SS/L for the ViaSat litigation settlement payments, and, if MDA and SS/L were to default on their share of the payments, we may not have sufficient liquidity to fund the missed payments” above).
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. Significant judgment is required to determine and estimate our tax liabilities, and our 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 or our valuation and utilization of deferred tax assets and liabilities. In addition, we are subject to regular examination of our income tax returns by the Internal Revenue Service and other taxing authorities. 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, 2015, we had various tax attributes including federal net operating loss carryforwards, or NOLs, of approximately $252.2 million, state NOLs, primarily California ($77.8 million) and New York ($1.1 million), and federal and state 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 reorganization 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, 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. 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, 2015 was 2.61%, was less than $32.6 million. As of December 31, 2015, the total market value of our equity ($1.3 billion) multiplied by the federal applicable long-term tax exempt rate was approximately $32.9 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.
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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.
Corporate
We lease approximately 9,000 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 leases an area in its headquarters building of approximately 112,000 rentable square feet 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).
The Allan Park earth station, located northwest of Toronto, Ontario on approximately 65 acres of 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.
Telesat’s Telstar 14R/Estrela do Sul 2 satellite is operated from Telesat’s SCC in Rio de Janeiro, Brazil.
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, the Netherlands and Singapore.
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 14 to the Loral consolidated financial statements for this discussion.
Item 4. Mine Safety Disclosures
Not Applicable
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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, 2014 through December 31, 2015.
| High | Low | |||||||
| Year ended December 31, 2015 | ||||||||
| Quarter ended December 31, 2015 | $ | 51.77 | $ | 35.10 | ||||
| Quarter ended September 30, 2015 | 67.80 | 46.42 | ||||||
| Quarter ended June 30, 2015 | 70.35 | 62.53 | ||||||
| Quarter ended March 31, 2015 | 79.13 | 65.70 | ||||||
| Year ended December 31, 2014 | ||||||||
| Quarter ended December 31, 2014 | $ | 81.53 | $ | 64.23 | ||||
| Quarter ended September 30, 2014 | 78.77 | 71.25 | ||||||
| Quarter ended June 30, 2014 | 75.80 | 67.00 | ||||||
| Quarter ended March 31, 2014 | 82.13 | 69.29 | ||||||
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 February 16, 2016, there were 210 holders of record of our voting common stock and five holders of record of our non-voting common stock.
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(c) Issuer Purchases of Equity Securities
In 2011 and 2012, Loral repurchased 154,494 shares of its voting common stock pursuant to a share repurchase program approved by Loral’s Board of Directors. These shares have been recorded as treasury shares.
(d) 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, 2015 and 2014.
(e) Securities Authorized for Issuance under Equity Compensation Plans
See Note 10 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 2016 definitive proxy statement which is incorporated herein by reference or by an amendment to this Annual Report on Form 10-K.
(f) 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, 2010 to December 31, 2015. The graph assumes that $100 was invested on December 31, 2010 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.
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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, 2015.
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, | ||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
| Statement of operations data: | ||||||||||||||||||||
| Loss from continuing operations before income taxes and equity in net (loss) income of affiliates | $ | (10,188 | ) | $ | (8,030 | ) | $ | (15,530 | ) | $ | (27,213 | ) | $ | (12,346 | ) | |||||
| Income tax benefit (provision)(1) | 45,476 | 8,105 | (1,841 | ) | 93,315 | (41,375 | ) | |||||||||||||
| Income (loss) from continuing operations before equity in net (loss) income of affiliates | 35,288 | 75 | (17,371 | ) | 66,102 | (53,721 | ) | |||||||||||||
| Equity in net (loss) income of affiliates(2) | (104,792 | ) | (1,502 | ) | 38,827 | 34,340 | 106,329 | |||||||||||||
| (Loss) income from continuing operations | (69,504 | ) | (1,427 | ) | 21,456 | 100,442 | 52,608 | |||||||||||||
| (Loss) income from discontinued operations, net of tax(3) | (778 | ) | (24,402 | ) | (4,877 | ) | 320,649 | 74,566 | ||||||||||||
| Net (loss) income attributable to common shareholders | (70,282 | ) | (25,829 | ) | 16,579 | 421,322 | 126,677 | |||||||||||||
| (Loss) income per share: | ||||||||||||||||||||
| Basic (loss) income per share | ||||||||||||||||||||
| Continuing operations | $ | (2.25 | ) | $ | (0.05 | ) | $ | 0.70 | $ | 3.27 | $ | 1.72 | ||||||||
| Discontinued operations | (0.03 | ) | (0.79 | ) | (0.16 | ) | 10.45 | 2.41 | ||||||||||||
| $ | (2.28 | ) | $ | (0.84 | ) | $ | 0.54 | $ | 13.72 | $ | 4.13 | |||||||||
| Diluted (loss) income per share | ||||||||||||||||||||
| Continuing operations | $ | (2.25 | ) | $ | (0.05 | ) | $ | 0.67 | $ | 3.22 | $ | 1.54 | ||||||||
| Discontinued operations | (0.03 | ) | (0.79 | ) | (0.16 | ) | 10.35 | 2.38 | ||||||||||||
| $ | (2.28 | ) | $ | (0.84 | ) | $ | 0.51 | $ | 13.57 | $ | 3.92 | |||||||||
| Dividend and Distribution Data: | ||||||||||||||||||||
| Cash dividends declared | $ | ― | $ | ― | $ | ― | $ | 417,606 | $ | ― | ||||||||||
| Per share | ― | ― | ― | 13.60 | ― | |||||||||||||||
| Cash distributions declared | ― | ― | ― | 892,147 | ― | |||||||||||||||
| Per share | ― | ― | ― | 29.00 | ― | |||||||||||||||
| December 31, | ||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
| Balance sheet data: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 58,853 | $ | 51,433 | $ | 5,926 | $ | 87,370 | $ | 197,114 | ||||||||||
| Total assets | 214,618 | 304,626 | 327,740 | 378,992 | 1,836,153 | |||||||||||||||
| Non-current liabilities | 91,697 | 113,262 | 110,120 | 121,015 | 485,598 | |||||||||||||||
| Total liabilities | 106,128 | 128,986 | 119,830 | 192,531 | 888,568 | |||||||||||||||
| Loral shareholders’ equity | 108,490 | 175,640 | 207,910 | 186,461 | 946,459 | |||||||||||||||
| (1) | The income tax benefit (provision) for each period included the impact of equity in net (loss) income of affiliates reflected below. During 2012, we recorded an $86.7 million income tax benefit after the statute of limitations for assessment of additional tax expired with regard to certain uncertain tax positions (“UTPs”) related to Old Loral and several of our federal and state income tax returns filed for 2007 and 2008. |
| (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. |
| (3) | (Loss) income from discontinued operations resulted from the sale of our wholly-owned subsidiary, SS/L, to MDA, in 2012 (see Notes 1 and 14 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 SS/L pursuant to the ViaSat Suit Settlement Agreement and Allocation Agreement, and, in 2012, we recorded a gain of $308.6 million, net of tax, on the sale of SS/L, which closed on November 2, 2012. |
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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.
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Overview
Business
Loral has one operating segment consisting of satellite based communications services. Loral participates in satellite services operations through its ownership interest in Telesat Holdco which owns Telesat, a leading global fixed satellite services operator, with offices and facilities around the world. Telesat provides its satellite and communication services from a fleet of satellites that occupy Canadian and other orbital locations.
Loral holds a 62.8% economic interest and a 32.7% voting interest in Telesat Holdco, the world’s fourth largest satellite operator with approximately $3.5 billion of backlog as of December 31, 2015.
At December 31, 2015, Telesat provided satellite services to customers from its fleet of 15 in-orbit satellites, including Telstar 12 VANTAGE which was successfully launched in the fourth quarter of 2015. In addition, Telesat owns the Canadian Ka-band payload on the ViaSat-1 satellite and has two other satellites under construction. 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 orbital locations, 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, including the newly launched Telstar 12 VANTAGE, and, in a disciplined manner, deploying expansion satellite capacity where Telesat anticipates there will be strong market demand.
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. Although Telesat regularly pursues opportunities to develop new satellites, 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.
Telesat anticipates that the relatively fixed cost nature of the business, combined with increasing demand for satellite services, will over time produce growth in operating income and cash flow.
In 2016, Telesat remains focused on increasing utilization of its existing satellites, the construction of its new satellites and identifying and pursuing opportunities to expand its satellite fleet, while maintaining operating discipline.
Telesat’s operating results are subject to fluctuations as a result of exchange rate variations. During 2015, approximately 51% of Telesat’s revenues, 42% of its operating expenses 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 debt financing. As of December 31, 2015, Telesat’s U.S. dollar denominated debt totaled $2.6 billion. As of December 31, 2015, a five percent increase (decrease) in the Canadian dollar against the U.S. dollar would have increased (decreased) Telesat’s net income by approximately $115.5 million. This analysis assumes all other variables, in particular interest rates, remain constant.
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Sale of SS/L
On November 2, 2012, Loral completed the Sale of SS/L 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, SS/L, 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 SS/L. On September 5, 2014, Loral, SS/L 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 SS/L in September 2013 were settled. Loral was also released by MDA, MDA Holdings and SS/L from indemnification claims relating to the ViaSat lawsuits under the Purchase Agreement. The terms of the Settlement Agreement provide, among other things, for payment by Loral and SS/L 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. As of December 31, 2015 and December 31, 2014, the total principal and accrued interest amount payable by Loral and SS/L to ViaSat, on a joint and several basis, was $32.4 million and $55.2 million, respectively.
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 will be responsible for $45 million, and MDA and SS/L will be responsible for $55 million, of the $100 million litigation settlement with ViaSat.
As of December 31, 2015, Loral has paid $32.0 million, including interest, toward the ViaSat settlement. Pursuant to the Allocation Agreement, Loral paid ViaSat $2.8 million in January 2016 and is obligated to make four additional equal quarterly payments to ViaSat through January 2017 totaling $11.2 million inclusive of interest at 3.25% per year (see Note 14 to the financial statements).
General
Our principal asset is our majority ownership interest in Telesat Holdco. In an effort to maximize shareholder value, we have been exploring potential strategic transactions to alter the status quo in our ownership of Telesat Holdco, including monetizing our interest through the sale of Loral or through the combination of Loral and Telesat into one public company. The initiative to monetize our interest in Telesat Holdco through the sale of Loral terminated in early 2015, and PSP, our Canadian co-owner of Telesat Holdco, has informed us that it does not wish to proceed with a combination transaction. While we remain interested in and plan to continue to pursue a strategic transaction, in our continued efforts to maximize shareholder value, we have been exploring other potential strategic initiatives. In connection with these initiatives, in July 2015, we exercised our rights under the Telesat Holdco Shareholders Agreement to require Telesat Holdco to conduct a Telesat IPO. Specifically, we requested that Telesat Holdco issue not more than 25 million newly issued shares of Telesat Holdco voting common stock. We also requested the termination of the Shareholders Agreement and the elimination of certain provisions in Telesat Holdco’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 Holdco 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 the Telesat IPO and subject to the receipt of any necessary regulatory approvals, to obtain majority voting control of Telesat Holdco. Telesat Holdco has selected two co-managing underwriters and has informed us that it is working to implement the Telesat IPO. In addition, we are in discussions with PSP to attempt to agree on our requests regarding the Shareholders Agreement and Telesat Holdco’s Articles of Incorporation. If we are unable to reach agreement with PSP on these matters, the advice of the lead underwriters selected for the Telesat IPO will be sought to assist resolution. There can be no assurance as to whether, when or on what terms the Telesat IPO, termination or modification of the Shareholders Agreement or any requested changes to Telesat Holdco’s Articles of Incorporation may occur. If the Telesat IPO proceeds under unfavorable terms or at an unfavorable price, we may withdraw our demand for the Telesat IPO or otherwise seek to enforce our rights. In addition, we have been and are continuing to explore a cash distribution to Telesat Holdco shareholders (and, in turn, a cash distribution to our stockholders), either in conjunction with a strategic transaction or the Telesat IPO or on a stand-alone basis. There can be no assurance as to when or whether we will be able to conclude any strategic transaction or that any strategic initiatives or transaction or cash distribution involving Telesat, Telesat Holdco or Loral may occur, or that any particular economic, tax, structural or other objectives or benefits with respect to any initiative, transaction or distribution involving Telesat, Telesat Holdco or Loral’s interest therein will be achieved.
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.
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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.
2015 Compared with 2014 and 2014 Compared with 2013
The following compares our consolidated results for 2015, 2014 and 2013 as presented in our financial statements:
General and Administrative Expenses
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (In thousands) | ||||||||||||
| General and administrative expenses | $ | 6,530 | $ | 5,330 | $ | 16,038 | ||||||
General and administrative expenses increased by $1.2 million for the year ended December 31, 2015 as compared to the year ended December 31, 2014, primarily due to (i) a $0.9 million increase in postretirement benefit expense resulting from the settlement of certain retiree medical liabilities, a higher pension insurance premium charged by the PBGC and amortization of actuarial losses incurred in 2014, (ii) a $0.2 million decrease in ViaSat revenue share due primarily to the impact of the change in the U.S. dollar/Canadian dollar exchange rate on Canadian dollar denominated revenue and (iii) a $0.2 million increase in consulting charges.
General and administrative expenses decreased by $10.7 million for the year ended December 31, 2014 as compared to the year ended December 31, 2013, primarily from a decrease in pension expense of $7.8 million due to accelerated amortization in 2013 as a result of the termination of our supplemental executive retirement plan, a $1.3 million decrease in professional fees, a $0.7 million reduction in compensation expense resulting from the restructuring of our corporate office functions, a $0.5 million decrease in expenses related to stock-based compensation and a $0.3 million decrease in rent expense.
Interest and Investment Income
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (In thousands) | ||||||||||||
| Interest and investment income | $ | 138 | $ | 581 | $ | 1,238 | ||||||
Interest and investment income for 2015, 2014 and 2013 consists primarily of interest on our cash balance and the three-year promissory note in the principal amount of $101 million received in connection with the Sale (the “Land Note”). The decrease from 2014 to 2015 was primarily the result of the $33.7 million principal payment of the Land Note received on March 31, 2015. The decrease from 2013 to 2014 was primarily the result of the $67.3 million principal payment of the Land Note received on March 31, 2014.
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Other Expense
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (In thousands) | ||||||||||||
| Other expense | $ | 3,779 | $ | 3,266 | $ | 713 | ||||||
Other expense for the years ended December 31, 2015, 2014 and 2013 is primarily comprised of expenses related to the evaluation of strategic initiatives.
Income Tax Benefit (Provision)
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (In thousands) | ||||||||||||
| Income tax benefit (provision) | $ | 45,476 | $ | 8,105 | $ | (1,841 | ) | |||||
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 on a pre-tax loss from continuing operations of $10.2 million. For 2014, we recorded a current tax provision of $2.2 million and a deferred tax benefit of $10.3 million, resulting in a total tax benefit of $8.1 million on a pre-tax loss from continuing operations of $8.0 million. For 2013, we recorded a current tax benefit of $26.3 million and a deferred tax provision of $28.2 million, resulting in a total tax provision of $1.8 million on a pre-tax loss from continuing operations of $15.5 million. The deferred tax benefit (provision) for each period included the impact of equity in net (loss) income of affiliates from our consolidated statement of operations.
During 2015, the statute of limitations for the assessment of additional tax expired with regard to several federal and state UTPs from 2007, 2010 and 2011, and certain other UTPs were settled. As a result, the reduction to our liability for UTPs provided a current tax benefit, partially offset by an additional provision for the potential payment of interest on our remaining UTPs.
In December 2014, we received a $10.6 million tax refund from the carryback of our 2013 federal tax loss against the taxes previously paid for 2012. For 2014, the current tax provision includes a $3.9 million reduction to the benefit recorded in 2013 for this refund after having made lower contributions to our qualified pension plan in 2014 than originally anticipated, partially offset by a benefit of $2.6 million to reduce our liability for UTPs. The deferred tax benefit also included an increase to our federal NOL carryforward from the enhanced extraterritorial income exclusion provided by former section 114 of the Internal Revenue Code. Without the Sale, we would not have remeasured the extraterritorial income exclusion because it would have provided only a minimal cash tax benefit.
During 2013, the current tax benefit primarily relates to the refunds received from our federal and state income tax returns filed for 2012 (primarily as a result of the enhanced extraterritorial income exclusion) and the anticipated benefit from the carryback of the Company’s 2013 federal tax loss.
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.
See Critical Accounting Matters — Taxation below for discussion of our accounting method for income taxes.
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Equity in Net (Loss) Income of Affiliates
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (In thousands) | ||||||||||||
| Telesat Holdings Inc. | $ | (74,329 | ) | $ | 24,698 | $ | 47,251 | |||||
| XTAR, LLC | (30,463 | ) | (26,200 | ) | (5,854 | ) | ||||||
| Other | — | — | (2,570 | ) | ||||||||
| $ | (104,792 | ) | $ | (1,502 | ) | $ | 38,827 | |||||
The following is a reconciliation of the changes in our investment in Telesat for the years ended December 31, 2015 and 2014:
| Year Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| (In thousands) | ||||||||
| Opening Balance, January 1, | $ | 74,329 | $ | 60,157 | ||||
| Equity in net (loss) income of Telesat | (131,038 | ) | 25,986 | |||||
| Eliminations of affiliate transactions and related amortization | (1,215 | ) | (1,288 | ) | ||||
| Unrecognized loss (see below) | 57,924 | — | ||||||
| Settlement of tax indemnification | — | (4,963 | ) | |||||
| Proportionate share of Telesat other comprehensive income (see below) | — | (5,563 | ) | |||||
| Ending balance, December 31, | $ | — | $ | 74,329 | ||||
As of December 31, 2015, we held a 62.8% 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 SS/L 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, our investment in Telesat has been reduced to zero as a result of recording our interest in Telesat’s losses which were primarily driven by foreign exchange losses. In following the equity method of accounting, we will not record equity in net income of Telesat until our share of Telesat’s future net income exceeds the unrecognized loss of $57.9 million. In addition, we will not record our equity of $20.8 million in Telesat’s other comprehensive income until all unrecognized losses have been recorded.
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Summary financial information for Telesat in accordance with U.S. GAAP in Canadian dollars and U.S. dollars for the years ended December 31, 2015, 2014 and 2013 and as of December 31, 2015 and 2014 follows (in thousands):
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| 2015 | 2014 | 2013 | 2015 | 2014 | 2013 | |||||||||||||||||||
| (In Canadian dollars) | (In U.S. dollars) | |||||||||||||||||||||||
| Statement of Operations Data: | ||||||||||||||||||||||||
| Revenues | 954,157 | 920,856 | 892,812 | 751,684 | 837,440 | 867,914 | ||||||||||||||||||
| Operating expenses | (178,607 | ) | (178,075 | ) | (190,491 | ) | (140,706 | ) | (161,944 | ) | (185,179 | ) | ||||||||||||
| Depreciation, amortization and stock-based compensation | (242,430 | ) | (254,943 | ) | (252,813 | ) | (190,985 | ) | (231,849 | ) | (245,764 | ) | ||||||||||||
| Loss on disposition of long lived assets | (30 | ) | (304 | ) | (1,725 | ) | (24 | ) | (276 | ) | (1,677 | ) | ||||||||||||
| Operating income | 533,090 | 487,534 | 447,783 | 419,969 | 443,371 | 435,294 | ||||||||||||||||||
| Interest expense | (176,165 | ) | (200,563 | ) | (216,210 | ) | (138,783 | ) | (182,395 | ) | (210,180 | ) | ||||||||||||
| Expense of refinancing | — | — | (20,219 | ) | — | — | (19,655 | ) | ||||||||||||||||
| Foreign exchange loss | (541,991 | ) | (255,411 | ) | (197,065 | ) | (426,980 | ) | (232,275 | ) | (191,569 | ) | ||||||||||||
| Gain on financial instruments | 9,914 | 77,931 | 113,191 | 7,810 | 70,872 | 110,034 | ||||||||||||||||||
| Other income | 4,661 | 3,056 | 11,668 | 3,672 | 2,779 | 11,343 | ||||||||||||||||||
| Income tax provision | (94,499 | ) | (67,025 | ) | (40,159 | ) | (74,447 | ) | (60,954 | ) | (39,039 | ) | ||||||||||||
| Net (loss) income | (264,990 | ) | 45,522 | 98,989 | (208,759 | ) | 41,398 | 96,228 | ||||||||||||||||
| Average exchange rate for translating Canadian dollars to U.S. dollars ( 1 U.S. dollar equals) | 1.2714 | 1.1001 | 1.0287 | |||||||||||||||||||||
| As of December 31, | As of December 31, | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| (In Canadian dollars) | (In U.S. dollars) | |||||||||||||||
| Balance Sheet Data: | ||||||||||||||||
| Current assets | 786,202 | 578,525 | 568,106 | 497,287 | ||||||||||||
| Total assets | 5,548,543 | 5,290,592 | 4,009,352 | 4,552,613 | ||||||||||||
| Current liabilities | 259,465 | 264,029 | 187,488 | 227,200 | ||||||||||||
| Long-term debt, including current portion | 4,108,490 | 3,605,572 | 2,968,776 | 3,102,635 | ||||||||||||
| Total liabilities | 5,031,747 | 4,557,625 | 3,635,918 | 3,921,887 | ||||||||||||
| Shareholders’ equity | 516,796 | 732,967 | 373,434 | 630,726 | ||||||||||||
| Period end exchange rate for translating Canadian dollars to U.S. dollars (1 U.S. dollar equals) | 1.3839 | 1.1621 | ||||||||||||||
Telesat revenue decreased by $86 million for the year ended December 31, 2015 as compared to the year ended December 31, 2014 due primarily to the impact of the change in the U.S. dollar/Canadian dollar exchange rate on Canadian dollar denominated revenue, lower revenue from customers in the energy and resource industries and lower equipment sales. Telesat’s revenue, excluding foreign exchange impact, would have decreased by $29 million for the year ended December 31, 2015 as compared to the year ended December 31, 2014.
Telesat revenue decreased by $30 million for the year ended December 31, 2014 as compared to the year ended December 31, 2013 due primarily to the impact of the change in the U.S. dollar/Canadian dollar exchange rate on Canadian dollar denominated revenue, a decrease in revenue earned on Telesat’s Nimiq 2 satellite as the satellite was returned by Telesat’s customer in the third quarter of 2013 and lower equipment sales. These revenue decreases were partially offset by increased revenue on the Anik G1 satellite which entered commercial service in May 2013. Telesat’s revenue excluding foreign exchange impact would have decreased by $1 million for the year ended December 31, 2014 as compared to the year ended December 31, 2013.
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Telesat’s operating income decreased by $23 million for the year ended December 31, 2015 as compared to the year ended December 31, 2014 primarily due to the revenue decrease described above and the start of depreciation of the Telstar 12 VANTAGE satellite that entered service in December 2015. The foregoing decreases to operating income were partially offset by the impact of the change in the U.S. dollar/Canadian dollar exchange rate on Canadian dollar denominated expenses, a decrease in depreciation expense due to the end of useful life, for accounting purposes, of the Nimiq 2 satellite in February 2015, a decrease in amortization of intangible assets, a decrease in share-based compensation expense, a decrease in in-orbit insurance expense, lower bad debt expense and lower cost of sales related to lower equipment sales. Telesat’s operating income excluding foreign exchange impact would have decreased by $9 million for the year ended December 31, 2015 as compared to the year ended December 31, 2014.
Telesat’s operating income increased by $8 million for the year ended December 31, 2014 as compared to the year ended December 31, 2013 primarily due to the impact of the change in the U.S. dollar/Canadian dollar exchange rate on Canadian dollar denominated expenses, a decrease in share-based compensation expense related to stock options granted during the second quarter of 2013, a decrease in the provision for variable compensation, lower cost of sales as a result of lower equipment sales, lower in-orbit insurance expenses and lower amortization of intangible assets. These increases to operating income were partially offset by the revenue decrease described above and increased depreciation on Telesat’s Anik G1 satellite which entered commercial service in May 2013. Telesat’s operating income excluding foreign exchange impact would have increased by $15 million for the year ended December 31, 2014 as compared to the year ended December 31, 2013.
Expense of refinancing for the year ended December 31, 2013 primarily represents the premium paid and the write-off of deferred financing costs related to the redemption of Telesat’s 12.5% senior subordinated notes.
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, 2015, 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, 2015, Telesat’s U.S. dollar denominated debt totaled $2.6 billion. As of December 31, 2015, a five percent increase (decrease) in the Canadian dollar against the U.S. dollar would have increased (decreased) Telesat’s net income by approximately $115.5 million. This analysis assumes all other variables, in particular interest rates, remain constant.
The equity losses in XTAR, our 56% owned joint venture, 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, 2015, the value of our investment in XTAR was reduced to zero as a result of 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 and $18.7 million for the years ended December 31, 2015 and 2014, respectively, related to our investment in XTAR. The impairment charge recorded in 2014 was primarily due to a decline in XTAR’s revenues by approximately 17% from 2013 to 2014 resulting in a reassessment of our revenue expectations for future years. 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.
For the year ended December 31, 2013, we recorded a loss contingency of $3.7 million for an indemnification of certain pre-closing liabilities related to our sale of Globalstar do Brasil S.A. (“GdB”) in 2008. We also recorded a gain of $1.1 million related to the sale of our ownership interest in an affiliate with no carrying value.
Loss from Discontinued Operations, net of tax
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (In thousands) | ||||||||||||
| Loss from discontinued operations, net of tax | $ | (778 | ) | $ | (24,402 | ) | $ | (4,877 | ) | |||
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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, 2015, 2014 and 2013. Loss from discontinued operations in 2015 primarily comprises interest expense of $1.4 million on the ViaSat Settlement Agreement and the Allocation Agreement, net of an income tax benefit of $0.5 million. In 2014, loss from discontinued operations primarily comprises an increase to our indemnification liability of $38.8 million pursuant to the ViaSat Suit Settlement Agreement and the Allocation Agreement and is net of an income tax benefit of $14.5 million. Loss from discontinued operations in 2013 primarily comprises changes in the fair value of indemnification liabilities relating to the Sale, net of an income tax benefit of $3.0 million.
Backlog
Telesat’s backlog as of December 31, 2015 and 2014 was $3.5 billion and $3.9 billion, respectively. It is expected that approximately 15% of satellite services backlog will be recognized as revenue by Telesat during 2016. As of December 31, 2015, Telesat had received approximately $233 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.
Investments in Affiliates
Ownership interests in Telesat and XTAR are accounted for using the equity method of accounting. Income and losses of affiliates are recorded based on our beneficial interest. Our equity in net income or loss also reflects amortization of profits eliminated, to the extent of our economic interest in Telesat and XTAR, on satellites we constructed for Telesat and XTAR during the period in which we owned SS/L and on Loral’s sale to Telesat in April 2011 of its portion of the payload on the ViaSat-1 satellite and related assets. 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. 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. As of December 31, 2015, the value of our investment in XTAR was reduced to zero as a result of the decline in its fair value that was determined to be other-than-temporary.
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.
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Assets and Liabilities Measured at Fair Value
The following table presents our assets and liabilities measured at fair value at December 31, 2015:
| Level 1 | Level 2 | Level 3 | ||||||||||
| (In thousands) | ||||||||||||
| Assets | ||||||||||||
| Cash equivalents: Money market funds | $ | 53,129 | $ | — | $ | — | ||||||
| Other current assets: | ||||||||||||
| Indemnification - Sale of SS/L | — | — | 1,953 | |||||||||
| Liabilities | ||||||||||||
| Long term liabilities: | ||||||||||||
| Indemnification - Globalstar do Brasil S.A. | $ | — | $ | — | $ | 1,006 | ||||||
The carrying amount of cash equivalents approximates fair value because of the short maturity of those instruments.
The asset resulting from the indemnification of SS/L 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 GdB, originally determined using expected value analysis, is net of payments since inception. The fair values of indemnification liabilities are not remeasured on a recurring basis.
The Company does not have any non-financial assets or non-financial liabilities that are recognized or disclosed at fair value as of December 31, 2015.
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.
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.
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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, recommended by our consulting actuary and adopted by us, for the qualified pension plan and other employee postretirement benefit costs was 4.25% as of December 31, 2015 and 4.00% as of December 31, 2014.
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 and fixed income investments. Both investment types may include alternative investments which are permitted to be up to 40% 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 equity investments and 43.5% in fixed income investments. The expected long-term rate of return on plan assets determined on this basis was 7.25% for 2015, 2014 and 2013. For 2016, we will use an expected long-term rate of return of 7.00%.
Pension and other employee postretirement benefit costs included in income from continuing operations are expected to be approximately $1.3 million in 2016 compared to $1.6 million in 2015. Lowering the discount rate and the expected long-term rate of return each by 0.5% would have increased the qualified pension and other employee postretirement benefit costs by approximately $0.1 million and $0.1 million, respectively, in 2015.
The benefit obligations for pensions and other employee postretirement benefits exceeded the fair value of plan assets by $18.2 million at December 31, 2015. 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.
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Liquidity and Capital Resources
Loral
As described above, Loral’s principal asset is a 62.8% 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, 2015, the value of our investment in XTAR was reduced to 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, 2015 and 2014, XTAR had deferred payment of liabilities to Hisdesat of $17.7 million and $5.4 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 as well as consulting fees 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, 2015, Loral had $58.9 million of cash and cash equivalents. The Company’s cash and cash equivalents as of December 31, 2015 increased by $7.4 million from December 31, 2014 due primarily to a $33.7 million principal payment received from MDA under the Land Note related to the Sale, partially offset by $11.2 million in payments pursuant to the Settlement Agreement and Allocation Agreement relating to the ViaSat Suit, corporate expenses net of consulting fees and revenue share from Telesat of $5.4 million, payments of $4.3 million related to strategic initiatives, postretirement benefits funding of $3.8 million and other indemnification payments of $1.5 million. A discussion of cash changes by activity is set forth in the sections, “Net cash used in operating activities,” “Net cash provided by investing activities,” and “Net cash provided by (used in) financing activities.”
The Company did not have a credit facility as of December 31, 2015 and 2014.
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 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 for the next 12 months.
We expect that our major cash outlays for the next 12 months will include additional payments under the Settlement Agreement and the Allocation Agreement, payments under employee benefit programs and general corporate expenses net of consulting fees from Telesat.
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Risks to Cash Flow
In the fourth quarter of 2012, we sold our former subsidiary, SS/L, to MDA pursuant to the Purchase Agreement. Under the terms of the Purchase Agreement, we are obligated to indemnify MDA from (1) liabilities with respect to certain pre-closing taxes; and (2) certain litigation costs and litigation damages relating to the ViaSat Suit. Although the ViaSat Suit has been settled and our indemnification liability with respect thereto was determined in December 2014, the payment obligations to ViaSat are on a joint and several basis with MDA and SS/L. If MDA and SS/L were to default on all or part of their payment obligations to ViaSat, Loral would be obligated to pay ViaSat any amounts not paid by MDA and SS/L. We also remain obligated to indemnify MDA for certain pre-closing taxes. The amounts of indemnification claims relating to certain 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.
Telesat
Cash and Available Credit
As of December 31, 2015, Telesat had CAD 691 million of cash and short-term investments as well as approximately CAD 140 million of borrowing availability under its revolving credit facility.
Cash Flows from Operating Activities
Cash generated from operating activities for the year ended December 31, 2015 was CAD 422 million, a CAD 10 million increase compared to the prior year. The increase was primarily due to higher operating income, combined with lower interest payments and a positive change in working capital, partially offset by higher income taxes paid.
Cash generated from operating activities for the year ended December 31, 2014 was CAD 412 million, a CAD 68 million decrease compared to the prior year. The decrease was primarily due to higher income taxes paid and lower prepayments received from customers for future satellite services, partially offset by lower interest paid and an increase in operating income.
Cash generated from operating activities for the year ended December 31, 2013 was CAD 480 million. This consisted of operating income and customer prepayments for future satellite services, net of interest and income taxes paid.
Cash Flows used in Investing Activities
Cash used in Telesat’s investing activities for the year ended December 31, 2015 was CAD 194 million. Telesat’s investing activities included CAD 183 million of expenditures on satellite programs for the completion and launch of the Telstar 12 VANTAGE satellite in December 2015 and for the beginning of construction of the Telstar 19 VANTAGE and Telstar 18 VANTAGE satellites, as well as CAD 10 million for other property and equipment.
Cash used in investing activities for the year ended December 31, 2014 was CAD 95 million. This consisted of CAD 85 million of expenditures for the on-going construction of Telstar 12 VANTAGE, as well as CAD 10 million for other property and equipment, net of proceeds from the sale of assets.
Cash used in investing activities for the year ended December 31, 2013 was CAD 79 million. This consisted of CAD 71 million of cash outflows related to Telesat’s satellite programs for the completion and launch of Anik G1 in April 2013, and for the on-going construction of Telstar 12 VANTAGE, as well as CAD 8 million for other property and equipment, net of proceeds from the sale of assets.
Cash Flows used in Financing Activities
Cash used in Telesat’s financing activities for the year ended December 31, 2015 was CAD 81 million. This was primarily related to mandatory principal payments made on Telesat’s senior secured credit facilities.
Cash used in financing activities for the year ended December 31, 2014 was CAD 137 million. This was primarily related to mandatory principal repayments made on Telesat’s senior secured credit facilities and the cash settlement related to the termination of Telesat’s cross-currency basis swaps and forward foreign exchange contract in October 2014.
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Cash used in financing activities for the year ended December 31, 2013 was CAD 292 million. This was primarily the result of the early redemption of Telesat’s 12.5% senior subordinated notes and the associated premiums for early redemption. Other financing activities included mandatory repayments made on Telesat’s senior secured credit facilities, debt issue costs relating to the re-pricing and amendment of Telesat’s credit agreement in April 2013 and satellite performance incentive payments.
In addition, cash generated by exchange rate changes was CAD 45 million, CAD 19 million and CAD 7 million for the years ended December 31, 2015, 2014 and 2013, respectively. See Consolidated Operating Results – Equity in Net (Loss) Income of Affiliates for exchange rate information.
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, 2015, cash flows from operating activities and drawings on the available lines of credit 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 will 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 available lines of credit under Telesat’s revolving credit facility. 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, 2015 and December 31, 2014 was as follows:
| December 31, | ||||||||||||
| Maturity | Currency | 2015 | 2014 | |||||||||
| (In CAD thousands) | ||||||||||||
| Senior Secured Credit Facilities: | ||||||||||||
| Revolving credit facility | March 28, 2017 | CAD or USD equivalent | — | — | ||||||||
| Term Loan A | March 28, 2017 | CAD | 375,000 | 425,000 | ||||||||
| Term Loan B - Canadian facility | March 28, 2019 | CAD | 136,150 | 137,550 | ||||||||
| Term Loan B - U.S. facility | March 28, 2019 | USD | 2,349,505 | 1,993,233 | ||||||||
| 6.0% Senior notes | May 15, 2017 | USD | 1,245,510 | 1,045,890 | ||||||||
| 4,106,165 | 3,601,673 | |||||||||||
| Less: Deferred financing costs, interest rate floors and prepayment options | (42,944 | ) | (55,994 | ) | ||||||||
| Total debt under international financial reporting standards | 4,063,221 | 3,545,679 | ||||||||||
| U.S. GAAP adjustments | 45,269 | 59,893 | ||||||||||
| Total debt under U.S. GAAP | 4,108,490 | 3,605,572 | ||||||||||
| Current portion | 102,412 | 73,444 | ||||||||||
| Long term portion | 4,006,078 | 3,532,128 | ||||||||||
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Senior Secured Credit Facilities
The obligations under Telesat’s 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 other 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 senior secured 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.
The senior secured credit facilities are comprised of the following facilities:
i — Revolving Credit Facility
Telesat’s revolving credit facility (“Revolving Facility”) is a $140 million loan facility available in either Canadian or U.S. dollars, maturing on March 28, 2017. Loans under the Revolving Facility bear interest at a floating rate plus an applicable margin of 2.00% for prime rate and Alternative Base Rate (“ABR”) loans and 3% for Bankers Acceptance (“BA”) and Eurodollar loans. The Revolving Facility currently has an unused commitment fee of 50 basis points. As of December 31, 2015, other than approximately CAD 0.1 million in drawings related to letters of credit, there were no borrowings under this facility.
ii — Term Loan A Facility
Telesat’s term loan A facility (“TLA Facility”) is a CAD 500 million loan maturing on March 28, 2017. As of December 31, 2015, CAD 375 million of the facility was outstanding which represents the full amount available following mandatory repayments. The outstanding borrowings under the TLA Facility currently bear interest at a floating rate of the BA borrowing rate plus an applicable margin of 3.00%. The mandatory principal repayments on the TLA Facility are payable in varying amounts on a quarterly basis.
iii — Term Loan B — Canadian Facility
Telesat’s Canadian term loan B facility (“Canadian TLB Facility”) is a CAD 140 million loan maturing on March 28, 2019. As of December 31, 2015, CAD 136 million of this facility was outstanding, which represents the full amount available following mandatory repayments. The Canadian TLB Facility currently bears interest at a floating rate of the BA borrowing rate, but not less than 1.00%, plus an applicable margin of 3.25%. The mandatory principal repayments on the Canadian TLB Facility are a quarter of 1% of the original amount of the loan, which must be paid on the last day of each quarter.
iv — Term Loan B — U.S. Facility
Telesat’s U.S. term loan B facility (“U.S. TLB Facility”) is a $1.746 billion loan maturing on March 28, 2019. As of December 31, 2015, $1.698 billion of the facility was outstanding, which represents the full amount available following mandatory repayments. The outstanding borrowings under the U.S. TLB Facility bear interest at a floating rate of LIBOR, but not less than 0.75%, plus an applicable margin of 2.75%. The mandatory principal repayments on the U.S. TLB Facility are a quarter of 1% of the original amount of the loan, which must be paid on the last day of each quarter.
The maturity date for each of the senior secured credit facilities described above will be accelerated if Telesat’s existing senior notes or certain refinancing thereof are not repurchased, redeemed, refinanced or deferred before the date that is 91 days prior to the maturity date of such notes.
Senior Notes
The senior notes, in the amount of $900 million, bear interest at an annual rate of 6.0% and are due May 15, 2017. They include covenants or terms that restrict Telesat’s ability to, among other things, (i) incur additional indebtedness, (ii) incur liens, (iii) pay dividends or make certain other restricted payments, investments or acquisitions, (iv) enter into certain transactions with affiliates, (v) modify or cancel its satellite insurance, (vi) effect mergers with another entity, and (vii) redeem the senior notes, without penalty, before May 15, 2016, in each case subject to exceptions provided in the senior notes indenture.
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As of December 31, 2015, Telesat was in compliance with the financial covenants of its senior secured credit facilities and the indenture governing its senior notes.
Debt Service Cost
An estimate of interest expense is based upon assumptions of foreign exchange rates, LIBOR and BA rates and the applicable margins of Telesat’s senior secured credit facilities and senior notes. Telesat’s estimated interest expense for the year ending December 31, 2016 is expected to be approximately CAD 180 million.
Derivatives
Telesat uses, as required, interest rate and currency derivatives to manage its exposure to changes in interest rates and foreign exchange rates.
In order to manage its currency risk, Telesat had cross-currency basis swaps to synthetically convert $1.0 billion of the U.S. dollar denominated debt into CAD 1.2 billion of debt. These swaps were entered into in 2007 and matured in October 2014. Telesat has no outstanding currency derivative instruments as of December 31, 2015.
As of December 31, 2015, Telesat had one interest rate swap to fix interest on CAD 250 million of Canadian dollar denominated debt at a fixed rate of 1.62% (excluding applicable margins) and one interest rate swap to fix interest on CAD 300 million of U.S. dollar denominated debt at a fixed rate of 1.46% (excluding applicable margins). These contracts mature between June 30, 2016 and September 30, 2016.
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 413 million as of December 31, 2015. 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. For the year ended December 31, 2015, Telesat had capital expenditures of CAD 229 million which included CAD 52 million in trade and other payables, as compared to capital expenditure of CAD 108 million in the prior year.
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Contractual Obligations and Other Commercial Commitments
The following table aggregates Loral’s contractual obligations and other commercial commitments as of December 31, 2015 (in thousands).
Contractual Obligations:
| Payments Due by Period (3) | ||||||||||||||||||||
| Less than | More than | |||||||||||||||||||
| Total | 1 Year | 1-3 Years | 4-5 Years | 5 Years | ||||||||||||||||
| SS/L indemnification (1) | $ | 14,047 | $ | 11,238 | $ | 2,809 | $ | — | $ | — | ||||||||||
| Lease payments(2) | 877 | 585 | 292 | — | — | |||||||||||||||
| (1) | Represents future payments to ViaSat pursuant to the Settlement Agreement among Loral, MDA, SS/L and ViaSat and the Allocation Agreement between Loral and MDA. |
| (2) | Represents future minimum payments under operating leases. |
| (3) | Does not include our liabilities for uncertain tax positions of $70 million. Because the timing of future cash outflows associated with our liabilities for uncertain tax positions is highly uncertain, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities (see Note 7 to the financial statements). Does not include obligations for pension and other postretirement benefits, for which we are required to make employer contributions of approximately $2.3 million in 2016. We also expect to make employer contributions to our plans in future years. |
Net Cash Used in Operating Activities
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 used in operations was $29.1 million for the year ended December 31, 2014.
Net cash used in operating activities by continuing operations was $2.4 million for the year ended December 31, 2014, consisting primarily of a $9.7 million cash use attributable to income from continuing operations adjusted for non-cash operating items, a $3.9 million decrease in pension and other post retirement liabilities and a $2.9 million decrease in other long term liabilities, partially offset by a $13.1 million reduction to income taxes receivable, net and a $1.1 million increase in accrued expenses and other current liabilities.
Net cash used in operating activities by discontinued operations was $26.7 million for the year ended December 31, 2014 consisting primarily of net payments of $20.8 million to ViaSat pursuant to the Settlement Agreement and the Allocation Agreement and payment of $10.8 million of indemnified litigation costs related to the ViaSat Suit, partially offset by reimbursement by SS/L of its $5.4 million final share of litigation costs related to the ViaSat Suit.
Net cash used in operations was $70.5 million for the year ended December 31, 2013.
Net cash used in operating activities by continuing operations was $21.5 million for the year ended December 31, 2013, consisting primarily of an increase in income taxes receivable of $12.1 million, a $17.7 million lump sum payment to the participants in the SERP as a result of its termination, an $8.4 million decrease in accrued expenses and other current liabilities of which $3.7 million relates to payment of the GdB indemnification liability and $2.7 million in contributions to the qualified pension plan, partially offset by $19.9 million from income from continuing operations adjusted for non-cash operating items, which included a tax benefit of $10.1 million received in cash during 2013.
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Net cash used in operating activities by discontinued operations was $49.0 million for the year ended December 31, 2013 consisting primarily of income tax payments of $35.1 million relating to the gain on the Sale and payment of $13.2 million of indemnification liabilities related to the Sale.
Net Cash Provided by Investing Activities
Net cash provided by investing activities for the year ended December 31, 2015 was $33.6 million.
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 principal under the Land Note.
Net cash provided by investing activities for the year ended December 31, 2014 was $72.8 million.
Net cash provided by investing activities from continuing operations for the year ended December 31, 2014 was $5.4 million consisting primarily of a tax indemnification recovery received from Telesat.
Net cash provided by investing activities from discontinued operations for the year ended December 31, 2014 was $67.3 million consisting of the receipt of principal under the Land Note.
Net cash provided by investing activities from continuing operations for the year ended December 31, 2013 was $1.1 million relating to the proceeds from the sale of our ownership interests in an affiliate.
Net Cash Provided by (Used in) Financing Activities
Net cash provided by financing activities was $2.6 million and $1.9 million for the years ended December 31, 2015 and 2014, respectively, consisting of excess tax benefits associated with stock-based compensation.
Net cash used in financing activities by continuing operations for the year ended December 31, 2013 was $12.0 million which includes funding of $8.9 million of withholding taxes relating to stock-based compensation and a $3.1 million adjustment to 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
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. Operating cash flows for 2014 included contributions of approximately $4.1 million to the qualified pension plan. Operating cash flows for 2013 included contributions of approximately $2.7 million to the qualified pension plan, net of $1.2 million received as a true-up of amounts transferred to the SS/L pension plan related to the Sale. In 2013, we also made regular benefit payments of $0.4 million for our supplemental executive retirement plan, in addition to the lump sum payment of $17.7 million related to the termination of the supplemental executive retirement plan.
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).
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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 14 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 2015, 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, 2015.
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. Telesat is also exposed to foreign currency risk on anticipated transactions, such as the costs of satellite construction, launch and acquisition.
Telesat’s main currency exposures as of December 31, 2015 lie in its U.S. dollar denominated debt financing and cash and short-term investments. In addition, approximately 51% of Telesat’s revenue, 42% of its operating expenses, 86% of its interest expense and a majority of its capital expenditures were denominated in U.S. dollars for the year ended December 31, 2015.
As of December 31, 2015, a five percent change in the Canadian dollar against the U.S. dollar would have changed Telesat’s net income by approximately $115.5 million. This analysis assumes that 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.
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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.
Telesat uses the following instruments, as required:
| • | forward currency contracts to hedge foreign currency risk on anticipated cash flows, mainly related to the construction of satellites and interest payments; | |
| • | Currency derivative instruments to hedge the foreign exchange risk on its U.S. dollar denominated debt; and | |
| • | interest rate swaps to hedge the interest rate risk related to indebtedness, a portion of which includes a variable interest rate. |
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 Exchange Act) as of December 31, 2015, 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 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, 2015.
Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2015 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in its attestation report which is included below.
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Changes in Internal Controls Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2015 that have materially affected or are reasonably likely to materially affect our 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.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Loral Space & Communications Inc.
New York, New York
We have audited the internal control over financial reporting of Loral Space & Communications Inc. and subsidiaries (the “Company”) as of December 31, 2015, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. 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 conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel 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 the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2015, of the Company and our report dated February 29, 2016 expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.
/s/ DELOITTE & TOUCHE LLP
New York, New York
February 29, 2016
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None.
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 February 16, 2016.
| Name | Age | Position | ||
| Avi Katz | 57 | President, General Counsel and Secretary since December 2012. Senior Vice President, General Counsel and Secretary from January 2008 to December 2012. | ||
| John Capogrossi | 62 | 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 | 52 | 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 2016 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 2016 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 2016 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 2016 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 2016 definitive proxy statement which is incorporated herein by reference or by amendment to this Annual Report on Form 10-K.
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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, 2015 and 2014 | F-3 |
| Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013 | F-4 |
| Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2015, 2014 and 2013 | F-5 |
| Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2015, 2014 and 2013 | F-6 |
| Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013 | F-7 |
| Notes to Consolidated Financial Statements | F-8 |
| (a) 2. Financial Statement Schedule | |
| Schedule II | F-37 |
| Separate Financial Statements of Subsidiaries not consolidated Pursuant to Rule 3-09 of Regulation S-X | |
| Telesat Holdings Inc. and Subsidiaries: | |
| Report of Independent Registered Public Accounting Firm | F-38 |
| Consolidated Statements of (Loss) Income for the years ended December 31, 2015, 2014 and 2013 | F-39 |
| Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2015, 2014 and 2013 | F-40 |
| Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2015, 2014 and 2013 | F-41 |
| Consolidated Balance Sheets as of December 31, 2015 and 2014 | F-42 |
| Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013 | F-43 |
| Notes to the 2015 Consolidated Financial Statements | F-44 |
| 60 |
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) ‡ |
| 61 |
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 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 Michel G. Cayouette(20) ‡ | |
| 10.30 | 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 Paul D. Bush(20) ‡ | |
| 10.31 | 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) ‡ | |
| 10.32 | 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) | |
| 10.33 | 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) | |
| 10.34 | MDA/Loral Dispute Resolution, dated December 1, 2014, by and between Loral Space & Communications Inc. and MacDonald, Dettwiler and Associates Ltd.(22) |
| 62 |
Exhibit Number |
Description | |
| 14.1 | Code of Conduct, Revised as of January 19, 2016(23) | |
| 21.1 | List of Subsidiaries of the Registrant† | |
| 23.1 | Consent of Deloitte & Touche LLP† | |
| 23.2 | Consent of Deloitte & Touche 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 | Articles of Incorporation of Telesat Holdings Inc. (formerly 4363205 Canada Inc.)(2) | |
| 99.2 | By-Law No. 1 of Telesat Holdings Inc. (formerly 4363205 Canada Inc.)(2) | |
| 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 April 2, 2013, to the Credit Agreement, dated March 28, 2012, 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(27) | |
| 99.5 | Indenture, dated May 14, 2012, with respect to Telesat Canada’s 6.0% Senior Notes due 2017, among Telesat Canada, Telesat LLC, as co-issuer, the guarantors party thereto, and The Bank of New York Mellon, as Trustee(26) | |
| 99.6 | First Supplemental Indenture, dated as of September 13, 2013, with respect to Telesat Canada’s 6.0% Senior Notes due 2017, among Telesat Luxembourg S.à r.l., Telesat Canada, Telesat LLC, as co-issuer, the guarantors party thereto and The Bank of New York Mellon, as Trustee(28) | |
| 99.7 | Second Supplemental Indenture, dated as of November 13, 2015, with respect to Telesat Canada’s 6.0% Senior Notes due 2017, among Telesat (IOM) Holdings Limited, Telesat International Limited, Telesat Canada, Telesat LLC, as co-issuer, the guarantors party thereto and The Bank of New York Mellon, as Trustees(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. |
| 63 |
| (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 Form 6-K filed by Telesat Canada on March 29, 2012. |
| (26) | Incorporated by reference from the Form 6-K filed by Telesat Canada on May 14, 2012. |
| (27) | Incorporated by reference from the Form 6-K filed by Telesat Holdings Inc. on April 2, 2013. |
| (28) | Incorporated by reference from the Form 20-F filed by Telesat Holdings Inc. on February 24, 2014. |
| (29) | Incorporated by reference from the Form 20-F filed by Telesat Holdings Inc. on February 25, 2016. |
| † | Filed herewith. |
| ‡ | Management contract or compensatory plan, contract or arrangement with directors or named executive officers. |
| 64 |
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: February 29, 2016 | ||
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. Mark H. Rachesky, M.D. |
Director, Non-Executive Chairman of the Board |
February 29, 2016 | ||
/s/ MICHAEL B. TARGOFF Michael B. Targoff |
Director, Vice Chairman of the Board
|
February 29, 2016 | ||
/s/ JOHN D. HARKEY, JR. John D. Harkey, Jr. |
Director | February 29, 2016 | ||
/s/ ARTHUR L. SIMON Arthur L. Simon |
Director | February 29, 2016 | ||
/s/ JOHN P. STENBIT John P. Stenbit |
Director | February 29, 2016 | ||
/s/ JANET T. YEUNG Janet T. Yeung |
Director | February 29, 2016 | ||
/s/ AVI KATZ Avi Katz |
President, General Counsel & Secretary (Principal Executive Officer) | February 29, 2016 | ||
/s/ JOHN CAPOGROSSI John Capogrossi |
Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) |
February 29, 2016 | ||
/s/ RAVINDER S. GIRGLA Ravinder S. Girgla |
Vice President and Controller (Principal Accounting Officer) |
February 29, 2016 |
| 65 |
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Loral Space & Communications Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Loral Space & Communications Inc. and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive (loss) income, equity, and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included the financial statement schedule listed in the Index at Item 15(a)2. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 29, 2016 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
New York, New York
February 29, 2016
| F-2 |
LORAL SPACE & COMMUNICATIONS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 58,853 | $ | 51,433 | ||||
| Notes receivable | — | 33,667 | ||||||
| Other current assets | 2,979 | 1,786 | ||||||
| Total current assets | 61,832 | 86,886 | ||||||
| Investments in affiliates | — | 104,792 | ||||||
| Deferred tax assets | 152,676 | 112,898 | ||||||
| Other assets | 110 | 50 | ||||||
| Total assets | $ | 214,618 | $ | 304,626 | ||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accrued employment costs | $ | 2,376 | $ | 2,300 | ||||
| Other current liabilities | 12,055 | 13,424 | ||||||
| Total current liabilities | 14,431 | 15,724 | ||||||
| Pension and other postretirement liabilities | 18,119 | 20,793 | ||||||
| Long-term liabilities | 73,578 | 92,469 | ||||||
| Total liabilities | 106,128 | 128,986 | ||||||
| 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 and 21,568,706 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 | 1,020,129 | 1,017,520 | ||||||
| Treasury stock (at cost), 154,494 shares of voting common stock | (9,592 | ) | (9,592 | ) | ||||
| Accumulated deficit | (873,660 | ) | (803,378 | ) | ||||
| Accumulated other comprehensive loss | (28,698 | ) | (29,221 | ) | ||||
| Total shareholders' equity | 108,490 | 175,640 | ||||||
| Total liabilities and shareholders' equity | $ | 214,618 | $ | 304,626 | ||||
See notes to consolidated financial statements
| F-3 |
LORAL SPACE & COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| General and administrative expenses | $ | (6,530 | ) | $ | (5,330 | ) | $ | (16,038 | ) | |||
| Operating loss | (6,530 | ) | (5,330 | ) | (16,038 | ) | ||||||
| Interest and investment income | 138 | 581 | 1,238 | |||||||||
| Interest expense | (17 | ) | (15 | ) | (17 | ) | ||||||
| Other expense | (3,779 | ) | (3,266 | ) | (713 | ) | ||||||
| Loss from continuing operations before income taxes and equity in net (loss) income of affiliates | (10,188 | ) | (8,030 | ) | (15,530 | ) | ||||||
| Income tax benefit (provision) | 45,476 | 8,105 | (1,841 | ) | ||||||||
| Income (loss) from continuing operations before equity in net (loss) income of affiliates | 35,288 | 75 | (17,371 | ) | ||||||||
| Equity in net (loss) income of affiliates | (104,792 | ) | (1,502 | ) | 38,827 | |||||||
| (Loss) income from continuing operations | (69,504 | ) | (1,427 | ) | 21,456 | |||||||
| Loss from discontinued operations, net of tax | (778 | ) | (24,402 | ) | (4,877 | ) | ||||||
| Net (loss) income | $ | (70,282 | ) | $ | (25,829 | ) | $ | 16,579 | ||||
| Net (loss) income per share: | ||||||||||||
| Basic | ||||||||||||
| (Loss) income from continuing operations | $ | (2.25 | ) | $ | (0.05 | ) | $ | 0.70 | ||||
| Loss from discontinued operations, net of tax | (0.03 | ) | (0.79 | ) | (0.16 | ) | ||||||
| Net (loss) income | $ | (2.28 | ) | $ | (0.84 | ) | $ | 0.54 | ||||
| Diluted | ||||||||||||
| (Loss) income from continuing operations | $ | (2.25 | ) | $ | (0.05 | ) | $ | 0.67 | ||||
| Loss from discontinued operations, net of tax | (0.03 | ) | (0.79 | ) | (0.16 | ) | ||||||
| Net (loss) income | $ | (2.28 | ) | $ | (0.84 | ) | $ | 0.51 | ||||
| Weighted average common shares outstanding: | ||||||||||||
| Basic | 30,928 | 30,920 | 30,850 | |||||||||
| Diluted | 30,928 | 30,920 | 30,999 | |||||||||
See notes to consolidated financial statements
| F-4 |
LORAL SPACE & COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Net (loss) income | $ | (70,282 | ) | $ | (25,829 | ) | $ | 16,579 | ||||
| Other comprehensive income (loss), net of tax: | ||||||||||||
| Post-retirement benefits | 523 | (4,811 | ) | 8,482 | ||||||||
| Proportionate share of Telesat other comprehensive (loss) income | — | (3,494 | ) | 7,996 | ||||||||
| Other comprehensive income (loss) net of tax | 523 | (8,305 | ) | 16,478 | ||||||||
| Comprehensive (loss) income | $ | (69,759 | ) | $ | (34,134 | ) | $ | 33,057 | ||||
See notes to consolidated financial statements
| F-5 |
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, 2013 | 21,417 | $ | 214 | 9,506 | $ | 95 | $ | 1,027,266 | 154 | $ | (9,592 | ) | $ | (794,128 | ) | $ | (37,394 | ) | $ | 186,461 | ||||||||||||||||||||
| Net income | 16,579 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 16,478 | |||||||||||||||||||||||||||||||||||||||
| Comprehensive income | 33,057 | |||||||||||||||||||||||||||||||||||||||
| Exercise of restricted stock units | 175 | 2 | (2 | ) | — | |||||||||||||||||||||||||||||||||||
| Equitable adjustment to restricted stock units for dividends and distributions | 120 | 1 | (1 | ) | — | |||||||||||||||||||||||||||||||||||
| Shares surrendered to fund withholding taxes | (143 | ) | (1 | ) | (8,896 | ) | (8,897 | ) | ||||||||||||||||||||||||||||||||
| Adjustment to tax benefit associated with stock-based compensation | (3,128 | ) | (3,128 | ) | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 417 | 417 | ||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2013 | 21,569 | 216 | 9,506 | 95 | 1,015,656 | 154 | (9,592 | ) | (777,549 | ) | (20,916 | ) | 207,910 | |||||||||||||||||||||||||||
| Net loss | (25,829 | ) | ||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | (8,305 | ) | ||||||||||||||||||||||||||||||||||||||
| Comprehensive loss | (34,134 | ) | ||||||||||||||||||||||||||||||||||||||
| Adjustment to tax benefit associated with stock-based compensation | 1,864 | 1,864 | ||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2014 | 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 | ||||||||||||||||||||
See notes to consolidated financial statements
| F-6 |
LORAL SPACE & COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Operating activities: | ||||||||||||
| Net (loss) income | $ | (70,282 | ) | $ | (25,829 | ) | $ | 16,579 | ||||
| Loss from discontinued operations, net of tax | 778 | 24,402 | 4,877 | |||||||||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||||||||||
| Non-cash operating items (Note 2) | 66,399 | (8,276 | ) | (1,521 | ) | |||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Other current assets and other assets | 25 | (125 | ) | 2,012 | ||||||||
| Accrued expenses and other current liabilities | (988 | ) | 1,152 | (8,442 | ) | |||||||
| Income taxes receivable and payable | (834 | ) | 13,128 | (12,112 | ) | |||||||
| Pension and other postretirement liabilities | (3,504 | ) | (3,930 | ) | (21,183 | ) | ||||||
| Long-term liabilities | (7,586 | ) | (2,903 | ) | (1,750 | ) | ||||||
| Net cash used in operating activities – continuing operations | (15,992 | ) | (2,381 | ) | (21,540 | ) | ||||||
| Net cash used in operating activities – discontinued operations | (12,762 | ) | (26,743 | ) | (48,965 | ) | ||||||
| Net cash used in operating activities | (28,754 | ) | (29,124 | ) | (70,505 | ) | ||||||
| Investing activities: | ||||||||||||
| Tax indemnification recovery from affiliate | — | 5,438 | — | |||||||||
| Proceeds from sale of investments, net | — | — | 1,150 | |||||||||
| Capital expenditures | (102 | ) | (4 | ) | (64 | ) | ||||||
| Net cash (used in) provided by investing activities – continuing operations | (102 | ) | 5,434 | 1,086 | ||||||||
| Receipt of principal, Land Note - discontinued operations | 33,667 | 67,333 | — | |||||||||
| Net cash provided by investing activities | 33,565 | 72,767 | 1,086 | |||||||||
| Financing activities: | ||||||||||||
| Funding of withholding taxes for stock-based compensation | — | — | (8,897 | ) | ||||||||
| Adjustment to tax benefit associated with stock based-based compensation | 2,609 | 1,864 | (3,128 | ) | ||||||||
| Net cash provided by (used in) financing activities – continuing operations | 2,609 | 1,864 | (12,025 | ) | ||||||||
| Net cash provided by financing activities – discontinued operations | — | — | — | |||||||||
| Net cash provided by (used in) financing activities | 2,609 | 1,864 | (12,025 | ) | ||||||||
| Increase (decrease) in cash and cash equivalents | 7,420 | 45,507 | (81,444 | ) | ||||||||
| Cash and cash equivalents — beginning of period | 51,433 | 5,926 | 87,370 | |||||||||
| Cash and cash equivalents — end of period | $ | 58,853 | $ | 51,433 | $ | 5,926 | ||||||
See notes to consolidated financial statements
| F-7 |
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 through its ownership interest in Telesat Holdings Inc. (“Telesat Holdco”) which owns Telesat Canada (“Telesat”), a global satellite services operator. Telesat owns and leases a satellite fleet that operates in geosynchronous 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.
Loral holds a 62.8% economic interest and a 32.7% voting interest in Telesat Holdco (see Note 5). We use the equity method of accounting for our ownership interest in Telesat Holdco.
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.
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.) (“SS/L”), 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, SS/L, 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 SS/L (see Note 14).
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, 2015, 2014 and 2013.
Investments in Affiliates
Ownership interests in Telesat and XTAR, LLC (“XTAR”) are accounted for using the equity method of accounting. Income and losses of affiliates are recorded based on our beneficial interest. Our equity in net income or loss also reflects amortization of profits eliminated, to the extent of our economic interest in Telesat and XTAR, on satellites we constructed for them while we owned SS/L and on Loral’s sale to Telesat in April 2011 of its portion of the payload on the ViaSat-1 satellite and related assets. 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. 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 differ from estimates.
| F-8 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 and Cash Equivalents
As of December 31, 2015, the Company had $58.9 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 and no redemption limitations. Management determines the appropriate classification of its investments at the time of purchase and at each balance sheet date.
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 a result, management believes that its potential credit risks are minimal.
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, 2015 and December 31, 2014 (in thousands):
| December 31, 2015 | December 31, 2014 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Cash and cash equivalents: | ||||||||||||||||||||||||
| Money market funds | $ | 53,129 | $ | — | $ | — | $ | 42,432 | $ | — | $ | — | ||||||||||||
| Note receivable: | ||||||||||||||||||||||||
| Land Note | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 33,667 | ||||||||||||
| Other current assets: | ||||||||||||||||||||||||
| Indemnification - Sale of SS/L | $ | — | $ | — | $ | 1,953 | $ | — | $ | — | $ | 428 | ||||||||||||
| Liabilities | ||||||||||||||||||||||||
| Long term liabilities | ||||||||||||||||||||||||
| Indemnification - Globalstar do Brasil S.A. | $ | — | $ | — | $ | 1,006 | $ | — | $ | — | $ | 972 | ||||||||||||
| F-9 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The carrying amount of cash equivalents approximates fair value as of each reporting date because of the short maturity of those instruments. The carrying amount of the Land Note (see Note 4) approximates fair value because the stated interest rate was consistent with then current market rates.
The asset resulting from the indemnification of SS/L is for certain pre-closing taxes and reflects the excess of payments since inception over the estimated liability, which was originally determined using 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. The fair values of indemnification liabilities are not remeasured on a recurring basis.
The Company does not have any non-financial assets or non-financial liabilities that are recognized or disclosed at fair value as of December 31, 2015.
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.
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.
| F-10 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Non-cash operating items: | ||||||||||||
| Equity in net loss (income) of affiliates | $ | 104,792 | $ | 1,502 | $ | (38,827 | ) | |||||
| Deferred taxes | (39,694 | ) | (10,276 | ) | 28,184 | |||||||
| Depreciation and amortization | 41 | 42 | 18 | |||||||||
| Stock-based compensation | — | — | 417 | |||||||||
| Amortization of prior service credit and actuarial loss | 1,260 | 456 | 8,687 | |||||||||
| Net non-cash operating items – continuing operations | $ | 66,399 | $ | (8,276 | ) | $ | (1,521 | ) | ||||
| Supplemental information: | ||||||||||||
| Interest paid – continuing operations | $ | 314 | $ | 15 | $ | 17 | ||||||
| Interest paid – discontinued operations | $ | 1,549 | $ | 227 | $ | — | ||||||
| Tax refunds, net of payments - continuing operations | $ | (233 | ) | $ | (10,265 | ) | $ | (10,061 | ) | |||
| Tax payments, net of refunds – discontinued operations | $ | — | $ | — | $ | 35,074 | ||||||
Recent Accounting Pronouncements
In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-17, Income Taxes – Balance Sheet Classification of Deferred Taxes, which simplifies the balance sheet classification of deferred taxes. The new guidance requires that all deferred taxes be presented as noncurrent. The new guidance is effective in fiscal years beginning after December 15, 2016 with earlier application permitted. The amendments in this update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company adopted the guidance for the 2015 annual reporting period and applied it prospectively. The new guidance did not have a material impact on our consolidated financial statements (see Note 7).
In January 2015, the FASB issued ASU No. 2015-01, Income Statement – Extraordinary and Unusual Items. ASU 2015-01 simplifies income statement classification by removing the concept of extraordinary items from U.S. GAAP. Under the existing guidance, an entity is required to separately disclose extraordinary items, net of tax, in the income statement after income from continuing operations if an event or transaction is of unusual nature and occurs infrequently. This separate, net-of-tax presentation (and corresponding earnings per share impact) will no longer be allowed. The existing requirement to separately present items that are of unusual nature or occur infrequently on a pre-tax basis within income from continuing operations has been retained. The new guidance also requires similar separate presentation of items that are both unusual and infrequent. The guidance, effective for the Company on January 1, 2016, with earlier application permitted as of the beginning of the fiscal year of adoption, is not expected to have a material impact on our consolidated financial statements.
In August 2014, the FASB issued a new standard – ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern - that will explicitly require management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. According to the new standard, substantial doubt about an entity’s ability to continue as a going concern exists if it is probable that the entity will be unable to meet its obligations as they become due within one year after the date the entity’s financial statements are issued. In order to determine the specific disclosures, if any, that would be required, management will need to assess if substantial doubt exists, and, if so, whether its plans will alleviate such substantial doubt. The new standard requires assessment each annual and interim period and will be effective for the Company on December 31, 2016 with earlier application permitted. We do not expect this guidance to have a material impact on our consolidated financial statements.
| F-11 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU No. 2014-08 changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, only those disposals that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results will be reported as discontinued operations in the consolidated financial statements. Also, disposal of an equity method investment that meets the definition of a discontinued operation is to be reported in discontinued operations under the new guidance. The guidance, effective for the Company on January 1, 2015, did not 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 | Loss | ||||||||||
| Balance at January 1, 2013 | $ | (17,653 | ) | $ | (19,741 | ) | $ | (37,394 | ) | |||
| Other comprehensive income before reclassification | 3,102 | 7,996 | 11,098 | |||||||||
| Amounts reclassified from accumulated other comprehensive loss | 5,380 | — | 5,380 | |||||||||
| Net current-period other comprehensive income | 8,482 | 7,996 | 16,478 | |||||||||
| Balance at December 31, 2013 | (9,171 | ) | (11,745 | ) | (20,916 | ) | ||||||
| Other comprehensive loss before reclassification | (5,147 | ) | (3,494 | ) | (8,641 | ) | ||||||
| Amounts reclassified from accumulated other comprehensive loss | 336 | — | 336 | |||||||||
| Net current-period other comprehensive loss | (4,811 | ) | (3,494 | ) | (8,305 | ) | ||||||
| Balance at December 31, 2014 | (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 loss | 523 | — | 523 | |||||||||
| Balance at December 31, 2015 | $ | (13,459 | ) | $ | (15,239 | ) | $ | (28,698 | ) | |||
| F-12 |
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, 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 Holdco other comprehensive loss (see Note 5) | — | — | — | |||||||||
| Other comprehensive loss | $ | 836 | $ | (313 | ) | $ | 523 | |||||
| Year ended December 31, 2014 | ||||||||||||
| Postretirement Benefits: | ||||||||||||
| Net actuarial loss and prior service credits | $ | (8,117 | ) | $ | 2,970 | $ | (5,147 | ) | ||||
| Amortization of prior service credits and net actuarial loss | 456 | (a) | (120 | ) | 336 | |||||||
| Postretirement benefits | (7,661 | ) | 2,850 | (4,811 | ) | |||||||
| Proportionate share of Telesat Holdco other comprehensive (loss) gain | (5,563 | ) | 2,069 | (3,494 | ) | |||||||
| Other comprehensive income | $ | (13,224 | ) | $ | 4,919 | $ | (8,305 | ) | ||||
| Year ended December 31, 2013 | ||||||||||||
| Postretirement Benefits: | ||||||||||||
| Net actuarial loss and prior service credits | $ | 5,012 | $ | (1,910 | ) | $ | 3,102 | |||||
| Amortization of prior service credits and net actuarial loss | 8,687 | (a) | (3,307 | ) | 5,380 | |||||||
| Postretirement benefits | 13,699 | (5,217 | ) | 8,482 | ||||||||
| Proportionate share of Telesat Holdco other comprehensive (loss) income | 12,906 | (4,910 | ) | 7,996 | ||||||||
| Other comprehensive income | $ | 26,605 | $ | (10,127 | ) | $ | 16,478 | |||||
(a) Reclassifications are included in general and administrative expenses.
4. Receivables
In connection with the Sale, Loral received a three-year promissory note in the principal amount of $101 million (the “Land Note”). Loral received principal payments under the Land Note of $33.7 million and $67.3 million on March 31, 2015 and 2014, respectively. Interest on the Land Note ranged from 1.0% to 1.5%. All amounts due under the Land Note had been received as of March 31, 2015.
5. Investments in Affiliates
Investments in affiliates consist of (in thousands):
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| Telesat Holdings Inc. | $ | — | $ | 74,329 | ||||
| XTAR, LLC | — | 30,463 | ||||||
| $ | — | $ | 104,792 | |||||
| F-13 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Equity in net (loss) income of affiliates consists of (in thousands):
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Telesat Holdings Inc. | $ | (74,329 | ) | $ | 24,698 | $ | 47,251 | |||||
| XTAR, LLC | (30,463 | ) | (26,200 | ) | (5,854 | ) | ||||||
| Other | — | — | (2,570 | ) | ||||||||
| $ | (104,792 | ) | $ | (1,502 | ) | $ | 38,827 | |||||
Telesat
As of December 31, 2015 and 2014, we held a 62.8% economic interest and a 32.7% voting interest in Telesat. 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.
As of December 31, 2015, our investment in Telesat has been reduced to zero as a result of recording our interest in Telesat’s losses which were primarily driven by foreign exchange losses. In following the equity method of accounting, we will not record equity in net income of Telesat until our share of Telesat’s future net income exceeds the unrecognized loss of $57.9 million. In addition, we will not record our equity of $20.8 million in Telesat’s other comprehensive income until all unrecognized losses have been recorded.
Our statements of operations and comprehensive (loss) income for the years ended December 31, 2015 and 2014 included equity in net (loss) income of affiliates of $(3.5) million and $0.3 million, respectively, and other comprehensive income of $5.3 million and $0.4 million, respectively, that should have been recognized in prior periods. These adjustments, which related to our investment in Telesat, 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.
The ability of Telesat to pay dividends or certain other restricted payments as well as consulting fees in cash to Loral is governed by applicable covenants in Telesat’s debt and shareholder agreements. Under Telesat’s credit agreement and the indenture for Telesat’s 6% senior notes, dividends or certain other restricted payments may be paid only if there is a sufficient capacity under a restricted payment basket, which is based on a formula of cumulative consolidated EBITDA less 1.4 times cumulative consolidated interest expense. Under the 6% senior note indenture and credit agreement, Telesat is generally permitted to pay consulting fees to Loral in cash (See Note 15).
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 SS/L and on Loral’s sale to Telesat in April 2011 of its portion of the payload on the ViaSat-1 satellite and related assets.
In connection with the acquisition of our ownership interest in Telesat in 2007, Loral retained the benefit of tax recoveries related to transferred assets and indemnified Telesat (“Telesat Indemnification”) for certain liabilities including Loral Skynet’s tax liabilities arising prior to January 1, 2007. During the year ended December 31, 2014, Loral and Telesat settled several of the Telesat Indemnification tax disputes (see Note 15) resulting in a net cash recovery of $5.4 million which was received from Telesat in April 2014. Our investment in Telesat was reduced by $5.0 million as a result of this recovery.
On April 2, 2013, Telesat re-priced and amended the Telesat Credit Agreement. The amendment converted CAD 34 million from Canadian to U.S. dollars and decreased the interest rates on Telesat’s Canadian and U.S. term loan B facilities by 0.50%. The amendment also decreased the interest rate floors on the debt to 1.00% and 0.75% for the Canadian term loan B facility and U.S. term loan B facility, respectively. The permitted leverage ratio to incur first lien debt is now 4.25:1.00 which represents a change from the prior 4.00:1.00 senior secured leverage ratio in the credit agreement.
| F-14 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
On May 1, 2013, Telesat redeemed its 12.5% senior subordinated notes due November 1, 2017 at a price of 106.25% of the principal amount of the senior subordinated notes. Expense of refinancing for the year ended December 31, 2013 primarily represents the premium paid and the write-off of deferred financing costs related to this note redemption.
The following table presents summary financial data for Telesat in accordance with U.S. GAAP, for the years ended December 31, 2015, 2014 and 2013 and as of December 31, 2015 and 2014 (in thousands):
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Statement of Operations Data: | ||||||||||||
| Revenues | $ | 751,684 | $ | 837,440 | $ | 867,914 | ||||||
| Operating expenses | (140,706 | ) | (161,944 | ) | (185,179 | ) | ||||||
| Depreciation, amortization and stock-based compensation | (190,985 | ) | (231,849 | ) | (245,764 | ) | ||||||
| Loss on disposition of long lived assets | (24 | ) | (276 | ) | (1,677 | ) | ||||||
| Operating income | 419,969 | 443,371 | 435,294 | |||||||||
| Interest expense | (138,783 | ) | (182,395 | ) | (210,180 | ) | ||||||
| Expense of refinancing | — | — | (19,655 | ) | ||||||||
| Foreign exchange loss | (426,980 | ) | (232,275 | ) | (191,569 | ) | ||||||
| Gain on financial instruments | 7,810 | 70,872 | 110,034 | |||||||||
| Other income | 3,672 | 2,779 | 11,343 | |||||||||
| Income tax provision | (74,447 | ) | (60,954 | ) | (39,039 | ) | ||||||
| Net (loss) income | $ | (208,759 | ) | $ | 41,398 | $ | 96,228 | |||||
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| Balance Sheet Data: | ||||||||
| Current assets | $ | 568,106 | $ | 497,287 | ||||
| Total assets | 4,009,352 | 4,552,613 | ||||||
| Current liabilities | 187,488 | 227,200 | ||||||
| Long-term debt, including current portion | 2,968,776 | 3,102,635 | ||||||
| Total liabilities | 3,635,918 | 3,921,887 | ||||||
| Shareholders’ equity | 373,434 | 630,726 | ||||||
Telesat had capital expenditures of $152.5 million, $86.6 million and $77.7 million for the years ended December 31, 2015, 2014 and 2013, respectively.
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.
| F-15 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of December 31, 2015, the carrying value of our investment in XTAR was reduced to 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 and $18.7 million for the years ended December 31, 2015 and 2014, respectively, related to our investment in XTAR. The impairment charge recorded in 2014 was primarily due to a decline in XTAR’s revenues by approximately 17% from 2013 to 2014 resulting in a reassessment of our revenue expectations for future years. 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 will discontinue providing for our allocated share of XTAR’s net losses as our investment has been 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 requires payments by XTAR of $26 million in 2015, with increases thereafter to a maximum of $28 million per year through the end of the useful life of the satellite which is estimated to be in 2020. Under this lease agreement, Hisdesat may also be entitled under certain circumstances to a share of the revenues generated on the XTAR-LANT transponders. 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, 2015 were $29.3 million. As of December 31, 2015 and 2014, XTAR has deferred payment of liabilities of $17.7 million and $5.4 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 (see Note 15). The ability of XTAR to pay dividends and management fees in cash to Loral is governed by XTAR’s operating agreement.
The following table presents summary financial data for XTAR for the years ended December 31, 2015, 2014 and 2013 and as of December 31, 2015 and 2014 (in thousands):
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Statement of Operations Data: | ||||||||||||
| Revenues | $ | 25,852 | $ | 29,171 | $ | 35,283 | ||||||
| Operating expenses | (31,933 | ) | (31,367 | ) | (33,763 | ) | ||||||
| Depreciation and amortization | (8,874 | ) | (9,257 | ) | (9,247 | ) | ||||||
| Operating loss | (14,955 | ) | (11,453 | ) | (7,727 | ) | ||||||
| Net loss | (18,722 | ) | (13,835 | ) | (10,895 | ) | ||||||
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| Balance Sheet Data: | ||||||||
| Current assets | $ | 7,533 | $ | 4,992 | ||||
| Total assets | 44,793 | 53,508 | ||||||
| Current liabilities | 41,712 | 28,585 | ||||||
| Total liabilities | 68,126 | 59,342 | ||||||
| Members’ equity | (23,333 | ) | (5,834 | ) | ||||
Other
For the year ended December 31, 2013, we recorded a loss contingency and made a payment of $3.7 million for an indemnification of certain pre-closing liabilities related to our sale of GdB in 2008. We also recorded a gain of $1.1 million related to the sale of our ownership interest in an affiliate with no carrying value.
As of December 31, 2015 and 2014, the Company held various indirect ownership interests in two foreign companies that currently serve as exclusive service providers for Globalstar service in Mexico and Russia. The Company accounts for these ownership interests using the equity method of accounting. Loral has written off its investments in these companies, and, because we have no future funding requirements relating to these investments, there is no requirement for us to provide for our allocated share of these companies’ net losses.
| F-16 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
6. Other Current Liabilities
Other current liabilities consists of (in thousands):
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| SS/L indemnification liability relating to ViaSat Suit settlement (see Note 14) | $ | 10,714 | $ | 10,081 | ||||
| Accrued professional fees | 871 | 1,849 | ||||||
| Pension and other postretirement liabilities | 120 | 526 | ||||||
| Deferred tax liability | — | 416 | ||||||
| Accrued liabilities | 350 | 552 | ||||||
| $ | 12,055 | $ | 13,424 | |||||
7. Income Taxes
The benefit (provision) for income taxes on the loss from continuing operations before income taxes and equity in net (loss) income of affiliates consists of the following (in thousands):
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Current: | ||||||||||||
| U.S. Federal | $ | (1,089 | ) | $ | (5,524 | ) | $ | 25,567 | ||||
| State and local | 7,106 | 3,573 | 976 | |||||||||
| Foreign | (235 | ) | (220 | ) | (200 | ) | ||||||
| Total current | 5,782 | (2,171 | ) | 26,343 | ||||||||
| Deferred: | ||||||||||||
| U.S. Federal | 35,721 | 8,531 | (26,981 | ) | ||||||||
| State and local | 3,973 | 1,745 | (1,203 | ) | ||||||||
| Total deferred | 39,694 | 10,276 | (28,184 | ) | ||||||||
| Total income tax benefit (provision) | $ | 45,476 | $ | 8,105 | $ | (1,841 | ) | |||||
Our current tax benefit (provision) includes a decrease (increase) to our liability for UTPs for (in thousands):
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Decrease to unrecognized tax benefits | $ | 4,921 | $ | 3,062 | $ | 1,952 | ||||||
| Interest expense | (103 | ) | (1,757 | ) | (1,429 | ) | ||||||
| Penalties | 1,393 | 1,250 | 521 | |||||||||
| Total | $ | 6,211 | $ | 2,555 | $ | 1,044 | ||||||
The deferred tax benefit (provision) for each period included the impact of equity in net (loss) income of affiliates from our consolidated statement of operations.
During 2015, the statute of limitations for the assessment of additional tax expired with regard to several federal and state UTPs from 2007, 2010 and 2011, and certain other UTPs were settled. As a result, the reduction to our liability for UTPs provided a current tax benefit, partially offset by an additional provision for the potential payment of interest on our remaining UTPs.
During 2014, the Company received a $10.6 million tax refund from the carryback of its 2013 federal tax loss against taxes previously paid for 2012. The current tax provision of $2.2 million for 2014 included a reduction to the benefit recorded in 2013 for this refund after having made lower contributions to our qualified pension plan in 2014 than originally anticipated.
| F-17 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
For 2014 and 2013, the deferred tax benefit (provision) also included an increase to our federal NOL carryforward from the enhanced extraterritorial income exclusion provided by former section 114 of the Internal Revenue Code. Without the Sale, we would not have remeasured the extraterritorial income exclusion because it would have provided only a minimal cash tax benefit. Also, the deferred tax provision for each period included the impact of our equity in net income of Telesat.
During 2013, the current tax benefit of $26.3 million primarily relates to the refunds received from our federal and state income tax returns filed for 2012 (primarily as a result of the enhanced extraterritorial income exclusion) and the anticipated benefit from the carryback of the Company’s 2013 federal tax loss.
In addition to the benefit (provision) for income taxes on the loss from continuing operations presented above, we also recorded the following items (in thousands):
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Tax benefit on loss from discontinued operations | $ | 450 | $ | 14,482 | $ | 2,995 | ||||||
| Adjustment to tax benefit associated with stock-based compensation recorded to paid-in-capital | 2,609 | 1,864 | (3,128 | ) | ||||||||
| Deferred tax (provision) benefit for adjustments in other comprehensive loss (See Note 3) | (313 | ) | 4,919 | (10,127 | ) | |||||||
The Company uses the with-and-without approach of determining when excess tax benefits from stock-based compensation have been realized. During 2015, the Company received a $2.1 million tax refund from the carryback of its 2014 U.S. federal NOL to 2012. The Company re-determined the excess tax benefit from stock-based compensation and recorded a $2.6 million increase, a $1.9 million increase and a $3.1 million decrease to paid-in-capital for the years ended December 31, 2015, 2014 and 2013, respectively. In addition to the deferred tax assets on the consolidated balance sheet as of December 31, 2015, the Company has $4.5 million of federal AMT credits that, when realized in the future, will also be recorded as an increase to paid-in-capital.
The benefit (provision) 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 (loss) income of affiliates because of the effect of the following items (in thousands):
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Tax benefit at U.S. Statutory Rate of 35% | $ | 3,566 | $ | 2,811 | $ | 5,435 | ||||||
| Permanent adjustments which change statutory amounts: | ||||||||||||
| State and local income taxes, net of federal income tax | 7,821 | 4,497 | 155 | |||||||||
| Equity in net loss (income) of affiliates | 36,677 | 526 | (13,589 | ) | ||||||||
| Extraterritorial income exclusion | — | 3,468 | 6,177 | |||||||||
| Domestic production activity benefit | — | — | 2,317 | |||||||||
| Provision for unrecognized tax benefits | (708 | ) | (833 | ) | (332 | ) | ||||||
| Interest on deferred installment sale | — | (216 | ) | (1,296 | ) | |||||||
| Nondeductible expenses | (1,411 | ) | (1,359 | ) | (762 | ) | ||||||
| Change in valuation allowance | (307 | ) | (624 | ) | (121 | ) | ||||||
| Federal research and development credit | — | — | 402 | |||||||||
| Foreign income taxes | (153 | ) | (143 | ) | (130 | ) | ||||||
| Other, net | (9 | ) | (22 | ) | (97 | ) | ||||||
| Total income tax benefit (provision) | $ | 45,476 | $ | 8,105 | $ | (1,841 | ) | |||||
| F-18 |
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, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Balance at January 1 | $ | 78,333 | $ | 80,527 | $ | 76,080 | ||||||
| Increases related to prior year tax positions | 1,955 | 2,141 | 6,755 | |||||||||
| Decreases related to prior year tax positions | — | (423 | ) | (1,025 | ) | |||||||
| Decreases as a result of statute expirations | (6,876 | ) | (3,043 | ) | (1,283 | ) | ||||||
| Decreases as a result of tax settlements | (1,114 | ) | (869 | ) | — | |||||||
| Balance at December 31 | $ | 72,298 | $ | 78,333 | $ | 80,527 | ||||||
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 2011. Earlier years related to certain foreign jurisdictions remain subject to examination. Various federal, state and foreign income tax returns are currently under examination. However, 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 and state income tax returns filed for 2011 and 2012, potentially resulting in a $31.3 million reduction to our unrecognized tax benefits. Pursuant to the Purchase Agreement for the Sale, we are obligated to indemnify SS/L for taxes related to periods prior to the closing of the transaction.
Our liability for UTPs decreased from $77.1 million at December 31, 2014 to $69.5 million at December 31, 2015 and is included in long-term liabilities in the consolidated balance sheets. At December 31, 2015, we have accrued $5.6 million and $6.4 million for the potential payment of tax-related interest and penalties, respectively. If our positions are sustained by the taxing authorities, approximately $30.3 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, 2015, 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, 2015, 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 15).
At December 31, 2015, we had federal NOL carryforwards of $252.2 million, state NOL carryforwards, primarily California ($77.8 million) and New York ($1.1 million), and federal research credits of $1.2 million which expire from 2016 to 2024, as well as federal and state AMT and state research credit carryforwards of approximately $7.4 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. Our annual limitation was increased significantly each year through 2010, the last year allowed for the recognition of additional benefits from our “net unrealized built-in gains” (i.e., the excess of fair market value over tax basis for our assets) as of the Effective Date.
We assess the recoverability of our 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, 2015, we had a valuation allowance totaling $8.2 million against our deferred tax assets for certain tax credit and loss carryovers due to the limited carryforward periods. During 2015, the valuation allowance increased by $0.3 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.
| F-19 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
During 2014, the valuation allowance increased by $0.7 million, of which $0.6 million was recorded as a provision to continuing operations in our statement of operations and $0.1 million was charged to other comprehensive loss.
During 2013, the valuation allowance increased by $0.1 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, | ||||||||
| 2015 | 2014 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss and tax credit carryforwards | $ | 117,676 | $ | 122,152 | ||||
| Compensation and benefits | 1,639 | 1,790 | ||||||
| Indemnification liabilities | 5,434 | 9,114 | ||||||
| Other, net | 2,023 | 2,413 | ||||||
| Federal benefit of uncertain tax positions | 7,818 | 10,026 | ||||||
| Pension costs | 6,294 | 6,752 | ||||||
| Investments in and advances to affiliates | 20,004 | — | ||||||
| Total deferred tax assets before valuation allowance | 160,888 | 152,247 | ||||||
| Less valuation allowance | (8,212 | ) | (7,905 | ) | ||||
| Deferred tax assets net of valuation allowance | 152,676 | 144,342 | ||||||
| Deferred tax liabilities: | ||||||||
| Deferred installment sale | — | (12,376 | ) | |||||
| Investments in and advances to affiliates | — | (19,645 | ) | |||||
| Total deferred tax liabilities | — | (32,021 | ) | |||||
| Net deferred tax assets | $ | 152,676 | $ | 112,321 | ||||
| Classification on consolidated balance sheets: | ||||||||
| Other current assets | $ | — | $ | 654 | ||||
| Long-term deferred tax assets | 152,676 | 112,898 | ||||||
| Other current liabilities | — | (416 | ) | |||||
| Long term liabilities | — | (815 | ) | |||||
| Net deferred tax assets | $ | 152,676 | $ | 112,321 | ||||
As discussed in Note 2, during the year ended December 31, 2015, the Company prospectively adopted ASU 2015-17, Income Taxes – Balance Sheet Classification of Deferred Taxes. If the accounting change were adopted on a retrospective basis, the current deferred tax assets and liabilities as of December 31, 2014 as per the table above would be classified as long-term deferred tax assets and liabilities, respectively.
| F-20 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
8. Long Term Liabilities
Long term liabilities consists of (in thousands):
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| SS/L indemnification liability relating to ViaSat Suit settlement (see Note 14) | $ | 2,754 | $ | 13,242 | ||||
| Indemnification liabilities - other (see Note 14) | 1,006 | 972 | ||||||
| Deferred tax liability | — | 815 | ||||||
| Liabilities for uncertain tax positions | 69,511 | 77,133 | ||||||
| Other | 307 | 307 | ||||||
| $ | 73,578 | $ | 92,469 | |||||
9. Shareholders’ Equity
In June 2013, the Company settled 175,000 restricted stock units (“RSUs”) granted in 2009, 2010 and 2011 to Michael B. Targoff, Vice Chairman of the Company and former Chief Executive Officer and President. In connection with this settlement, the Company issued to Mr. Targoff 91,204 shares of its voting common stock, net of 83,796 shares to satisfy withholding taxes. The grant date fair value of these RSUs was previously recorded as stock-based compensation as the RSUs vested, and the stock issuance had no effect on our consolidated financial statements.
10. Stock-Based Compensation
Stock Plans
The Loral amended and restated 2005 stock incentive plan (the “Stock Incentive Plan”) allows 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 (collectively, the “Awards”). The total number of shares of voting common stock reserved and available for issuance under the Stock Incentive Plan is 1,390,880 shares of which 1,315,618 were available for future grant at December 31, 2015. This number of shares of voting common stock available for issuance would be reduced if restricted stock units are settled in voting common stock. In addition, shares of common stock that are issuable under awards that expire, are forfeited or canceled, or withheld in payment of the exercise price or taxes relating to an Award, will again be available for Awards under the Stock Incentive Plan.
During the year ended December 31, 2013 the following activity occurred under the Stock Incentive Plan (in thousands):
| Year Ended December 31, 2013 | ||||
| Total fair value of restricted stock units vested | $ | 2,241 | ||
Stock-based compensation expense consists of the following (in thousands):
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Stock-based compensation | $ | — | $ | 12 | $ | 488 | ||||||
As of December 31, 2015, there is no unrecognized compensation cost related to non-vested awards.
| F-21 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
11. 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 61.7%. 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):
| Year Ended December 31, 2013 | ||||
| Income from continuing operations — basic | $ | 21,456 | ||
| Less: Adjustment for dilutive effect of Telesat stock options | (641 | ) | ||
| Income from continuing operations — diluted | $ | 20,815 | ||
Telesat stock options are excluded from the calculation of diluted loss per share for the years ended December 31, 2015 and 2014 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, 2013 | ||||
| Weighted average common shares outstanding | 30,850 | |||
| Unconverted restricted stock units | 149 | |||
| Common shares outstanding for diluted earnings per share | 30,999 | |||
For the years ended December 31, 2015 and 2014, 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 | 2014 | |||||||
| Unconverted restricted stock units | 78 | 84 | ||||||
12. 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 investments and fixed income 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 through plans sponsored 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.
| F-22 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Termination of Supplemental Executive Retirement Plan (“SERP”)
In connection with the corporate office restructuring as a result of the Sale, on December 13, 2012, Loral’s Board of Directors approved termination of the SERP. The Company made lump sum payments of $17.7 million in December 2013 to the participants in the SERP in accordance with the requirements of Section 409A of the Internal Revenue Code and the regulations promulgated thereunder. The lump sum payouts were calculated based on plan provisions.
Funded Status
The following tables provide a reconciliation of the changes in the plans’ benefit obligations and fair value of assets for 2015 and 2014, and a statement of the funded status as of December 31, 2015 and 2014. We use a December 31 measurement date for the pension plans and other post-retirement benefits (in thousands).
| Pension Benefits | Other Benefits | |||||||||||||||
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Reconciliation of benefit obligation: | ||||||||||||||||
| Obligation at beginning of period | $ | 48,172 | $ | 40,242 | $ | 1,623 | $ | 1,517 | ||||||||
| Service cost | 511 | 188 | 2 | 1 | ||||||||||||
| Interest cost | 1,896 | 1,882 | 38 | 71 | ||||||||||||
| Participant contributions | 22 | 21 | 38 | 58 | ||||||||||||
| Actuarial (gain) loss | (1,930 | ) | 7,554 | (1 | ) | 145 | ||||||||||
| Benefit payments | (1,695 | ) | (1,715 | ) | (92 | ) | (169 | ) | ||||||||
| Curtailment and settlement | — | — | (1,049 | ) | — | |||||||||||
| Obligation at December 31, | 46,976 | 48,172 | 559 | 1,623 | ||||||||||||
| Reconciliation of fair value of plan assets | ||||||||||||||||
| Fair value of plan assets at beginning of period | 28,476 | 24,628 | — | — | ||||||||||||
| Actual return on plan assets | (248 | ) | 1,464 | — | — | |||||||||||
| Employer contributions | 2,741 | 4,078 | 54 | 111 | ||||||||||||
| Participant contributions | 22 | 21 | 38 | 58 | ||||||||||||
| Benefit payments | (1,695 | ) | (1,715 | ) | (92 | ) | (169 | ) | ||||||||
| Fair value of plan assets at December 31, | 29,296 | 28,476 | — | — | ||||||||||||
| Funded status at end of period | $ | (17,680 | ) | $ | (19,696 | ) | $ | (559 | ) | $ | (1,623 | ) | ||||
The benefit obligations for pensions and other employee benefits exceeded the fair value of plan assets by $18.2 million at December 31, 2015 (the “unfunded benefit obligations”). The unfunded benefit obligations were measured using a discount rate of 4.25% and 4.00% at December 31, 2015 and 2014, respectively. Lowering the discount rate by 0.5% would have increased the unfunded benefit obligations by approximately $3.6 million and $4.0 million as of December 31, 2015 and 2014, respectively. Market conditions and interest rates will significantly affect future assets and liabilities of Loral’s pension plan and other post-retirement benefits.
| F-23 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The pre-tax amounts recognized in accumulated other comprehensive loss as of December 31, 2015 and 2014 consist of (in thousands):
| Pension Benefits | Other Benefits | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Actuarial loss | $ | (16,830 | ) | $ | (17,200 | ) | $ | (95 | ) | $ | (550 | ) | ||||
| Amendments-prior service cost | — | — | (69 | ) | (80 | ) | ||||||||||
| $ | (16,830 | ) | $ | (17,200 | ) | $ | (164 | ) | $ | (630 | ) | |||||
The amounts recognized in other comprehensive loss during the years ended December 31, 2015, 2014 and 2013 consist of (in thousands):
| Year Ended December 31, | ||||||||||||||||||||||||
| 2015 | 2014 | 2013 | ||||||||||||||||||||||
Pension Benefits | Other Benefits | Pension Benefits | Other Benefits | Pension Benefits | Other Benefits | |||||||||||||||||||
| Actuarial (loss) gain during the period | $ | (425 | ) | $ | 1 | $ | (7,972 | ) | $ | (145 | ) | $ | 5,491 | $ | (249 | ) | ||||||||
| Prior service credit during the period | — | — | — | — | — | (230 | ) | |||||||||||||||||
| Amortization of actuarial loss | 795 | 26 | 408 | 39 | 5,947 | 44 | ||||||||||||||||||
| Amortization of prior service cost | — | 11 | — | 9 | — | 9 | ||||||||||||||||||
| Recognition due to curtailment | — | 428 | — | — | 2,624 | 63 | ||||||||||||||||||
| Total recognized in other comprehensive income (loss) | $ | 370 | $ | 466 | $ | (7,564 | ) | $ | (97 | ) | $ | 14,062 | $ | (363 | ) | |||||||||
Amounts recognized in the balance sheet consist of (in thousands):
| Pension Benefits | Other Benefits | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Current Liabilities | $ | — | $ | — | $ | 120 | $ | 526 | ||||||||
| Long-Term Liabilities | 17,680 | 19,696 | 439 | 1,097 | ||||||||||||
| $ | 17,680 | $ | 19,696 | $ | 559 | $ | 1,623 | |||||||||
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 $0.8 million.
The accumulated pension benefit obligation was $46.0 million and $46.9 million at December 31, 2015 and 2014, respectively.
During 2015, we contributed $2.7 million to the qualified pension plan and contributed $1.1 million for other employee post-retirement benefits including payments to participants affected by the discontinuation of retiree medical benefits at age 65. During 2016, based on current estimates, our minimum required contributions to the qualified pension plan will be approximately $2.2 million. We expect that our funding of other employee post-retirement benefits during 2016 will not be significant.
| F-24 |
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, 2015, 2014 and 2013 (in thousands):
| Pension Benefits | Other Benefits | |||||||||||||||||||||||
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| 2015 | 2014 | 2013 | 2015 | 2014 | 2013 | |||||||||||||||||||
| Service cost | $ | 511 | $ | 188 | $ | 311 | $ | 2 | $ | 1 | $ | 2 | ||||||||||||
| Interest cost | 1,896 | 1,882 | 1,843 | 38 | 71 | 65 | ||||||||||||||||||
| Expected return on plan assets | (2,107 | ) | (1,882 | ) | (1,503 | ) | — | — | — | |||||||||||||||
| Recognition due to curtailment | — | — | 1,671 | 428 | — | 78 | ||||||||||||||||||
| Amortization of prior service cost | — | — | — | 11 | 9 | 9 | ||||||||||||||||||
| Amortization of net actuarial loss | 795 | 408 | 5,947 | 26 | 39 | 44 | ||||||||||||||||||
| Net periodic cost | $ | 1,095 | $ | 596 | $ | 8,269 | $ | 505 | $ | 120 | $ | 198 | ||||||||||||
Assumptions
Assumptions used to determine net periodic cost:
| For the Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Discount rate | 4.00 | % | 4.75 | % | 4.00 | % | ||||||
| Expected return on plan assets | 7.25 | % | 7.25 | % | 7.25 | % | ||||||
| Rate of compensation increase | 4.25 | % | 4.25 | % | 4.25 | % | ||||||
Assumptions used to determine the benefit obligation:
| December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Discount rate | 4.25 | % | 4.00 | % | 4.75 | % | ||||||
| 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 2016 is 7.0%.
As of December 31, 2015 and 2014, 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 plans, 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.
| F-25 |
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.
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. Alternative investments are held for both diversification and higher returns than those typically available in traditional asset classes. Asset allocation policy is reviewed regularly.
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. The pension plans’ actual and targeted asset allocations are as follows:
| December 31, | ||||||||||||||||
| Actual Allocation | Target Allocation | |||||||||||||||
| 2015 | 2014 | Target | Target Range | |||||||||||||
| Equities | 57 | % | 58 | % | 56.5 | % | 50-70% | |||||||||
| Fixed Income | 43 | % | 42 | % | 43.5 | % | 30-50% | |||||||||
| 100 | % | 100 | % | 100 | % | 100 | % | |||||||||
The target and target range levels can be further defined as follows:
| Target Allocation | ||||||||
| Target | Target Range | |||||||
| U.S. Large Cap Equities | 23.0 | % | 15-40% | |||||
| U.S. Small Cap Equities | 6.5 | % | 0-10% | |||||
| Global Equities | 7.5 | % | 5-20% | |||||
| Non-U.S. Equities | 12.0 | % | 5-20% | |||||
| Alternative Equity Investments | 7.5 | % | 0-20% | |||||
| Total Equities | 56.5 | % | 50-70% | |||||
| Fixed Income | 34.5 | % | 20-40% | |||||
| Alternative Fixed Income Investments | 9.0 | % | 0-20% | |||||
| Total Fixed Income | 43.5 | % | 30-50% | |||||
| Total Target Allocation | 100 | % | 100 | % | ||||
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.
| F-26 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The table below provides the fair values of the Company’s pension plan assets at December 31, 2015 and 2014, by asset category. The table also identifies the level of inputs used to determine the fair value of assets in each category. The Company’s pension plan assets are mainly held in commingled employee benefit fund trusts.
| Fair Value Measurements | ||||||||||||||||||||
| Quoted Prices | ||||||||||||||||||||
| In Active Markets | Significant | Significant | ||||||||||||||||||
| For Identical | Observable | Unobservable | ||||||||||||||||||
| Assets | Inputs | Inputs | ||||||||||||||||||
| Asset Category | Total | Percentage | Level 1 | Level 2 | Level 3 | |||||||||||||||
| (In thousands) | ||||||||||||||||||||
| At December 31, 2015: | ||||||||||||||||||||
| Equity securities: | ||||||||||||||||||||
| U.S. large-cap(1) | $ | 7,159 | 24 | % | $ | 7,159 | ||||||||||||||
| U.S. small-cap(2) | 1,989 | 7 | % | 1,989 | ||||||||||||||||
| Global (3) | 2,333 | 8 | % | 2,333 | ||||||||||||||||
| Non-U.S.(4) | 3,704 | 13 | % | 3,704 | ||||||||||||||||
| Alternative investments: | ||||||||||||||||||||
| Equity long/short fund(5) | 847 | 3 | % | $ | 847 | |||||||||||||||
| Real Estate Securities(6) | 614 | 2 | % | 614 | ||||||||||||||||
| Private equity fund(7) | 174 | 0 | % | 174 | ||||||||||||||||
| 16,820 | 57 | % | — | 15,799 | 1,021 | |||||||||||||||
| Fixed income securities: | ||||||||||||||||||||
| Commingled funds(8) | 10,708 | 37 | % | 10,708 | ||||||||||||||||
| Alternative investments: | ||||||||||||||||||||
| Distressed opportunity limited partnership(9) | 313 | 1 | % | 313 | ||||||||||||||||
| Multi-strategy limited partnerships(10) | 1,455 | 5 | % | 1,455 | ||||||||||||||||
| 12,476 | 43 | % | — | 10,708 | 1,768 | |||||||||||||||
| $ | 29,296 | 100 | % | — | $ | 26,507 | $ | 2,789 | ||||||||||||
| At December 31, 2014: | ||||||||||||||||||||
| Equity securities: | ||||||||||||||||||||
| U.S. large-cap(1) | $ | 7,031 | 25 | % | $ | 7,031 | ||||||||||||||
| U.S. small-cap(2) | 2,004 | 7 | % | 2,004 | ||||||||||||||||
| Global (3) | 2,288 | 8 | % | 2,288 | ||||||||||||||||
| Non-U.S.(4) | 3,494 | 12 | % | 3,494 | ||||||||||||||||
| Alternative investments: | ||||||||||||||||||||
| Equity long/short fund(5) | 801 | 3 | % | $ | 801 | |||||||||||||||
| Real Estate Securities(6) | 598 | 2 | % | 598 | ||||||||||||||||
| Private equity fund(7) | 249 | 1 | % | 249 | ||||||||||||||||
| 16,465 | 58 | % | — | 15,415 | 1,050 | |||||||||||||||
| Fixed income securities: | ||||||||||||||||||||
| Commingled funds(8) | 10,273 | 36 | % | 10,273 | ||||||||||||||||
| Alternative investments: | ||||||||||||||||||||
| Distressed opportunity limited partnership(9) | 368 | 1 | % | 368 | ||||||||||||||||
| Multi-strategy limited partnerships(10) | 1,370 | 5 | % | 1,370 | ||||||||||||||||
| 12,011 | 42 | % | — | 10,273 | 1,738 | |||||||||||||||
| $ | 28,476 | 100 | % | — | $ | 25,688 | $ | 2,788 | ||||||||||||
| F-27 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| (1) | Investments in common stocks that rank among the largest 1,000 companies in the U.S. stock market. |
| (2) | Investments in common stocks that rank among the small capitalization stocks in the U.S. stock market. |
| (3) | Investments in common stocks across the world without being limited by national borders or to specific regions. |
| (4) | Investments in common stocks of companies from developed and emerging countries outside the United States. |
| (5) | 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. |
| (6) | As of December 31, 2015 and 2014, the pension plan was invested in real estate through a fund of funds which invests in global public real estate securities (REITs). |
| (7) | 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. |
| (8) | Investments in bonds representing many sectors of the broad bond market with both short-term and intermediate-term maturities. |
| (9) | 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. |
| (10) | Investments mainly in partnerships that have multi-strategy investment programs and do not rely on a single investment model. As of December 31, 2015 and 2014, investments include a partnership that has monthly liquidation rights with notice of 33 days. As of December 31, 2014, investments also included a second partnership that had quarterly liquidation rights with notice of 65 days. Both funds were reported on a one month lag. |
The significant amount of Level 2 investments in the table results from including in this category investments in commingled funds that contain investments with values based on quoted market prices, but for which the funds are not valued on a quoted market basis. These commingled funds are valued at their net asset values (NAVs) that are calculated by the investment manager or sponsor. Equity investments in both U.S and non-U.S. stocks as well as public real estate investment trusts are primarily valued using a market approach based on the quoted market prices of identical securities. Fixed income investments are primarily valued using a market approach with inputs that include broker quotes, benchmark yields, base spreads and reported trades.
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, 2015 and 2014 is presented below:
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||
| Private Equity Fund | Equity Long/Short Fund | Distressed Opportunity Ltd. Partnership | Other Limited Partnership | Multi Strategy Funds | Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Balance at January 1, 2014 | $ | 287 | $ | 842 | $ | 364 | — | $ | 1,291 | $ | 2,784 | |||||||||||||
| Unrealized gain (loss) | 12 | (41 | ) | 4 | — | 79 | 54 | |||||||||||||||||
| Realized gain/(loss) | — | — | — | 16 | — | 16 | ||||||||||||||||||
| Sales | (50 | ) | — | — | (16 | ) | — | (66 | ) | |||||||||||||||
| Balance at December 31, 2014 | 249 | 801 | 368 | — | 1,370 | 2,788 | ||||||||||||||||||
| Unrealized gain (loss) | 2 | 46 | (55 | ) | — | 26 | 19 | |||||||||||||||||
| Realized gain | — | — | — | — | 59 | 59 | ||||||||||||||||||
| Purchases | — | — | — | — | 639 | 639 | ||||||||||||||||||
| Sales | (77 | ) | — | — | — | (639 | ) | (716 | ) | |||||||||||||||
| Balance at December 31, 2015 | $ | 174 | $ | 847 | $ | 313 | — | $ | 1,455 | $ | 2,789 | |||||||||||||
| F-28 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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. They are included in Level 3 due to their restrictions on redemption to semi-annual periods on June 30 and December 31.
The Multi-Strategy Funds invest in various underlying securities. Each fund’s net asset value is calculated by the fund manager and is not publicly available. The fund managers accumulate all the underlying security values and use them in determining the funds’ net asset values.
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 | |||||||
| 2016 | $ | 1,738 | $ | 123 | ||||
| 2017 | 1,733 | 59 | ||||||
| 2018 | 1,923 | 56 | ||||||
| 2019 | 1,917 | 48 | ||||||
| 2020 | 2,085 | 44 | ||||||
| 2021 to 2025 | 12,439 | 157 | ||||||
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, 2015 and 2014, Company contributions were $0.1 million and for the year ended December 31, 2013, Company contributions were $0.2 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.
13. 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. The carrying amount of the Land Note approximates fair value because the stated interest rate is consistent with current market rates.
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.
| F-29 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Derivatives and Hedging Transactions
There were no derivative instruments as of December 31, 2015 and 2014.
14. Commitments and Contingencies
Financial Matters
In the fourth quarter of 2012, we sold our former subsidiary, SS/L, 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 $2.0 million and 0.4 million as of December 31, 2015 and 2014, respectively. 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. As a result of an April 2013 adverse court decision in Brazil relating to a potential tax liability, an adverse outcome for which was previously believed to be remote, Loral recorded a loss contingency and made a payment of $3.7 million in 2013. Our consolidated balance sheets include liabilities of $1.0 million as of December 31, 2015 and December 31, 2014, for indemnification liabilities relating to the sale of GdB.
See Note 15— 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.
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, 2015 | $ | 679 | ||
| Year ended December 31, 2014 | 595 | |||
| Year ended December 31, 2013 | 876 | |||
The following is a schedule of future minimum payments, by year and in the aggregate, under leases with initial or remaining terms of one year or more as of December 31, 2015 (in thousands):
| Operating | ||||
| Leases | ||||
| 2016 | $ | 585 | ||
| 2017 | 292 | |||
| F-30 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 SS/L. In September 2014, Loral, SS/L 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 SS/L in September 2013 were settled. Loral was also released by MDA, MDA Holdings and SS/L from indemnification claims relating to the ViaSat lawsuits under the Purchase Agreement.
The terms of the Settlement Agreement provide, among other things, for payment by Loral and SS/L 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. As of December 31, 2015 and 2014, the total principal and interest accrued amount payable by Loral and SS/L to ViaSat, on a joint and several basis, was $32.4 million and $55.2 million, respectively.
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 will be responsible for $45 million, and MDA and SS/L will be responsible for $55 million, of the $100 million litigation settlement with ViaSat.
As of December 31, 2015, Loral has paid $32.0 million, including interest, toward the ViaSat settlement. Pursuant to the Allocation Agreement, Loral paid ViaSat $2.8 million in January 2016 and is obligated to make four additional equal quarterly payments to the ViaSat through January 2017 totaling $11.2 million inclusive of interest at 3.25% per year. Our consolidated balance sheet as of December 31, 2015 and 2014 includes indemnification liabilities related to the ViaSat Settlement Agreement of $13.5 million and $23.3 million, respectively. As Loral’s payment obligations to ViaSat are on a joint and several basis with MDA and SS/L, if MDA and SS/L were to default on all or part of their payment obligations to ViaSat, Loral would be obligated to pay ViaSat any amounts not paid by MDA and SS/L.
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.
15. 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, 2015 and December 31, 2014, approximately 38.0% of the outstanding voting common stock and 57.1% of the combined outstanding voting and non-voting common stock of Loral.
Transactions with Affiliates
Telesat
As described in Note 5, we own 62.8% of Telesat and account for our ownership interest under the equity method of accounting.
| F-31 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 Holdco and certain of its subsidiaries, including Telesat, 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 Holdco and its subsidiaries will be conducted and the relationships among the parties thereto and future shareholders of Telesat Holdco. 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 Holdco or any of its subsidiaries. Additionally, the Shareholders Agreement details the matters requiring the approval of the shareholders of Telesat Holdco (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 Holdco. The Shareholders Agreement also (i) restricts the ability of holders of certain shares of Telesat Holdco to transfer such shares unless certain conditions are met or approval of the transfer is granted by the directors of Telesat Holdco, (ii) provides for a right of first offer to certain Telesat Holdco shareholders if a holder of equity shares of Telesat Holdco 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 Holdco 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 Holdco (a “Telesat IPO”). In connection with our exploration of strategic initiatives to alter the status quo in our ownership of Telesat Holdco, in July 2015, we exercised our rights under the Shareholders Agreement to require Telesat Holdco to conduct a Telesat IPO. Specifically, we requested that Telesat Holdco issue not more than 25 million newly issued shares of Telesat Holdco voting common stock. We also requested the termination of the Shareholders Agreement and the elimination of certain provisions in Telesat Holdco’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 Holdco 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 the Telesat IPO and subject to the receipt of any necessary regulatory approvals, to obtain majority voting control of Telesat Holdco. Telesat Holdco has selected two co-managing underwriters and has informed us that it is working to implement the Telesat IPO. In addition, we are in discussions with PSP to attempt to agree on our requests regarding the Shareholders Agreement and Telesat Holdco’s Articles of Incorporation. If we are unable to reach agreement with PSP on these matters, the advice of the lead underwriters selected for the Telesat IPO will be sought to assist resolution. There can be no assurance as to whether, when or on what terms the Telesat IPO, termination or modification of the Shareholders Agreement or any requested changes to Telesat Holdco’s Articles of Incorporation may occur. If the Telesat IPO proceeds under unfavorable terms or at an unfavorable price, we may withdraw our demand for an IPO or otherwise seek to enforce our rights. There can be no assurance that the Telesat IPO will occur, or that any particular economic, tax, structural or other objectives or benefits with respect to the Telesat IPO will be achieved.
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 Holdco 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 Holdco, including a right to cause Telesat Holdco 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 Holdco, to cause the sale of Telesat Holdco 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 Holdco 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 Holdco 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 Holdco and certain of its subsidiaries, including Telesat. In addition, Michael B. Targoff, Loral’s Vice Chairman, serves on the board of directors of Telesat Holdco and certain of its subsidiaries, including Telesat.
| F-32 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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. If the terms of Telesat’s bank or bridge facilities or certain other debt obligations prevent Telesat from paying such fees in cash, Telesat may issue junior subordinated promissory notes to Loral in the amount of such payment, with interest on such promissory notes payable at the rate of 7% per annum, compounded quarterly, from the date of issue of such promissory note to the date of payment thereof. Our general and administrative expenses for each of the years ended December 31, 2015, 2014 and 2013, 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, 2015 and 2014 and $3.5 million for the year ended December 31, 2013 for consulting fees, and for the year ended December 31, 2013, Loral received interest and payments in promissory notes of $1.3 million for consulting fees and interest. Loral also received cash payments of $2.6 million from Telesat for the year ended December 31, 2013 for redemption of notes receivable. Telesat was not permitted to pay these amounts in cash previously because Telesat did not meet the leverage ratio required for cash payment under the indenture for its 12.5% senior subordinated notes due November 1, 2017. These notes were redeemed in May 2013. We had no notes receivable from Telesat as of December 31, 2015 and 2014 related to the Consulting Agreement.
The Telesat Indemnification (as defined in Note 5 above) 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 $2 million. The Company believes that Loral Skynet’s filing position will ultimately be sustained requiring no payment under the Telesat Indemnification. In addition, the tax authority in Hong Kong had previously challenged Loral Skynet’s and Telesat’s offshore claim for exempt income for the years 1999 to 2009, issuing assessments which required Loral Skynet to deposit approximately $6.5 million of taxes in 2006 and 2007 in order to retain its right to appeal. During the first quarter of 2014, Loral’s portion of this tax liability in Hong Kong and various other claims under the Telesat Indemnification were settled for approximately $1.1 million resulting in a cash recovery of $5.4 million which was received from Telesat in April 2014. There can be no assurance that there will be no future claims under the Telesat Indemnification related to tax disputes.
Loral’s employees and retirees participate in certain welfare plans sponsored by Telesat. Loral pays Telesat an annual administrative fee of $0.1 million and reimburses Telesat for the plan costs attributable to Loral participants.
Loral, along with Telesat Holdco, 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 Holdco 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 Holdco should Telesat Holdco be prohibited by applicable law or under the terms of any credit agreement applicable to Telesat Holdco 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 Holdco of its call right under Telesat Holdco'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 Holdco 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 Holdco to cause the Special Purchaser or Loral to purchase a portion of the shares in Telesat Holdco owned by him, or that are issuable to him under Telesat Holdco'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 Holdco.
| F-33 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 Holdco, with Telesat Holdco agreeing to the acquisition of such subsidiary by Telesat Holdco from the Special Purchaser for nominal consideration and with the purchase price for the shares being paid by Telesat Holdco within ten (10) business days after completion of the winding-up of such subsidiary into Telesat Holdco.
ViaSat/Telesat
In connection with an agreement entered into between SS/L and ViaSat for the construction by SS/L 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, $1.0 million and $1.3 million for the years ended December 31, 2015, 2014 and 2013, respectively. We had a receivable from Telesat of $0.2 million and $0.3 million as of December 31, 2015 and 2014, respectively.
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. SS/L 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, 2015 and 2014. 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, 2015, 2014 and 2013, and we had a full allowance against these receivables as of December 31, 2015 and 2014. 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. During 2013 and 2014, Mr. Targoff also assisted the Board with respect to the ViaSat Suit. Under the agreement, Mr. Targoff receives consulting fees of $120,000 per month and reimburses the Company for certain expenses. For the year ended December 31, 2015, Mr. Targoff earned $1,440,000 and reimbursed Loral net expenses of $63,000, and for each of the years ended December 31, 2014 and 2013, he earned $1,440,000 and reimbursed Loral net expenses of $204,000.
| F-34 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
16. Selected Quarterly Financial Information (unaudited, in thousands, except per share amounts)
| Quarter Ended | ||||||||||||||||
| Year ended December 31, 2015 (1) | March 31, | June 30, | September 30, | December 31, | ||||||||||||
| Operating loss | $ | (1,617 | ) | $ | (2,080 | ) | $ | (1,652 | ) | $ | (1,181 | ) | ||||
| Loss from continuing operations before income taxes and equity in net (loss) income of affiliates | (1,904 | ) | (4,781 | ) | (1,806 | ) | (1,697 | ) | ||||||||
| Equity in net (loss) income of affiliates(2) | (76,845 | ) | 25,087 | (38,475 | ) | (14,559 | ) | |||||||||
| (Loss) income from continuing operations (3) | (82,503 | ) | 18,027 | (3,347 | ) | (1,681 | ) | |||||||||
| Loss from discontinued operations, net of tax (4) | (139 | ) | (227 | ) | (208 | ) | (204 | ) | ||||||||
| Net (loss) income | (82,642 | ) | 17,800 | (3,555 | ) | (1,885 | ) | |||||||||
| Net (loss) income per share: | ||||||||||||||||
| Basic | ||||||||||||||||
| (Loss) income from continuing operations | $ | (2.67 | ) | $ | 0.58 | $ | (0.11 | ) | $ | (0.05 | ) | |||||
| Loss from discontinued operations, net of tax | — | (0.01 | ) | (0.01 | ) | (0.01 | ) | |||||||||
| Net (loss) income | $ | (2.67 | ) | $ | 0.57 | $ | (0.12 | ) | $ | (0.06 | ) | |||||
| Diluted | ||||||||||||||||
| (Loss) income from continuing operations | $ | (2.67 | ) | $ | 0.56 | $ | (0.11 | ) | $ | (0.05 | ) | |||||
| Loss from discontinued operations, net of tax | — | (0.01 | ) | (0.01 | ) | (0.01 | ) | |||||||||
| Net (loss) income | $ | (2.67 | ) | $ | 0.55 | $ | (0.12 | ) | $ | (0.06 | ) | |||||
| Quarter Ended | ||||||||||||||||
| Year ended December 31, 2014 (1) | March 31, | June 30, | September 30, | December 31, | ||||||||||||
| Operating loss | $ | (1,340 | ) | $ | (1,336 | ) | $ | (1,281 | ) | $ | (1,373 | ) | ||||
| Loss from continuing operations before income taxes and equity in net (loss) income of affiliates | (1,977 | ) | (1,881 | ) | (1,643 | ) | (2,529 | ) | ||||||||
| Equity in net (loss) income of affiliates(2) | (2,169 | ) | 64,363 | (19,283 | ) | (44,413 | ) | |||||||||
| (Loss) income from continuing operations (3) | (14,818 | ) | 53,002 | (25,880 | ) | (13,731 | ) | |||||||||
| Loss from discontinued operations, net of tax (4) | (7 | ) | (1 | ) | (6,440 | ) | (17,954 | ) | ||||||||
| Net (loss) income | (14,825 | ) | 53,001 | (32,320 | ) | (31,685 | ) | |||||||||
| Net (loss) income per share: | ||||||||||||||||
| Basic | ||||||||||||||||
| (Loss) income from continuing operations | $ | (0.48 | ) | $ | 1.71 | $ | (0.84 | ) | $ | (0.44 | ) | |||||
| Loss from discontinued operations, net of tax | — | — | (0.21 | ) | (0.58 | ) | ||||||||||
| Net (loss) income | $ | (0.48 | ) | $ | 1.71 | $ | (1.05 | ) | $ | (1.02 | ) | |||||
| Diluted | ||||||||||||||||
| (Loss) income from continuing operations | $ | (0.48 | ) | $ | 1.67 | $ | (0.84 | ) | $ | (0.44 | ) | |||||
| Loss from discontinued operations, net of tax | — | — | (0.21 | ) | (0.58 | ) | ||||||||||
| Net (loss) income | $ | (0.48 | ) | $ | 1.67 | $ | (1.05 | ) | $ | (1.02 | ) | |||||
| (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. |
| F-35 |
LORAL SPACE & COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| (2) | Amounts include net income (loss) of affiliates of $1.8 million, $(1.5) million and $(3.5) million for the quarters ended June 30, 2014, September 30, 2014 and September 30, 2015, respectively, that should have been recognized in prior periods. 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) | Variations in income from continuing operations among quarters in 2015 and 2014 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. Equity in net (loss) income of affiliates for the quarters ended December 31, 2015, September 30, 2015 and December 31, 2014 included an impairment charge to reduce our investment in XTAR to its fair value. |
| (4) | Loss from discontinued operations, net of tax, for the quarters ended September 30, 2014 and December 31, 2014 includes the effects of the settlement of the ViaSat Suit and the allocation of the settlement between Loral and MDA, parent of SS/L (see Note 14). |
| F-36 |
LORAL SPACE & COMMUNICATIONS INC.
VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended December 31, 2015, 2014 and 2013
(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 2013 | ||||||||||||||||
| Allowance for affiliate receivables | $ | 5,246 | $ | 1,446 | $ | — | $ | 6,692 | ||||||||
| Deferred tax valuation allowance | $ | 7,108 | $ | 120 | $ | — | $ | 7,228 | ||||||||
| Year ended 2014 | ||||||||||||||||
| Allowance for affiliate receivables | $ | 6,692 | $ | — | $ | — | $ | 6,692 | ||||||||
| Deferred tax valuation allowance | $ | 7,228 | $ | 624 | $ | 53 | $ | 7,905 | ||||||||
| Year ended 2015 | ||||||||||||||||
| Allowance for affiliate receivables | $ | 6,692 | $ | — | $ | — | $ | 6,692 | ||||||||
| Deferred tax valuation allowance | $ | 7,905 | $ | 307 | $ | — | $ | 8,212 | ||||||||
| (1) | Changes in the deferred tax valuation allowance which have been charged to other accounts have been recorded in other comprehensive loss. |
| F-37 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Telesat Holdings Inc.
We have audited the accompanying consolidated balance sheets of Telesat Holdings Inc. and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of (loss) income, comprehensive (loss) income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Telesat Holdings Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
/s/ Deloitte LLP
Chartered Professional Accountants
Licensed Public Accountants
February 24, 2016
Toronto, Canada
| F-38 |
Consolidated Statements of (Loss) Income
For the year ended December 31
| (in thousands of Canadian dollars) | Notes | 2015 | 2014 | 2013 | ||||||||||
| Revenue | 6 | $ | 954,907 | $ | 922,871 | $ | 896,896 | |||||||
| Operating expenses | 7 | (184,279 | ) | (187,789 | ) | (201,062 | ) | |||||||
| 770,628 | 735,082 | 695,834 | ||||||||||||
| Depreciation | (207,835 | ) | (216,496 | ) | (211,151 | ) | ||||||||
| Amortization | (27,902 | ) | (30,825 | ) | (32,659 | ) | ||||||||
| Other operating (losses) gains, net | 8 | (30 | ) | (304 | ) | 25,335 | ||||||||
| Operating income | 534,861 | 487,457 | 477,359 | |||||||||||
| Interest expense | 9 | (183,297 | ) | (206,933 | ) | (224,099 | ) | |||||||
| Loss on financing | 24 | — | — | (18,487 | ) | |||||||||
| Interest and other income | 4,661 | 3,056 | 11,668 | |||||||||||
| Gain on changes in fair value of financial instruments | 6,035 | 48,931 | 80,928 | |||||||||||
| Loss on foreign exchange | (540,470 | ) | (241,087 | ) | (194,909 | ) | ||||||||
| (Loss) income before tax | (178,210 | ) | 91,424 | 132,460 | ||||||||||
| Tax expense | 10 | (88,729 | ) | (78,220 | ) | (64,367 | ) | |||||||
| Net (loss) income | $ | (266,939 | ) | $ | 13,204 | $ | 68,093 | |||||||
See accompanying notes to the consolidated financial statements
| F-39 |
Consolidated Statements of Comprehensive (Loss) Income
For the year ended December 31
| (in thousands of Canadian dollars) | Notes | 2015 | 2014 | 2013 | ||||||||||
| Net (loss) income | $ | (266,939 | ) | $ | 13,204 | $ | 68,093 | |||||||
| Other comprehensive income (loss) | ||||||||||||||
| Items that may be reclassified into profit or loss | ||||||||||||||
| Foreign currency translation adjustments | 44,740 | 3,793 | (1,281 | ) | ||||||||||
| Items that will not be reclassified into profit or loss | ||||||||||||||
| Actuarial gains (losses) on employee benefit plans | 29 | 5,225 | (23,346 | ) | 21,230 | |||||||||
| Tax (expense) recovery | (1,425 | ) | 5,777 | (5,280 | ) | |||||||||
| Other comprehensive income (loss) | 48,540 | (13,776 | ) | 14,669 | ||||||||||
| Total comprehensive (loss) income | $ | (218,399 | ) | $ | (572 | ) | $ | 82,762 | ||||||
See accompanying notes to the consolidated financial statements
| F-40 |
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 at January 1, 2013 | $ | 340,602 | $ | 315,792 | $ | 656,394 | $ | 373,042 | $ | 4,038 | $ | (6,742 | ) | $ | (2,704 | ) | $ | 1,026,732 | ||||||||||||||||
| Net income | — | — | — | 68,093 | — | — | — | 68,093 | ||||||||||||||||||||||||||
| Dividends declared on preferred shares | 25 | — | — | — | (10 | ) | — | — | — | (10 | ) | |||||||||||||||||||||||
| Issuance of share capital | 25 | — | 266 | 266 | — | — | — | — | 266 | |||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax expense of $5,280 | — | — | — | 15,950 | — | (1,281 | ) | (1,281 | ) | 14,669 | ||||||||||||||||||||||||
| Share-based compensation | — | — | — | (1,062 | ) | 13,215 | — | 13,215 | 12,153 | |||||||||||||||||||||||||
| Balance at December 31, 2013 | $ | 340,602 | $ | 316,058 | $ | 656,660 | $ | 456,013 | $ | 17,253 | $ | (8,023 | ) | $ | 9,230 | $ | 1,121,903 | |||||||||||||||||
| Balance at January 1, 2014 | $ | 340,602 | $ | 316,058 | $ | 656,660 | $ | 456,013 | $ | 17,253 | $ | (8,023 | ) | $ | 9,230 | $ | 1,121,903 | |||||||||||||||||
| Net income | — | — | — | 13,204 | — | — | — | 13,204 | ||||||||||||||||||||||||||
| Dividends declared on preferred shares | 25 | — | — | — | (20 | ) | — | — | — | (20 | ) | |||||||||||||||||||||||
| Issuance of share capital | 25 | — | 214 | 214 | — | — | — | — | 214 | |||||||||||||||||||||||||
| Other comprehensive (loss) income, net of tax recovery of $5,777 | — | — | — | (17,569 | ) | — | 3,793 | 3,793 | (13,776 | ) | ||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | 9,643 | — | 9,643 | 9,643 | ||||||||||||||||||||||||||
| Balance at December 31, 2014 | $ | 340,602 | $ | 316,272 | $ | 656,874 | $ | 451,628 | $ | 26,896 | $ | (4,230 | ) | $ | 22,666 | $ | 1,131,168 | |||||||||||||||||
| Balance 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 at December 31, 2015 | $ | 340,602 | $ | 316,272 | $ | 656,874 | $ | 188,479 | $ | 32,265 | $ | 40,510 | $ | 72,775 | $ | 918,128 | ||||||||||||||||||
See accompanying notes to the consolidated financial statements
| F-41 |
Consolidated Balance Sheets
| (in thousands of Canadian dollars) | Notes | December 31, 2015 | December 31, 2014 | |||||||
| Assets | ||||||||||
| Cash and cash equivalents | 30 | $ | 690,726 | $ | 497,356 | |||||
| Trade and other receivables | 11 | 50,781 | 49,534 | |||||||
| Other current financial assets | 12 | 1,186 | 765 | |||||||
| Prepaid expenses and other current assets | 13 | 17,100 | 17,202 | |||||||
| Total current assets | 759,793 | 564,857 | ||||||||
| Satellites, property and other equipment | 6, 16 | 1,925,265 | 1,861,015 | |||||||
| Deferred tax assets | 10 | 7,791 | 3,183 | |||||||
| Other long-term financial assets | 6, 14 | 40,362 | 38,442 | |||||||
| Other long-term assets | 6, 15 | 13,438 | 3,170 | |||||||
| Intangible assets | 6, 17 | 811,397 | 820,572 | |||||||
| Goodwill | 18 | 2,446,603 | 2,446,603 | |||||||
| Total assets | $ | 6,004,649 | $ | 5,737,842 | ||||||
| Liabilities | ||||||||||
| Trade and other payables | 19 | $ | 44,166 | $ | 36,714 | |||||
| Other current financial liabilities | 20 | 36,425 | 35,633 | |||||||
| Other current liabilities | 21 | 80,637 | 124,145 | |||||||
| Current indebtedness | 24 | 87,386 | 58,822 | |||||||
| Total current liabilities | 248,614 | 255,314 | ||||||||
| Long-term indebtedness | 24 | 3,975,835 | 3,486,857 | |||||||
| Deferred tax liabilities | 10 | 467,971 | 484,758 | |||||||
| Other long-term financial liabilities | 22 | 94,190 | 60,753 | |||||||
| Other long-term liabilities | 23 | 299,911 | 318,992 | |||||||
| Total liabilities | 5,086,521 | 4,606,674 | ||||||||
| Shareholders’ Equity | ||||||||||
| Share capital | 25 | 656,874 | 656,874 | |||||||
| Accumulated earnings | 188,479 | 451,628 | ||||||||
| Reserves | 72,775 | 22,666 | ||||||||
| Total shareholders’ equity | 918,128 | 1,131,168 | ||||||||
| Total liabilities and shareholders’ equity | $ | 6,004,649 | $ | 5,737,842 | ||||||
See accompanying notes to the consolidated financial statements
| F-42 |
Consolidated Statements of Cash Flows
For the year ended December 31
| (in thousands of Canadian dollars) | Notes | 2015 | 2014 | 2013 | ||||||||||
| Restated (Note 3) | Restated (Note 3) | |||||||||||||
| Cash flows from operating activities | ||||||||||||||
| Net (loss) income | $ | (266,939 | ) | $ | 13,204 | $ | 68,093 | |||||||
| Adjustments to reconcile net (loss) income to cash flows from operating activities | ||||||||||||||
| Depreciation | 207,835 | 216,496 | 211,151 | |||||||||||
| Amortization | 27,902 | 30,825 | 32,659 | |||||||||||
| Tax expense | 10 | 88,729 | 78,220 | 64,367 | ||||||||||
| Interest expense | 183,297 | 206,933 | 224,099 | |||||||||||
| Interest income | (4,543 | ) | (2,711 | ) | (1,288 | ) | ||||||||
| Loss on foreign exchange | 540,470 | 241,087 | 194,909 | |||||||||||
| Gain on changes in fair value of financial instruments | (6,035 | ) | (48,931 | ) | (80,928 | ) | ||||||||
| Share-based compensation | 28 | 5,369 | 9,655 | 13,517 | ||||||||||
| Impairment reversal on intangible assets | 8 | — | — | (17,274 | ) | |||||||||
| Gain on other post-employment benefit plan amendment | 8 | — | — | (9,786 | ) | |||||||||
| Loss on disposal of assets | 8 | 30 | 304 | 1,725 | ||||||||||
| Loss on financing | 24 | — | — | 18,487 | ||||||||||
| Other | (40,164 | ) | (50,657 | ) | (46,430 | ) | ||||||||
| Income taxes paid, net of income taxes received | 30 | (155,023 | ) | (80,799 | ) | (12,569 | ) | |||||||
| Interest paid, net of capitalized interest and interest received | 30 | (161,914 | ) | (192,897 | ) | (211,141 | ) | |||||||
| Customer prepayments on future satellite services | — | — | 32,305 | |||||||||||
| Repurchase of stock options and exercise of share appreciation rights | 28 | — | — | (1,196 | ) | |||||||||
| Operating assets and liabilities | 30 | 3,348 | (8,707 | ) | 388 | |||||||||
| Net cash from operating activities | $ | 422,362 | $ | 412,022 | $ | 481,088 | ||||||||
| Cash flows used in investing activities | ||||||||||||||
| Satellite programs, including capitalized interest | $ | (183,415 | ) | $ | (84,591 | ) | $ | (71,178 | ) | |||||
| Purchase of other property and equipment | (10,445 | ) | (10,695 | ) | (8,772 | ) | ||||||||
| Purchase of intangible assets | (5 | ) | (185 | ) | (6 | ) | ||||||||
| Proceeds from sale of assets | — | 311 | 1,081 | |||||||||||
| Net cash used in investing activities | $ | (193,865 | ) | $ | (95,160 | ) | $ | (78,875 | ) | |||||
| Cash flows used in financing activities | ||||||||||||||
| Repayment of indebtedness | $ | (73,864 | ) | $ | (70,692 | ) | $ | (271,448 | ) | |||||
| Settlement of derivatives | — | (60,824 | ) | (1,219 | ) | |||||||||
| Payment of premium on early retirement of indebtedness | — | — | (13,793 | ) | ||||||||||
| Payment of debt issue costs | — | — | (810 | ) | ||||||||||
| Proceeds from exercise of stock options | — | 202 | 99 | |||||||||||
| Dividends paid on preferred shares | (10 | ) | (20 | ) | (10 | ) | ||||||||
| Satellite performance incentive payments | (6,702 | ) | (5,452 | ) | (4,770 | ) | ||||||||
| Net cash used in financing activities | $ | (80,576 | ) | $ | (136,786 | ) | $ | (291,951 | ) | |||||
| Effect of changes in exchange rates on cash and cash equivalents | $ | 45,449 | $ | 18,567 | $ | 7,490 | ||||||||
| Increase in cash and cash equivalents | $ | 193,370 | $ | 198,643 | $ | 117,752 | ||||||||
| Cash and cash equivalents, beginning of year | 497,356 | 298,713 | 180,961 | |||||||||||
| Cash and cash equivalents, end of year | 30 | $ | 690,726 | $ | 497,356 | $ | 298,713 | |||||||
See accompanying notes to the consolidated financial statements
| F-43 |
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
1. BACKGROUND OF THE COMPANY
Telesat Holdings Inc. (the “Company” or “Telesat”) is a Canadian corporation. Telesat is a leading global satellite operator providing reliable and secure satellite-delivered communications solutions worldwide to broadcast, telecom, corporate and government customers. The fleet today consists of 15 satellites and the Canadian payload on ViaSat-1 with two other satellites under construction. Telesat also manages the operations of additional satellites for third parties. Telesat is headquartered in Ottawa at 1601 Telesat Court, Ontario, Canada, K1B 5P4, with offices and facilities around the world.
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 consolidated financial statements of Telesat Holdings Inc.
On February 24, 2016, 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.
| F-44 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
3. CHANGES IN ACCOUNTING POLICIES
IAS 1, Presentation of the Consolidated Statements of Cash Flows
The Company changed its presentation of the loss on foreign exchange on the consolidated statements of cash flows. The total loss on foreign exchange has been included as an adjustment to reconcile net (loss) income to cash flows from operating activities and the realized portion of the loss on foreign exchange has been included in the respective component of cash flows from operating assets and liabilities and in the effect of changes in exchange rates on cash and cash equivalents.
The change has resulted in the following reclassifications on the consolidated statements of cash flows.
| Year ended December 31, | 2014 | 2013 | ||||||
| Net cash from operating activities | $ | (177 | ) | $ | 1,558 | |||
| Effect of changes in exchange rates on cash and cash equivalents | 177 | (1,558 | ) | |||||
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 presentational currency of the Company. Each of the subsidiaries of the Company determines its own functional currency and uses that currency to measure items on its 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 (loss) income.
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.
| F-45 |
Telesat Holdings Inc.
Notes to the 2015 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 is recognized in income on a straight-line basis over the term of the related customer contract.
Inventory
Inventories are valued at the lower of cost and net realizable value and consist of finished goods and work in process. Cost for substantially all network equipment inventories is determined on a weighted average cost basis. Cost for work in process and certain one-of-a-kind finished goods are determined using the specific identification method.
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.
Depreciation is calculated using the straight-line method over the respective estimated useful lives of the assets.
| F-46 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
4. SIGNIFICANT ACCOUNTING POLICIES – (continued)
Below are the estimated useful lives in years of satellites, property and other equipment as of December 31, 2015.
| 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 (losses) gains, 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 (losses) gains, net.
Liabilities related to decommissioning and restoration of retiring property and 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.
Deferred Satellite Performance Incentive Payments
Deferred 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 cost 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 cost 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.
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 (losses) gains, net.
| F-47 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
4. SIGNIFICANT ACCOUNTING POLICIES – (continued)
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 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 of December 31, 2015.
| Years | ||||
| Revenue backlog | 9 to 17 | |||
| Customer relationships | 6 to 21 | |||
| Customer contracts | 5 to 15 | |||
| Concession rights | 1 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.
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.
| F-48 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
4. SIGNIFICANT ACCOUNTING POLICIES – (continued)
The key assumptions used in estimating the recoverable amounts of the orbital slots include:
| i) | the market penetration leading to revenue growth; |
| ii) | the profit margin; |
| 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 |
| v) | the discount rate. |
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.
| F-49 |
Telesat Holdings Inc.
Notes to the 2015 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 benchmark, an excess earnings analysis to determine aggregate intangible asset earnings, and other qualitative factors. The key assumptions used include the tax and discount rates.
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 (loss) income 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 (loss) income 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 Revolving Credit Facility and the Canadian Term Loan Facility are accounted for as short-term and long-term deferred charges and 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. All other debt issuance costs are included in current and long-term indebtedness and are amortized to interest expense using the effective interest method.
| F-50 |
Telesat Holdings Inc.
Notes to the 2015 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, workers 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. 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 2015 was determined based on membership data as at December 31, 2013. The accrued benefit obligation as at December 31, 2015 was determined based on the membership data as at December 31, 2014, and extrapolated one year based on December 31, 2015 assumptions. For certain Canadian post-retirement benefits, the expense for 2015 was based on membership and eligibility data as at September 30, 2012. For certain American post-retirement benefits, the expense for 2015 was based on membership and eligibility data as at January 1, 2015. The accrued benefit obligation as at December 31, 2015 was determined based on membership data as at January 1, 2015, and extrapolated, based on December 31, 2015 assumptions. The most recent valuation of the pension plans for funding purposes was as of January 1, 2015. The next required valuation for the employee pension plan is as of January 1, 2016 while the pension plan for designated employees is due as of January 1, 2018. Valuations will be performed for both pension plans as of January 1, 2016.
| F-51 |
Telesat Holdings Inc.
Notes to the 2015 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-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 Plan
The Company offers an equity-settled share-based incentive plan 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 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.
| F-52 |
Telesat Holdings Inc.
Notes to the 2015 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 accounting standards. The new standards determined to be applicable to the Company are disclosed below. The remaining standards have been excluded as they are not applicable.
Revenue
IFRS 15, Revenue from Contracts with Customers (“IFRS 15”) was issued by the IASB on May 28, 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 is currently evaluating the impact of IFRS 15 on its consolidated financial statements.
Financial instruments
IFRS 9, Financial Instruments (“IFRS 9”) was issued by the IASB on July 24, 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. The Company is currently evaluating the impact of IFRS 9 on its consolidated financial statements.
Leases
IFRS 16, Leases (“IFRS 16”) was issued by the IASB on January 13, 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 leased assets be recorded separately from the interest on the lease liabilities on 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.
| F-53 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
4. SIGNIFICANT ACCOUNTING POLICIES – (continued)
The standard is effective for annual periods beginning on or after January 1, 2019. Earlier application of the standard is permitted if it is applied in conjunction with IFRS 15. The Company is currently evaluating the impact of IFRS 16 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 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.
Critical accounting estimates and assumptions
The Company makes accounting estimates and assumptions that affect the carrying value of assets and liabilities, reported net (loss) income 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 $20.2 million and $11.4 million, respectively at December 31, 2015 (December 31, 2014 — $22.6 million and $19.4 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 (loss) income could vary.
| F-54 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
5. CRITICAL ACCOUNTING JUDGMENTS AND ESTIMATES – (continued)
Impairment of goodwill
Goodwill represented $2,446.6 million of total assets at December 31, 2015 and December 31, 2014. 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 $811.4 million of total assets at December 31, 2015 (December 31, 2014 — $820.6 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.
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. |
| F-55 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
6. SEGMENT INFORMATION – (continued)
Revenue derived from the above services were as follows:
| Year ended December 31, | 2015 | 2014 | 2013 | |||||||||
| Broadcast | $ | 492,633 | $ | 468,207 | $ | 471,006 | ||||||
| Enterprise | 434,555 | 430,217 | 402,377 | |||||||||
| Consulting and other | 27,719 | 24,447 | 23,513 | |||||||||
| Revenue | $ | 954,907 | $ | 922,871 | $ | 896,896 | ||||||
Geographic Information
Revenue by geographic regions was based on the point of origin of the revenue (destination of the billing invoice), and was allocated as follows:
| Year ended December 31, | 2015 | 2014 | 2013 | |||||||||
| Canada | $ | 431,005 | $ | 435,761 | $ | 446,567 | ||||||
| United States | 322,679 | 294,977 | 276,983 | |||||||||
| Latin America & Caribbean | 88,794 | 83,024 | 74,181 | |||||||||
| Europe, Middle East & Africa | 84,877 | 83,591 | 81,143 | |||||||||
| Asia & Australia | 27,552 | 25,518 | 18,022 | |||||||||
| Revenue | $ | 954,907 | $ | 922,871 | $ | 896,896 | ||||||
The Company’s satellites are in geosynchronous orbit. For disclosure purposes, the satellites have been classified based on ownership. Satellites, property and other equipment and intangible assets by geographic regions were allocated as follows with the comparative figures being restated to conform with the geographic regions disclosed in the current year:
| As at December 31, | 2015 | 2014 | ||||||
| Canada | $ | 1,310,943 | $ | 1,479,557 | ||||
| Europe, Middle East & Africa | 448,699 | 193,095 | ||||||
| United States | 162,269 | 184,419 | ||||||
| All others | 3,354 | 3,944 | ||||||
| Satellites, property and other equipment | $ | 1,925,265 | $ | 1,861,015 | ||||
| As at December 31, | 2015 | 2014 | ||||||
| Canada | $ | 755,380 | $ | 770,816 | ||||
| United States | 44,315 | 37,174 | ||||||
| All others | 11,702 | 12,582 | ||||||
| Intangible assets | $ | 811,397 | $ | 820,572 | ||||
Other long-term financial assets and other long-term assets by geographic regions were allocated as follows:
| As at December 31, | 2015 | 2014 | ||||||
| Canada | $ | 33,005 | $ | 36,509 | ||||
| Europe, Middle East & Africa | 5,536 | — | ||||||
| All others | 1,821 | 1,933 | ||||||
| Other long-term financial assets | $ | 40,362 | $ | 38,442 | ||||
| F-56 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
6. SEGMENT INFORMATION – (continued)
| As at December 31 | 2015 | 2014 | ||||||
| Canada | $ | 12,775 | $ | 3,108 | ||||
| All others | 663 | 62 | ||||||
| Other long-term assets | $ | 13,438 | $ | 3,170 | ||||
Goodwill was not allocated to geographic regions.
Major Customers
For the year ended December 31, 2015, there were three significant customers each representing more than 10% of consolidated revenue (December 31, 2014 and December 31, 2013 — three customers).
7. OPERATING EXPENSES
| Year ended December 31, | 2015 | 2014 | 2013 | |||||||||
| Compensation and employee benefits (a) | $ | 65,819 | $ | 69,723 | $ | 79,051 | ||||||
| Other operating expenses (b) | 41,947 | 42,555 | 43,960 | |||||||||
| Cost of sales (c) | 76,513 | 75,511 | 78,051 | |||||||||
| Operating expenses | $ | 184,279 | $ | 187,789 | $ | 201,062 | ||||||
| (a) | Compensation and employee benefits include salaries, bonuses, commissions, post-employment benefits and charges arising from share-based compensation. |
| (b) | Other operating expenses include general and administrative expenses, marketing expenses, in-orbit insurance expenses, professional fees and facility costs. |
| (c) | Cost of sales includes the cost of third-party capacity, the cost of equipment sales and other costs directly attributable to fulfilling the Company’s obligations under customer contracts. |
8. OTHER OPERATING (LOSSES) GAINS, NET
| Year ended December 31, | 2015 | 2014 | 2013 | |||||||||
| Impairment reversal on intangible assets (Note 17) | $ | — | $ | — | $ | 17,274 | ||||||
| Gain on other post-employment benefit plan amendment (Note 29) | — | — | 9,786 | |||||||||
| Loss on disposal of assets | (30 | ) | (304 | ) | (1,725 | ) | ||||||
| Other operating (losses) gains, net | $ | (30 | ) | $ | (304 | ) | $ | 25,335 | ||||
9. INTEREST EXPENSE
| Year ended December 31, | 2015 | 2014 | 2013 | |||||||||
| Interest on indebtedness | $ | 182,506 | $ | 167,051 | $ | 173,522 | ||||||
| Interest on derivative instruments | 3,721 | 38,851 | 46,349 | |||||||||
| Interest on performance incentive payments | 4,362 | 4,117 | 4,453 | |||||||||
| Interest on promissory notes | — | — | 66 | |||||||||
| Interest on employee benefit plans (Note 29) | 1,976 | 1,344 | 3,070 | |||||||||
| Capitalized interest (Note 16) | (9,268 | ) | (4,430 | ) | (3,361 | ) | ||||||
| Interest expense | $ | 183,297 | $ | 206,933 | $ | 224,099 | ||||||
| F-57 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
10. INCOME TAXES
| Year ended December 31, | 2015 | 2014 | 2013 | |||||||||
| Current tax expense | $ | 111,579 | $ | 103,388 | $ | 50,039 | ||||||
| Deferred tax (recovery) expense | (22,850 | ) | (25,168 | ) | 14,328 | |||||||
| Tax expense | $ | 88,729 | $ | 78,220 | $ | 64,367 | ||||||
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, | 2015 | 2014 | 2013 | |||||||||
| (Loss) income before tax | $ | (178,210 | ) | $ | 91,424 | $ | 132,460 | |||||
| Multiplied by the statutory income tax rates | 26.53 | % | 26.52 | % | 26.50 | % | ||||||
| (47,279 | ) | 24,246 | 35,102 | |||||||||
| Income tax recorded at rates different from the Canadian tax rate | 1,887 | 1,704 | 1,125 | |||||||||
| Permanent differences | 62,025 | 32,167 | 24,388 | |||||||||
| Effect on deferred tax balances due to changes in income tax rates | 1,554 | — | 196 | |||||||||
| Effect of temporary differences not recognized as deferred tax assets | 76,009 | 23,556 | 14,121 | |||||||||
| Previously unrecognized tax losses and credits | (4,392 | ) | (2,425 | ) | (8,443 | ) | ||||||
| Reversal of tax reserve | — | (708 | ) | (2,045 | ) | |||||||
| Other | (1,075 | ) | (320 | ) | (77 | ) | ||||||
| Tax expense | $ | 88,729 | $ | 78,220 | $ | 64,367 | ||||||
| Effective income tax rate | (49.79 | )% | 85.56 | % | 48.59 | % | ||||||
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, | 2015 | 2014 | ||||||
| Deferred tax assets | ||||||||
| Foreign tax credit | $ | 9,933 | $ | 9,879 | ||||
| Minimum tax credit | 1,185 | 801 | ||||||
| Financing charges | 5,540 | 8,871 | ||||||
| Unrealized foreign exchange losses | 23,709 | 17,891 | ||||||
| Deferred revenue | — | 1,159 | ||||||
| Loss carry forwards | 19,130 | 4,764 | ||||||
| Employee benefits | 11,710 | 12,731 | ||||||
| Other | 771 | 1,577 | ||||||
| Total deferred tax assets | $ | 71,978 | $ | 57,673 | ||||
| Deferred tax liabilities | ||||||||
| Capital assets | $ | (289,988 | ) | $ | (295,201 | ) | ||
| Intangibles | (237,942 | ) | (238,396 | ) | ||||
| Finance charges | (4,228 | ) | (4,388 | ) | ||||
| Reserves | — | (1,263 | ) | |||||
| Total deferred tax liabilities | $ | (532,158 | ) | $ | (539,248 | ) | ||
| Deferred tax liabilities, net | $ | (460,180 | ) | $ | (481,575 | ) | ||
| F-58 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
10. INCOME TAXES – (continued)
Deferred tax assets of $7.8 million (December 31, 2014 — $3.2 million) on the balance sheet relate to the U.S. and United Kingdom tax jurisdictions (December 31, 2014 — U.S. and Brazil tax jurisdiction).
Losses and tax credits
Foreign tax credit
The Company has $11.3 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 is $1.4 million. These credits will begin to expire in 2016.
Unrealized foreign exchange losses
The Company has recognized deferred tax assets of $19.8 million, and has unrecognized deductible temporary differences of $398 million in relation to the unrealized foreign exchange losses on its U.S. dollar denominated debt financing. The remaining $3.9 million relates to the U.S. tax jurisdiction.
Loss carry forwards
The Company has U.S. tax losses carried forward of $19.9 million which will expire between 2028 and 2031. The Company also has tax losses in the United Kingdom of $61.8 million, principally related to accelerated asset depreciation, that can be carried forward indefinitely.
Brazil tax losses and unrealized foreign exchange losses
The Company has Brazil tax losses carried forward of $7.2 million and $10.7 million of unrealized foreign exchange losses for which no deferred tax assets have been recognized. The unused tax losses have not been recognized as it is not more likely than not that a deferred tax asset can be realized.
Investments in subsidiaries
As at December 31, 2015, the Company had temporary differences of $73.4 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.
11. TRADE AND OTHER RECEIVABLES
| As at December 31, | 2015 | 2014 | ||||||
| Trade receivables | $ | 48,544 | $ | 45,921 | ||||
| Trade receivables due from related parties (Note 33) | 119 | 82 | ||||||
| Less: Allowance for doubtful accounts | (3,779 | ) | (3,977 | ) | ||||
| Net trade receivables | 44,884 | 42,026 | ||||||
| Other receivables | 5,897 | 7,412 | ||||||
| Other receivables due from related parties (Note 33) | — | 96 | ||||||
| Trade and other receivables | $ | 50,781 | $ | 49,534 | ||||
| F-59 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
11. TRADE AND OTHER RECEIVABLES – (continued)
Allowance for doubtful accounts
The movement in the allowance for doubtful accounts was as follows:
| Year ended December 31, | 2015 | 2014 | ||||||
| Allowance for doubtful accounts, beginning of year | $ | 3,977 | $ | 2,887 | ||||
| (Reversals) provisions for impaired receivables | (13 | ) | 1,711 | |||||
| Receivables written off | (80 | ) | (684 | ) | ||||
| Impact of foreign exchange | (105 | ) | 63 | |||||
| Allowance for doubtful accounts, end of year | $ | 3,779 | $ | 3,977 | ||||
12. OTHER CURRENT FINANCIAL ASSETS
| As at December 31, | 2015 | 2014 | ||||||
| Security deposits | $ | 1,186 | $ | 765 | ||||
| Other current financial assets | $ | 1,186 | $ | 765 | ||||
13. PREPAID EXPENSES AND OTHER CURRENT ASSETS
| As at December 31, | 2015 | 2014 | ||||||
| Prepaid expenses (a) | $ | 10,536 | $ | 11,456 | ||||
| Income tax recoverable | 188 | 146 | ||||||
| Inventory (b) | 5,933 | 5,152 | ||||||
| Deferred charges (c) | 301 | 300 | ||||||
| Other | 142 | 148 | ||||||
| Prepaid expenses and other current assets | $ | 17,100 | $ | 17,202 | ||||
| (a) | Prepaid expenses are primarily comprised of prepaid satellite in-orbit insurance, prepaid interest on long-term indebtedness and prepaid license fees. |
| (b) | As at December 31, 2015, inventory consists of $4.7 million of finished goods (December 31, 2014 — $5.0 million) and $1.2 million of work in process (December 31, 2014 — $0.2 million). During the year, $13.1 million was recognized as cost of equipment sales and recorded as an operating expense (December 31, 2014 — $15.5 million, December 31, 2013 — $20.7 million). |
| (c) | Deferred charges include deferred financing charges relating to the Revolving Credit Facility. |
14. OTHER LONG-TERM FINANCIAL ASSETS
| As at December 31, | 2015 | 2014 | ||||||
| Long-term receivables | $ | 13,672 | $ | 15,273 | ||||
| Security deposits | 6,455 | 541 | ||||||
| Derivative assets | 20,235 | 22,628 | ||||||
| Other long-term financial assets | $ | 40,362 | $ | 38,442 | ||||
| F-60 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
15. OTHER LONG-TERM ASSETS
Other long-term assets were allocated as follows with the comparative figures being restated to conform to the categories disclosed in the current year:
| As at December 31, | 2015 | 2014 | ||||||
| Prepaid expenses | $ | 736 | $ | 62 | ||||
| Deferred charges | 71 | 372 | ||||||
| Income tax recoverable | 12,329 | 2,434 | ||||||
| Other | 302 | 302 | ||||||
| Other long-term assets | $ | 13,438 | $ | 3,170 | ||||
16. SATELLITES, PROPERTY AND OTHER EQUIPMENT
| Satellites | Property and other equipment | Assets under construction | Total | |||||||||||||
| Cost at January 1, 2014 | $ | 2,848,929 | $ | 214,442 | $ | 46,178 | $ | 3,109,549 | ||||||||
| Additions | — | 2,814 | 104,887 | 107,701 | ||||||||||||
| Disposals/retirements | — | (2,118 | ) | — | (2,118 | ) | ||||||||||
| Reclassifications and transfers from assets under construction | — | 6,949 | (6,949 | ) | — | |||||||||||
| Impact of foreign exchange | — | 1,083 | 7,375 | 8,458 | ||||||||||||
| Cost at December 31, 2014 and January 1, 2015 | $ | 2,848,929 | $ | 223,170 | $ | 151,491 | $ | 3,223,590 | ||||||||
| Additions | — | 1,519 | 227,885 | 229,404 | ||||||||||||
| Disposals/retirements | — | (2,170 | ) | — | (2,170 | ) | ||||||||||
| Reclassifications and transfers from assets under construction | 315,863 | 9,155 | (325,018 | ) | — | |||||||||||
| Impact of foreign exchange | 48,789 | 2,001 | (6,301 | ) | 44,489 | |||||||||||
| Cost at December 31, 2015 | $ | 3,213,581 | 233,675 | 48,057 | 3,495,313 | |||||||||||
| Accumulated depreciation and impairment at January 1, 2014 | $ | (1,046,545 | ) | $ | (100,245 | ) | $ | — | $ | (1,146,790 | ) | |||||
| Depreciation | (200,576 | ) | (15,920 | ) | — | (216,496 | ) | |||||||||
| Disposals/retirements | — | 1,489 | — | 1,489 | ||||||||||||
| Impact of foreign exchange | — | (778 | ) | — | (778 | ) | ||||||||||
| Accumulated depreciation and impairment at December 31, 2014 and January 1, 2015 | $ | (1,247,121 | ) | $ | (115,454 | ) | $ | — | $ | (1,362,575 | ) | |||||
| Depreciation | (191,743 | ) | (16,092 | ) | — | (207,835 | ) | |||||||||
| Disposals/retirements | — | 2,140 | — | 2,140 | ||||||||||||
| Impact of foreign exchange | (131 | ) | (1,647 | ) | — | (1,778 | ) | |||||||||
| Accumulated depreciation and impairment at December 31, 2015 | $ | (1,438,995 | ) | $ | (131,053 | ) | $ | — | $ | (1,570,048 | ) | |||||
| Net carrying values | ||||||||||||||||
| At December 31, 2014 | $ | 1,601,808 | $ | 107,716 | $ | 151,491 | $ | 1,861,015 | ||||||||
| At December 31, 2015 | $ | 1,774,586 | $ | 102,622 | $ | 48,057 | $ | 1,925,265 | ||||||||
| F-61 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
16. SATELLITES, PROPERTY AND OTHER EQUIPMENT – (continued)
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 (Note 24).
Borrowing costs
Borrowing costs of $9.3 million were capitalized for the year ended December 31, 2015 (December 31, 2014 — $4.4 million, December 31, 2013 — $3.4 million). The average capitalization rate was 5% (6% in 2014 and 2013), representing the Company’s weighted average cost of debt.
Impairment
No impairment was recognized for the years ended December 31, 2015, 2014 and 2013.
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 | Total indefinite life intangibles | ||||||||||
| Cost at January 1, 2014 | $ | 600,725 | $ | 17,000 | $ | 617,725 | ||||||
| Additions | — | — | — | |||||||||
| Disposals/retirements | — | — | — | |||||||||
| Impact of foreign exchange | 3,121 | — | 3,121 | |||||||||
| Cost at December 31, 2014 and January 1, 2015 | $ | 603,846 | $ | 17,000 | $ | 620,846 | ||||||
| Additions | — | — | — | |||||||||
| Disposals/retirements | — | — | — | |||||||||
| Impact of foreign exchange | 6,765 | — | 6,765 | |||||||||
| Cost at December 31, 2015 | $ | 610,611 | $ | 17,000 | $ | 627,611 | ||||||
| Accumulated impairment at January 1, 2014 | $ | (1,100 | ) | $ | — | $ | (1,100 | ) | ||||
| Impairment reversal | — | — | — | |||||||||
| Accumulated impairment at December 31, 2014 and January 1, 2015 | $ | (1,100 | ) | $ | — | $ | (1,100 | ) | ||||
| Impairment reversal | — | — | — | |||||||||
| Accumulated impairment at December 31, 2015 | $ | (1,100 | ) | $ | — | $ | (1,100 | ) | ||||
| Net carrying values | ||||||||||||
| At December 31, 2014 | $ | 602,746 | $ | 17,000 | $ | 619,746 | ||||||
| At December 31, 2015 | $ | 609,511 | $ | 17,000 | $ | 626,511 | ||||||
| F-62 |
Telesat Holdings Inc.
Notes to the 2015 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 | Other | Total finite life intangibles | |||||||||||||||||||
| Cost at January 1, 2014 | $ | 268,460 | $ | 195,794 | $ | 12,688 | $ | 16,718 | $ | 1,196 | $ | 494,856 | ||||||||||||
| Additions | — | 2,356 | 170 | — | 320 | 2,846 | ||||||||||||||||||
| Disposals/retirements | (22,200 | ) | — | — | — | — | (22,200 | ) | ||||||||||||||||
| Impact of foreign exchange | 299 | 277 | — | — | (53 | ) | 523 | |||||||||||||||||
| Cost at December 31, 2014 and January 1, 2015 | $ | 246,559 | $ | 198,427 | $ | 12,858 | $ | 16,718 | $ | 1,463 | $ | 476,025 | ||||||||||||
| Additions | — | 1,285 | 10,284 | — | 5 | 11,574 | ||||||||||||||||||
| Disposals/retirements | (1,236 | ) | (1,710 | ) | — | — | — | (2,946 | ) | |||||||||||||||
| Impact of foreign exchange | 666 | 805 | — | — | (255 | ) | 1,216 | |||||||||||||||||
| Cost at December 31, 2015 | $ | 245,989 | $ | 198,807 | $ | 23,142 | $ | 16,718 | $ | 1,213 | $ | 485,869 | ||||||||||||
| Accumulated amortization and impairment at January 1, 2014 | $ | (180,918 | ) | $ | (75,906 | ) | $ | (1,741 | ) | $ | (7,244 | ) | $ | (386 | ) | $ | (266,195 | ) | ||||||
| Amortization | (17,600 | ) | (11,174 | ) | (998 | ) | (924 | ) | (129 | ) | (30,825 | ) | ||||||||||||
| Disposals/retirements | 22,200 | — | — | — | — | 22,200 | ||||||||||||||||||
| Impact of foreign exchange | (304 | ) | (102 | ) | — | — | 27 | (379 | ) | |||||||||||||||
| Accumulated amortization and impairment at December 31, 2014 and January 1, 2015 | $ | (176,622 | ) | $ | (87,182 | ) | $ | (2,739 | ) | $ | (8,168 | ) | $ | (488 | ) | $ | (275,199 | ) | ||||||
| Amortization | (14,303 | ) | (11,636 | ) | (876 | ) | (925 | ) | (162 | ) | (27,902 | ) | ||||||||||||
| Disposals/retirements | 1,236 | 1,710 | — | — | — | 2,946 | ||||||||||||||||||
| Impact of foreign exchange | (657 | ) | (314 | ) | — | — | 143 | (828 | ) | |||||||||||||||
| Accumulated amortization and impairment at December 31, 2015 | $ | (190,346 | ) | $ | (97,422 | ) | $ | (3,615 | ) | $ | (9,093 | ) | $ | (507 | ) | $ | (300,983 | ) | ||||||
| Net carrying values | ||||||||||||||||||||||||
| At December 31, 2014 | $ | 69,937 | $ | 111,245 | $ | 10,119 | $ | 8,550 | $ | 975 | $ | 200,826 | ||||||||||||
| At December 31, 2015 | $ | 55,643 | $ | 101,385 | $ | 19,527 | $ | 7,625 | $ | 706 | $ | 184,886 | ||||||||||||
The total combined indefinite and finite life intangible assets are summarized below.
| As at December 31, 2015 | As at December 31, 2014 | |||||||||||||||||||||||
| Cost | Accumulated amortization and impairment | Net carrying value | Cost | Accumulated amortization and impairment | Net carrying value | |||||||||||||||||||
| Indefinite life intangibles | $ | 627,611 | $ | (1,100 | ) | $ | 626,511 | $ | 620,846 | $ | (1,100 | ) | $ | 619,746 | ||||||||||
| Finite life intangibles | 485,869 | (300,983 | ) | 184,886 | 476,025 | (275,199 | ) | 200,826 | ||||||||||||||||
| Total intangibles | $ | 1,113,480 | $ | (302,083 | ) | $ | 811,397 | $ | 1,096,871 | $ | (276,299 | ) | $ | 820,572 | ||||||||||
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.
| F-63 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
17. INTANGIBLE ASSETS – (continued)
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 following are the remaining useful lives of the intangible assets:
| Years | ||||
| Revenue backlog | 1 to 9 | |||
| Customer relationships | 3 to 13 | |||
| Transponder rights | 9 | |||
| Customer contracts | 5 to 11 | |||
| Concession rights | 1 to 8 | |||
| Patent | 10 | |||
All of the Company’s intangible assets have been pledged as security as a requirement of the Company’s Senior Secured Credit Facilities (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 quarter of 2015, 2014 and 2013 in accordance with the policy described in Note 4.
In 2013, $17.3 million of the impairment on orbital slots was reversed due to a decrease in the discount rate.
No impairment loss was recognized in 2015, 2014, or 2013.
The recoverable amount, for indefinite life intangible assets, which is equal to the fair value less costs of disposal, was calculated using the following assumptions:
| 2015 | 2014 | 2013 | ||||||||||
| Discount rate | 10.0 | % | 10.0 | % | 10.0 | % | ||||||
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.
| F-64 |
Telesat Holdings Inc.
Notes to the 2015 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 quarter of 2015, 2014, and 2013 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:
| 2015 | 2014 | 2013 | ||||||||||
| Discount rate | 10.0 | % | 10.0 | % | 10.0 | % | ||||||
| Terminal year growth rate | 2.5 | % | 3.0 | % | 3.0 | % | ||||||
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, | 2015 | 2014 | ||||||
| Trade payables | $ | 2,821 | $ | 3,042 | ||||
| Other payables and accrued liabilities (a) | 40,816 | 33,379 | ||||||
| Other payables and accrued liabilities due to related parties (Note 33) | 529 | 293 | ||||||
| Trade and other payables | $ | 44,166 | $ | 36,714 | ||||
| (a) | Other payables and accrued liabilities include payables that are not trade in nature as well as various operating and capital accruals. |
20. OTHER CURRENT FINANCIAL LIABILITIES
| As at December 31, | 2015 | 2014 | ||||||
| Derivative liabilities | $ | 6,510 | $ | 11,533 | ||||
| Security deposits | 2,880 | 2,551 | ||||||
| Deferred satellite performance incentive payments | 11,011 | 6,937 | ||||||
| Interest payable (a) | 11,084 | 9,213 | ||||||
| Other | 4,940 | 5,399 | ||||||
| Other current financial liabilities | $ | 36,425 | $ | 35,633 | ||||
| (a) | Interest payable includes interest payable on indebtedness, interest payable on deferred satellite performance incentive payments, and interest payable on other current financial liabilities. |
21. OTHER CURRENT LIABILITIES
| As at December 31, | 2015 | 2014 | ||||||
| Deferred revenue | $ | 68,054 | $ | 69,112 | ||||
| Decommissioning liabilities (Note 23) | 96 | 121 | ||||||
| Uncertain tax positions | 1,315 | 1,315 | ||||||
| Income taxes payable | 7,934 | 53,029 | ||||||
| Other | 3,238 | 568 | ||||||
| Other current liabilities | $ | 80,637 | $ | 124,145 | ||||
| F-65 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
22. OTHER LONG-TERM FINANCIAL LIABILITIES
| As at December 31, | 2015 | 2014 | ||||||
| Derivative liabilities | $ | 4,903 | $ | 7,883 | ||||
| Security deposits | 551 | 360 | ||||||
| Deferred satellite incentive payments | 76,015 | 50,791 | ||||||
| Tax indemnification payable | 10,973 | — | ||||||
| Other | 1,748 | 1,719 | ||||||
| Other long-term financial liabilities | $ | 94,190 | $ | 60,753 | ||||
23. OTHER LONG-TERM LIABILITIES
| As at December 31, | 2015 | 2014 | ||||||
| Deferred revenue | $ | 255,076 | $ | 270,087 | ||||
| Accrued benefit liability (Note 29) | 42,762 | 46,779 | ||||||
| Uncertain tax positions | 175 | 175 | ||||||
| Decommissioning liabilities (a) | 1,628 | 1,534 | ||||||
| Other | 270 | 417 | ||||||
| Other long-term liabilities | $ | 299,911 | $ | 318,992 | ||||
| (a) | The current and long-term decommissioning liabilities on property and equipment were $1.7 million (December 31, 2014 — $1.7 million). The decommissioning liabilities are for the restoration of leased buildings and teleports. During the 2015 year, $0.1 million (December 31, 2014 — $0.1 million) was recorded as interest expense with no decommissioning liabilities derecognized (December 31, 2014 — $0.1 million). It is expected that the decommissioning liabilities will come to maturity between April 2017 and April 2062. |
24. INDEBTEDNESS
| As at December 31, | 2015 | 2014 | ||||||
| Senior Secured Credit Facilities (a) | ||||||||
| Revolving Credit Facility | $ | — | $ | — | ||||
| Term Loan A | 375,000 | 425,000 | ||||||
| Term Loan B — U.S. Facility (December 31, 2015 – USD $1,697,742, December 31, 2014 – USD $1,715,199) | 2,349,505 | 1,993,233 | ||||||
| Term Loan B — Canadian Facility | 136,150 | 137,550 | ||||||
| 6.0% Senior Notes (USD $900,000) (b) | 1,245,510 | 1,045,890 | ||||||
| 4,106,165 | 3,601,673 | |||||||
| Less: deferred financing costs, interest rate floors, prepayment option and premiums (c) | (42,944 | ) | (55,994 | ) | ||||
| 4,063,221 | 3,545,679 | |||||||
| Less: current indebtedness | (87,386 | ) | (58,822 | ) | ||||
| Long-term indebtedness | $ | 3,975,835 | $ | 3,486,857 | ||||
| F-66 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
24. INDEBTEDNESS – (continued)
On March 28, 2012, Telesat Canada entered into a Credit Agreement with a syndicate of banks which provides for the extension of credit under the Senior Secured Credit Facilities as described below. 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. The Credit Agreement contains covenants that restrict 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 Credit Agreement requires Telesat Canada to comply with a maximum senior secured leverage ratio. The Credit Agreement also contains customary events of default and affirmative covenants, including an excess cash sweep, that may require the Company to repay a portion of the outstanding principal under the Senior Secured Credit Facilities prior to the stated maturity.
On May 14, 2012, Telesat Canada issued, through a private placement, USD $700 million of 6.0% Senior Notes which mature on May 15, 2017. On October 29, 2012, an additional USD $200 million of 6.0% Senior Notes were issued through a private placement. The additional USD $200 million of Senior Notes were priced at 103.5% of the principal amount and held the same terms and conditions as those issued on May 14, 2012. The 6.0% 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 6.0% Senior Notes Indenture.
On April 2, 2013, Telesat amended its Senior Secured Credit Facilities. The amendment to the Senior Secured Credit Facilities converted $34 million from Canadian to U.S. dollars and decreased the interest rate on the Term Loan B — Canadian Facility (“Canadian TLB Facility”) and the Term Loan B — U.S. Facility (“U.S. TLB Facility”) by 0.50%. The amendment also decreased the interest rate floors on the debt to 0.75% and 1.00% for the U.S. TLB Facility and the Canadian TLB Facility, respectively. While the debt incurrence test and maximum permitted debt test of the Consolidated Total Secured Debt to EBITDA (the “Senior Secured Leverage Ratio”) remained unchanged at 5.00:1.00 and 5.25:1.00, respectively, the permitted leverage ratio to incur first lien debt changed to 4.25:1.00 from the prior 4.00:1.00. Additional debt issue costs of $6.7 million and $0.5 million were incurred with the amendment of the U.S. TLB Facility and Canadian TLB Facility, respectively.
On May 1, 2013, Telesat redeemed all outstanding 12.5% Senior Subordinated Notes at a price equal to 106.25% of the principal amount from cash on-hand. The redemption premiums, along with the deferred financing costs which were capitalized in the carrying value, were expensed resulting in a net loss on financing of $18.5 million.
| (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 maximum senior secured leverage ratio. At December 31, 2015 and December 31, 2014, Telesat was in compliance with this covenant. |
Each tranche of the Senior Secured Credit Facilities is subject to mandatory principal repayment requirements, which, in the initial years, are generally an annual amount representing one quarter of 1% of the initial aggregate principal amount, payable quarterly. The maturity of the Senior Secured Credit Facilities will be accelerated if Telesat Canada’s existing 6.0% Senior Notes due in 2017 or certain refinancing thereof are not repurchased, redeemed, refinanced or deferred before 91 days prior to the maturity date of such notes.
| F-67 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
24. INDEBTEDNESS – (continued)
The Senior Secured Credit Facilities have several tranches which are described below:
| (i) | A Revolving Credit Facility (“Revolving Facility”) of up to $140 million in Canadian or U.S. dollars is available to Telesat. This Revolving Facility matures on March 28, 2017 and is available to be drawn at any time. Loans under the Revolving Facility bear interest at a floating rate plus an applicable margin of 2.00% for prime rate and Alternative Base Rate loans and 3.00% for Bankers Acceptance (“BA”) and Eurodollar loans. The Revolving Facility has an unused commitment fee of 50 basis points. As of December 31, 2015, other than $0.1 million (December 31, 2014 — $0.2 million) in drawings related to letters of credit, there were no borrowings under this facility. |
| (ii) | The Term Loan A Facility (“TLA Facility”) is a $500 million loan maturing on March 28, 2017. Loans under this facility bear interest at a floating rate of the BA plus an applicable margin of 3.00%. Mandatory principal repayments of $50.0 million were made in 2015. The weighted average effective interest rate was 4.36% (December 31, 2014 — 4.60%). |
| (iii) | The U.S. TLB Facility is a USD $1,746 million loan maturing on March 28, 2019. The outstanding borrowings under the U.S. TLB Facility currently bear interest at a floating rate of LIBOR, but not less than 0.75%, plus an applicable margin of 2.75%. Mandatory principal repayments of $22.5 million were made in 2015. The weighted average effective interest rate was 4.26% (December 31, 2014 — 4.26%). |
| (iv) | The Canadian TLB Facility is a $140 million loan maturing on March 28, 2019. The outstanding borrowings under the Canadian TLB Facility currently bear interest at a floating rate of the BA borrowing, but not less than 1.00%, plus an applicable margin of 3.25%. Mandatory principal repayments of $1.4 million were made in 2015. The weighted average effective interest rate was 5.18% (December 31, 2014 — 5.37%). |
| (b) | The Senior Notes bear interest at an annual rate of 6.0% and are due May 15, 2017. The total balance of the Senior Notes is USD $900 million, with USD $700 million issued on May 14, 2012, and an additional USD $200 million issued on October 29, 2012. The Senior Notes include covenants or terms that restrict the Company’s ability to, among other things: (i) incur additional indebtedness, (ii) incur liens, (iii) pay dividends or make certain restricted payments, investments or acquisitions, (iv) enter into certain transactions with affiliates, (v) modify or cancel satellite insurance, (vi) effect mergers with another entity, and (vii) redeem the Senior Notes, without penalty, prior to May 15, 2016, in each case subject to exceptions provided for in the Senior Notes indenture. The weighted average effective interest rate was 5.99% (December 31, 2014 — 5.99%). |
| (c) | The TLA Facility, U.S. TLB Facility, Canadian TLB Facility and Senior Notes are presented on the balance sheet net of related deferred financing costs of $25.0 million (December 31, 2014 — $34.4 million). The indenture agreement for the Senior Notes contains provisions for certain prepayment options (Note 27) and premiums 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 indebtedness at their inception date. The aggregate impact of the prepayment option related to the 6.0% Senior Notes issued on May 14, 2012 and October 29, 2012 was a $5.6 million increase to the indebtedness. This liability is subsequently amortized using the effective interest method and had a carrying amount of $1.8 million at December 31, 2015 (December 31, 2014 — $3.0 million).
The initial fair value impact of the premiums on the 6.0% Senior Notes was an increase to indebtedness of $7.0 million. This liability is subsequently amortized using the effective interest method and had a carrying amount of $2.3 million at December 31, 2015 (December 31, 2014 — $3.9 million).
| F-68 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
24. INDEBTEDNESS – (continued)
The initial fair value impact, in March 2012, of the interest rate floors on the U.S. TLB Facility was a decrease to the indebtedness of $44.3 million. This asset is subsequently amortized using the effective interest method and had a carrying amount of $21.2 million at December 31, 2015 (December 31, 2014 — $27.3 million).
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 is subsequently amortized using the effective interest method and had a carrying amount of $0.9 million at December 31, 2015 (December 31, 2014 — $1.1 million).
The short-term and long-term portions of deferred financing costs, interest rate floors, prepayment option and premiums were as follows:
| As at December 31, | 2015 | 2014 | ||||||
| Short-term deferred financing costs | $ | 9,609 | $ | 9,355 | ||||
| Long-term deferred financing costs | 15,370 | 25,093 | ||||||
| $ | 24,979 | $ | 34,448 | |||||
| Short-term interest rate floors | $ | 6,479 | $ | 6,256 | ||||
| Long-term interest rate floors | 15,591 | 22,175 | ||||||
| $ | 22,070 | $ | 28,431 | |||||
| Short-term prepayment option | $ | (1,266 | ) | $ | (1,191 | ) | ||
| Long-term prepayment option | (516 | ) | (1,797 | ) | ||||
| $ | (1,782 | ) | $ | (2,988 | ) | |||
| Short-term premiums | $ | (1,649 | ) | $ | (1,552 | ) | ||
| Long-term premiums | (674 | ) | (2,345 | ) | ||||
| $ | (2,323 | ) | $ | (3,897 | ) | |||
| Deferred financing costs, interest rate floors, prepayment option and premiums | $ | 42,944 | $ | 55,994 | ||||
The outstanding balance of indebtedness, excluding deferred financing costs, interest rate floors, prepayment option and premiums will be repaid as follows (in millions of Canadian dollars):
| 2016 | 2017 | 2018 | 2019 | 2020 and thereafter | Total | |||||||||||||||||
| $ | 100.6 | $ | 1,571.1 | $ | 25.6 | $ | 2,408.9 | $ | — | $ | 4,106.2 | |||||||||||
| F-69 |
Telesat Holdings Inc.
Notes to the 2015 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 at December 31, 2015 and 2014 were as follows:
| Number of shares | Stated value | |||||||
| Common Shares | 74,252,460 | $ | 340,602 | |||||
| Voting Participating Preferred Shares | 7,034,444 | 77,995 | ||||||
| Non-Voting Participating Preferred Shares | 38,255,423 | 238,267 | ||||||
| Director Voting Preferred Shares | 1,000 | 10 | ||||||
| Share capital | $ | 656,874 | ||||||
In January 2013, January 2014, November 2014 and November 2015, dividends were declared and paid on the Director Voting Preferred Shares.
In 2013, 83,204 share appreciation rights (“SARs”) were exercised in relation to the stock options granted under the Company’s stock incentive plan for 24,638 Non-Voting Participating Preferred Shares with a stated value of $0.2 million.
In 2013, 8,948 stock options granted under the Company’s stock incentive plan were exercised for 8,948 Non-Voting Participating Preferred Shares in exchange for $0.1 million.
In 2014, 18,266 stock options granted under the Company’s stock incentive plan were exercised for 18,266 Non-Voting Participating Preferred Shares in exchange for $0.2 million.
There were no changes to the rights, privileges or conditions associated to each class of shares.
There were no changes in the number of shares issued in any class of shares in 2014 or 2015.
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, 2015. The Company’s share-based compensation plans have authorized the grant of up to 12,923,779 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.
| F-70 |
Telesat Holdings Inc.
Notes to the 2015 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. |
| F-71 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
25. SHARE CAPITAL – (continued)
| • | 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, 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 2014.
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, interest rate floors and premiums as detailed in Note 24).
The Company’s capital at the end of the year was as follows:
| As at December 31, | 2015 | 2014 | ||||||
| Shareholders’ equity (excluding reserves) | $ | 845,353 | $ | 1,108,502 | ||||
| Debt financing (excluding deferred financing costs, prepayment option, interest rate floors and premiums) | $ | 4,106,165 | $ | 3,601,673 | ||||
The Senior Secured Credit Facilities are secured by substantially all of the Company’s assets, excluding the assets of non-restricted subsidiaries. Under the terms of the Senior Secured Credit Facilities, Telesat Canada and the Guarantors are required to comply with a senior secured leverage ratio covenant. The covenant is based on the Senior Secured Leverage Ratio. At December 31, 2015, the Senior Secured Leverage Ratio was 3.70:1.00 (December 31, 2014 — 3.40:1.00), which was less than the maximum test ratio of 5.25:1.00.
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, 2015.
Credit risk
Credit risk is the risk that a counterparty to a financial asset will default, resulting in the Company incurring a financial loss. At December 31, 2015, the maximum exposure to credit risk is equal to the carrying value of the financial assets totaling $783.1 million (December 31, 2014 — $586.1 million).
| F-72 |
Telesat Holdings Inc.
Notes to the 2015 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 entered into various cross-currency basis swaps, forward foreign exchange contracts and interest rate swaps. The Company mitigates the credit risk associated with these swaps by entering into them with only high quality financial institutions.
The cross-currency basis swaps, forward foreign exchange contract, and three of the interest rate swaps were settled on October 31, 2014 with an additional interest rate swap settled on June 30, 2015.
The Company has credit evaluation, approval and monitoring processes intended to mitigate potential credit risks. The Company’s standard payment terms are 30 days. Interest at a rate of 1.5% per month, compounded monthly, is typically charged on balances remaining unpaid at the end of the standard payment terms. The Company’s historical experience with customer defaults has been minimal. As a result, the Company considers the credit quality of its North American customers to be high, however due to the additional complexities of collecting from its International customers, the Company considers the credit quality of its International customers to be lower than its North American customers. At December 31, 2015, North American and International customers made up 47% and 53% of the outstanding trade receivable balance, respectively (December 31, 2014 — 48% and 52%, respectively). Anticipated bad debt losses have been provided for in the allowance for doubtful accounts. The allowance for doubtful accounts at December 31, 2015 was $3.8 million (December 31, 2014 — $4.0 million).
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 debt financing. At December 31, 2015, $3,595.0 million of the $4,106.2 million total debt financing (December 31, 2014 — $3,039.1 million of the $3,601.7 million) was the Canadian dollar equivalent of the U.S. dollar denominated debt (before netting of deferred financing costs, premiums, interest rate floors and prepayment option).
In 2007, the Company entered into cross-currency basis swaps to economically hedge the foreign currency risk on a portion of its U.S. dollar denominated debt. These cross-currency basis swaps matured on October 31, 2014.
On September 22, 2014, the Company entered into a forward foreign exchange contract which required the Company to pay $1,036.7 million U.S. dollars to receive $1,141.6 million Canadian dollars. This forward foreign exchange contract was used to fix the exchange rate on the cross currency basis swaps on their maturity date. In 2014, a net loss of $17.8 million was recorded in gain on changes in fair value of financial instruments relating to the initial recognition and subsequent settlement of the forward foreign exchange contract.
As at December 31, 2015, 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 loss by $159.8 million (December 31, 2014 — $139.2 million) and decreased (increased) other comprehensive (loss) income by $4.0 million (December 31, 2014 — $2.9 million). This analysis assumes that all other variables, in particular interest rates, remain constant.
| F-73 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
27. FINANCIAL INSTRUMENTS – (continued)
Interest rate risk
The Company is exposed to interest rate risk on its cash and cash equivalents and its long-term debt. The interest rate risk on the long-term debt is from a portion of the debt 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. The Company has entered into interest rate swaps to hedge the interest rate risk associated with the variable interest rates on a portion of the long-term debt. As at December 31, 2015, the Company had one interest rate swap to fix interest on $250.0 million of debt at a fixed rate, excluding applicable margin, of 1.62% and one interest rate swap to fix interest on $300.0 million of U.S. denominated debt at a fixed interest rate, excluding applicable margin, of 1.46% (December 31, 2014 — two interest rate swaps to fix interest on $550.0 million of debt at a weighted average fixed rate, excluding applicable margin, of 1.53% and one interest rate swap to fix interest on $300.0 million of U.S. denominated debt at a fixed rate, excluding applicable margin, of 1.46%). These contracts mature between June 30, 2016 and September 30, 2016. As at December 31, 2015, the fair value of these derivative contracts was a liability of $2.3 million (December 31, 2014 — liability of $2.7 million).
If the interest rates on the unhedged variable rate debt change by 0.25%, excluding the potential impact of interest rate floors, the result would be an increase or decrease to net (loss) income of $4.8 million for the year ended December 31, 2015 (December 31, 2014 — $2.4 million).
Liquidity risk
The Company maintains credit facilities to ensure it has sufficient funds available to meet current and foreseeable financial requirements.
The following were the contractual maturities of financial liabilities as at December 31, 2015:
Carrying amount | Contractual cash flows (undiscounted) | 2016 | 2017 | 2018 | 2019 | 2020 | Thereafter | |||||||||||||||||||||||||
| Trade and other payables | $ | 44,166 | $ | 44,166 | $ | 44,166 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
| Security deposits | 3,431 | 3,431 | 2,886 | 87 | 197 | 19 | — | 242 | ||||||||||||||||||||||||
| Deferred satellites performance incentive payments | 88,243 | 120,514 | 14,867 | 14,076 | 14,614 | 14,007 | 11,667 | 51,283 | ||||||||||||||||||||||||
| Other financial liabilities | 18,017 | 18,537 | 5,228 | 11,894 | 568 | 484 | 363 | — | ||||||||||||||||||||||||
| Long-term indebtedness | 4,115,714 | 4,514,016 | 277,021 | 1,696,298 | 112,461 | 2,428,236 | — | — | ||||||||||||||||||||||||
| Interest rate swaps | 2,335 | 2,384 | 2,384 | — | — | — | — | — | ||||||||||||||||||||||||
| $ | 4,271,906 | $ | 4,703,048 | $ | 346,552 | $ | 1,722,355 | $ | 127,840 | $ | 2,442,746 | $ | 12,030 | $ | 51,525 | |||||||||||||||||
The carrying value of the deferred satellites performance incentive payments and other financial liabilities included $1.2 million and $0.3 million of interest payable, respectively. In addition, the carrying value of the indebtedness included $9.5 million of interest payable.
The contractual cash flows of the deferred satellites performance incentive payments and other financial liabilities included $31.4 million and $0.8 million of interest payments, respectively. In addition, the contractual cash flows of the indebtedness included $407.9 million of interest payments.
| F-74 |
Telesat Holdings Inc.
Notes to the 2015 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 sheet and the fair value hierarchy levels used to calculate those values were as follows:
As at December 31, 2015 | Loans and receivables | FVTPL | Other financial liabilities | Total | Fair value | Fair value hierarchy | ||||||||||||||||||
| Cash and cash equivalents | $ | 690,726 | $ | — | $ | — | $ | 690,726 | $ | 690,726 | Level 1 | |||||||||||||
| Trade and other receivables | 50,781 | — | — | 50,781 | 50,781 | (3) | ||||||||||||||||||
| Other current financial assets | 1,186 | — | — | 1,186 | 1,186 | Level 1 | ||||||||||||||||||
| Other long-term financial assets (1) | 20,127 | 20,235 | — | 40,362 | 40,362 | Level 1, Level 2 | ||||||||||||||||||
| Trade and other payables | — | — | (44,166 | ) | (44,166 | ) | (44,166 | ) | (3) | |||||||||||||||
| Other current financial liabilities | — | (6,510 | ) | (29,915 | ) | (36,425 | ) | (40,718 | ) | Level 2 | ||||||||||||||
| Other long-term financial liabilities | — | (4,903 | ) | (89,287 | ) | (94,190 | ) | (99,562 | ) | Level 2 | ||||||||||||||
| Indebtedness (2) | — | — | (4,106,165 | ) | (4,106,165 | ) | (4,069,522 | ) | Level 2 | |||||||||||||||
| $ | 762,820 | $ | 8,822 | $ | (4,269,533 | ) | $ | (3,497,891 | ) | $ | (3,470,913 | ) | ||||||||||||
As at December 31, 2014 | Loans and receivables | FVTPL | Other financial liabilities | Total | Fair value | Fair value hierarchy | ||||||||||||||||||
| Cash and cash equivalents | $ | 497,356 | $ | — | $ | — | $ | 497,356 | $ | 497,356 | Level 1 | |||||||||||||
| Trade and other receivables | 49,534 | — | — | 49,534 | 49,534 | (3) | ||||||||||||||||||
| Other current financial assets | 765 | — | — | 765 | 765 | Level 1 | ||||||||||||||||||
| Other long-term financial assets (1) | 15,814 | 22,628 | — | 38,442 | 38,442 | Level 1, Level 2 | ||||||||||||||||||
| Trade and other payables | — | — | (36,714 | ) | (36,714 | ) | (36,714 | ) | (3) | |||||||||||||||
| Other current financial liabilities | — | (11,533 | ) | (24,100 | ) | (35,633 | ) | (37,675 | ) | Level 2 | ||||||||||||||
| Other long-term financial liabilities | — | (7,883 | ) | (52,870 | ) | (60,753 | ) | (64,126 | ) | Level 2 | ||||||||||||||
| Indebtedness (2) | — | — | (3,601,673 | ) | (3,601,673 | ) | (3,590,132 | ) | Level 2 | |||||||||||||||
| $ | 563,469 | $ | 3,212 | $ | (3,715,357 | ) | $ | (3,148,676 | ) | $ | (3,142,550 | ) | ||||||||||||
| (1) | The other 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) | Excludes deferred financing costs, interest rate floors, prepayment option and premiums. |
| (3) | Trade and other receivables and trade and other payables approximate fair value due to the short-term maturity of these instruments. |
Assets pledged as security
The Senior Secured Credit Facilities are secured by substantially all of Telesat’s assets excluding the assets of non-restricted 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.
| F-75 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
27. FINANCIAL INSTRUMENTS – (continued)
The fair value hierarchy is as follows:
Level 1 based on quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company can access at the measurement date.
Level 2 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 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 value is 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. Included in cash and cash equivalents are $214.0 million (December 31, 2014 — $334.4 million) of short-term investments.
The fair value of the deferred satellites performance incentive payments, included in other current and other long-term financial liabilities, was determined using a discounted cash flow methodology. These calculations are performed on a recurring basis. At December 31, 2015, the discount rate used was 4.6% (December 31, 2014 — 4.7%).
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 floors, prepayment option and premiums. 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, | 2015 | 2014 | ||||||
| Canadian Term Loan A Facility | 99.00 | % | 99.50 | % | ||||
| Canadian Term Loan B Facility | 98.63 | % | 96.75 | % | ||||
| U.S. Term Loan B Facility | 98.25 | % | 98.44 | % | ||||
| 6.0% Senior Notes | 100.81 | % | 102.50 | % | ||||
Fair value of derivative financial instruments
Apart from the forward foreign exchange contract, derivatives were valued using a discounted cash flow methodology. The calculations of the fair value of the derivatives are performed on a recurring basis.
Interest and cross-currency basis swaps future cash flows were determined based on current yield curves and exchange rates and then discounted based on discount curves obtained from Bloomberg. The cross-currency basis swaps matured on October 31, 2014.
Prepayment option cash flows were calculated with a Bloomberg option valuation model which is based on the current price of the debt instrument and discounted based on a discount curve obtained from Bloomberg.
| F-76 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
27. FINANCIAL INSTRUMENTS – (continued)
Interest rate floor cash flows were calculated using the Black Scholes option valuation model in Bloomberg and discounted based on discount curves obtained from Bloomberg.
The fair value of the forward foreign exchange contract was calculated using the forward foreign exchange rate for the same transaction at the valuation date. The forward foreign exchange contract matured on October 31, 2014.
The discount rates used to discount U.S. dollar cash flows ranged from 0.43% to 1.46% (December 31, 2014 — 0.17% to 1.62%). The discount rates used to discount Canadian dollar cash flows ranged from 0.79% to 0.97% (December 31, 2014 — 1.30% to 1.70%).
The current and long-term portion of the fair value of the Company’s derivative assets and liabilities, at each balance sheet date, and the fair value hierarchy levels used to calculate those fair values were as follows:
| As at December 31, 2015 | Other long-term financial assets | Other current financial liabilities | Other long-term financial liabilities | Total | Fair value hierarchy | |||||||||||||
| Interest rate swaps | $ | — | $ | (2,335 | ) | $ | — | $ | (2,335 | ) | Level 2 | |||||||
| Interest rate floors | — | (4,175 | ) | (4,903 | ) | (9,078 | ) | Level 2 | ||||||||||
| Prepayment option | 20,235 | — | — | 20,235 | Level 2 | |||||||||||||
| $ | 20,235 | $ | (6,510 | ) | $ | (4,903 | ) | $ | 8,822 | |||||||||
| As at December 31, 2014 | Other long-term financial assets | Other current financial liabilities | Other long-term financial liabilities | Total | Fair value hierarchy | |||||||||||||
| Interest rate swaps | $ | — | $ | (2,434 | ) | $ | (298 | ) | $ | (2,732 | ) | Level 2 | ||||||
| Interest rate floors | — | (9,099 | ) | (7,585 | ) | (16,684 | ) | Level 2 | ||||||||||
| Prepayment option | 22,628 | — | — | 22,628 | Level 2 | |||||||||||||
| $ | 22,628 | $ | (11,533 | ) | $ | (7,883 | ) | $ | 3,212 | |||||||||
| F-77 |
Telesat Holdings Inc.
Notes to the 2015 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 are as follows:
| Fair value, December 31, 2013 and January 1, 2014 | $ | (102,724 | ) | |
| Unrealized gains (losses) on derivatives | ||||
| Interest rate floors | 8,090 | |||
| Prepayment options | (32,725 | ) | ||
| Interest rate swaps | 19,749 | |||
| Realized (losses) gains on derivatives | ||||
| Forward foreign exchange contract | (17,817 | ) | ||
| Cross-currency basis swaps | 71,634 | |||
| Net cash paid on settlement | ||||
| Forward foreign exchange contract | 19,297 | |||
| Cross-currency basis swaps | 41,527 | |||
| Impact of foreign exchange | (3,819 | ) | ||
| Fair value, December 31, 2014 and January 1, 2015 | $ | 3,212 | ||
| Unrealized gains (losses) on derivatives | ||||
| Interest rate floors | 10,233 | |||
| Prepayment options | (5,261 | ) | ||
| Interest rate swaps | 1,063 | |||
| Impact of foreign exchange | (425 | ) | ||
| Fair value, December 31, 2015 | $ | 8,822 |
| F-78 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
28. SHARE-BASED COMPENSATION PLANS
Telesat Holdings 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 12,923,779 options, 8,824,646 authorized in 2008, 4,036,729 authorized in 2013, and an additional 62,404 authorized in 2015, to purchase Non-Voting Participating Preferred Shares of Telesat Holdings Inc., 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 expire 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.
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.
In January 2016, the Board approved the purchase for cancellation of up to 25% of the currently outstanding stock options. The cash consideration for this purchase will be paid in the first half of 2016 and is expected to be approximately $25 million.
The stock options granted in the current and prior years, and their weighted average fair value were as follows:
| 2015 | 2014 | 2013 | ||||||||||
| Number of stock options granted | 418,606 | 150,000 | 3,999,399 | |||||||||
| Weighted average fair value of options granted | $ | 14.80 | $ | 12.05 | $ | 8.93 | ||||||
| F-79 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
28. SHARE-BASED COMPENSATION PLANS – (continued)
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, 2013 and January 1, 2014 | 3,664,455 | $ | 21.72 | 1,853,623 | $ | 18.40 | ||||||||||
| Granted | 67,500 | 82,500 | ||||||||||||||
| Forfeited | (100,884 | ) | (136,539 | ) | ||||||||||||
| Exercised (Note 25) | (8,256 | ) | (10,010 | ) | ||||||||||||
| Expired | — | — | ||||||||||||||
| Outstanding at December 31, 2014 and January 1, 2015 | 3,622,815 | $ | 21.95 | 1,789,574 | $ | 18.94 | ||||||||||
| Granted | 380,106 | 38,500 | ||||||||||||||
| Forfeited | (239,250 | ) | (2,750 | ) | ||||||||||||
| Exercised | — | — | ||||||||||||||
| Expired | — | — | ||||||||||||||
| Outstanding at December 31, 2015 | 3,763,671 | $ | 23.65 | 1,825,324 | $ | 19.38 | ||||||||||
The amounts of stock options exercisable and the weighted average remaining life were as follows:
| As at December 31, | 2015 | 2014 | ||||||
| Time vesting option plans | 2,265,694 | 1,757,250 | ||||||
| Performance vesting option plans | 1,079,145 | 920,134 | ||||||
| Weighted-average remaining life | 6 years | 7 years | ||||||
The share-based compensation expense included in the consolidated statements of income was as follows:
| Year ended December 31, | 2015 | 2014 | 2013 | |||||||||
| Operating expenses | $ | 5,369 | $ | 9,655 | $ | 13,517 | ||||||
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:
| 2015 | 2014 | 2013 | ||||||||||
| Dividend yield | — | % | — | % | — | % | ||||||
| Expected volatility | 24.6 | % | 24.8 | % | 25.0 | % | ||||||
| Risk-free interest rate | 1.81 | % | 1.76 | % | 1.74 | % | ||||||
| Expected life (years) | 10 | 10 | 10 | |||||||||
The expected volatility is based on the historical volatility.
| F-80 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
29. EMPLOYEE BENEFIT PLANS
The expenses included on the consolidated statements of (loss) income and the consolidated statements of comprehensive (loss) income were as follows:
| Pension plans | Other post-employment benefit plans | |||||||||||||||||||||||
| Year ended December 31, | 2015 | 2014 | 2013 | 2015 | 2014 | 2013 | ||||||||||||||||||
| Consolidated statements of (loss) income | ||||||||||||||||||||||||
| Operating expenses | $ | 7,659 | $ | 5,426 | $ | 6,104 | $ | 494 | $ | 362 | $ | 372 | ||||||||||||
| Interest expense | $ | 933 | $ | 294 | $ | 1,603 | $ | 1,043 | $ | 1,050 | $ | 1,467 | ||||||||||||
| Other operating (losses) gains, net | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 9,786 | ||||||||||||
| Consolidated statements of comprehensive (loss) income | ||||||||||||||||||||||||
| Actuarial (gains) losses on employee benefit plans | $ | (1,140 | ) | $ | 20,070 | $ | (24,942 | ) | $ | (4,085 | ) | $ | 3,276 | $ | 3,712 | |||||||||
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 $0.9 million for various defined contribution arrangements during 2015 (December 31, 2014 — $0.7 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.
In January 2013, the Company changed its funding strategy for other post-employment benefits provided to certain retired employees. As a result of this change, the Company recognized a $5.2 million loss in actuarial (gains) losses on the employee benefit plans in the statement of comprehensive (loss) income.
In 2013, there was a change in how certain retired employees would have their health care benefits coordinated with Medicare. As a result of this change, the Company recognized a $2.4 million loss in operating (losses) gains, net in the statement of (loss) income.
In 2013, the Company also announced that effective January 2015 it would cease paying health care and life insurance benefits to certain retired employees and would commence paying an amount into a health reimbursement account for the affected retired employees. As a result of this change in benefits, the Company recognized a $12.2 million gain in other operating (losses) gains, net in the statement of (loss) income.
The balance sheet obligations, which were included on the balance sheets in other long-term liabilities (note 23), were distributed between pension and other post-employment benefits as follows:
| As at December 31, | 2015 | 2014 | ||||||
| Pension benefits | $ | 19,901 | $ | 21,531 | ||||
| Other post-employment benefits | 22,861 | 25,248 | ||||||
| $ | 42,762 | $ | 46,779 | |||||
| F-81 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
29. EMPLOYEE BENEFIT PLANS – (continued)
The amounts recognized in the balance sheets and the funded statuses of the benefit plans were as follows:
| 2015 | 2014 | |||||||||||||||
| As at December 31, | Pension | Other | Pension | Other | ||||||||||||
| Present value of funded obligations | $ | 268,058 | $ | — | $ | 259,195 | $ | — | ||||||||
| Fair value of plan assets | (249,335 | ) | — | (238,911 | ) | — | ||||||||||
| $ | 18,723 | $ | — | $ | 20,284 | $ | — | |||||||||
| Present value of unfunded obligations | 1,178 | 22,861 | 1,247 | 25,248 | ||||||||||||
| Accrued benefit liability | $ | 19,901 | $ | 22,861 | $ | 21,531 | $ | 25,248 | ||||||||
The changes in the benefit obligations and in the fair value of plan assets were as follows:
| December 31, 2015 | Pension | Other | Total | |||||||||
| Change in benefit obligations | ||||||||||||
| Benefit obligation, January 1, 2015 | $ | 260,442 | $ | 25,248 | $ | 285,690 | ||||||
| Current service cost | 5,917 | 494 | 6,411 | |||||||||
| Interest expense | 10,533 | 1,043 | 11,576 | |||||||||
| Remeasurements | ||||||||||||
| Actuarial gains arising from plan experience | (2,983 | ) | (2,243 | ) | (5,226 | ) | ||||||
| Actuarial gains from change in demographic assumptions | — | (154 | ) | (154 | ) | |||||||
| Actuarial losses (gains) from changes in financial assumptions | 1,223 | (1,688 | ) | (465 | ) | |||||||
| Benefits paid | (8,761 | ) | (685 | ) | (9,446 | ) | ||||||
| Contributions by plan participants | 1,305 | 8 | 1,313 | |||||||||
| Adjustment to obligation for past service cost credit | 1,560 | — | 1,560 | |||||||||
| Other | — | 838 | 838 | |||||||||
| Benefit obligation, December 31, 2015 | $ | 269,236 | $ | 22,861 | $ | 292,097 | ||||||
| Change in fair value of plan assets | ||||||||||||
| Fair value of plan assets, January 1, 2015 | $ | (238,911 | ) | $ | — | $ | (238,911 | ) | ||||
| Contributions by plan participants | (1,305 | ) | (8 | ) | (1,313 | ) | ||||||
| Contributions by employer | (9,082 | ) | (677 | ) | (9,759 | ) | ||||||
| Interest income | (9,600 | ) | — | (9,600 | ) | |||||||
| Benefits paid | 8,761 | 685 | 9,446 | |||||||||
| Remeasurements | ||||||||||||
| Return on plan assets, excluding interest income | 620 | — | 620 | |||||||||
| Administrative costs | 386 | — | 386 | |||||||||
| Adjustment to fair value of assets due to past service cost credit | (204 | ) | — | (204 | ) | |||||||
| Fair value of plan assets, December 31, 2015 | $ | (249,335 | ) | $ | — | $ | (249,335 | ) | ||||
| Accrued benefit liability, December 31, 2015 | $ | 19,901 | $ | 22,861 | $ | 42,762 | ||||||
| F-82 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
29. EMPLOYEE BENEFIT PLANS – (continued)
| December 31, 2014 | Pension | Other | Total | |||||||||
| Change in benefit obligations | ||||||||||||
| Benefit obligation, January 1, 2014 | $ | 218,372 | $ | 21,626 | $ | 239,998 | ||||||
| Current service cost | 5,095 | 362 | 5,457 | |||||||||
| Interest expense | 11,042 | 1,050 | 12,092 | |||||||||
| Remeasurements | ||||||||||||
| Actuarial (gains) losses arising from plan experience | (1,166 | ) | 186 | (980 | ) | |||||||
| Actuarial (gains) losses from change in demographic assumptions | (2,242 | ) | 67 | (2,175 | ) | |||||||
| Actuarial losses from changes in financial assumptions | 36,348 | 3,023 | 39,371 | |||||||||
| Benefits paid | (8,379 | ) | (988 | ) | (9,367 | ) | ||||||
| Contributions by plan participants | 1,367 | 76 | 1,443 | |||||||||
| Other | 5 | (154 | ) | (149 | ) | |||||||
| Benefit obligation, December 31, 2014 | $ | 260,442 | $ | 25,248 | $ | 285,690 | ||||||
| Change in fair value of plan assets | ||||||||||||
| Fair value of plan assets, January 1, 2014 | $ | (212,623 | ) | $ | — | $ | (212,623 | ) | ||||
| Contributions by plan participants | (1,367 | ) | (76 | ) | (1,443 | ) | ||||||
| Contributions by employer | (10,013 | ) | (912 | ) | (10,925 | ) | ||||||
| Interest income | (10,748 | ) | — | (10,748 | ) | |||||||
| Benefits paid | 8,379 | 988 | 9,367 | |||||||||
| Remeasurements | ||||||||||||
| Return on plan assets, excluding interest income | (12,870 | ) | — | (12,870 | ) | |||||||
| Administrative costs | 331 | — | 331 | |||||||||
| Fair value of plan assets, December 31, 2014 | $ | (238,911 | ) | $ | — | $ | (238,911 | ) | ||||
| Accrued benefit liability, December 31, 2014 | $ | 21,531 | $ | 25,248 | $ | 46,779 | ||||||
The weighted average duration of the defined benefit obligation as at December 31, 2015 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, 2015 is 27 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 2025 are as follows:
| Pension | Other | |||||||
| 2016 | $ | 9,185 | $ | 923 | ||||
| 2017 | $ | 9,696 | $ | 952 | ||||
| 2018 | $ | 10,369 | $ | 984 | ||||
| 2019 | $ | 11,152 | $ | 1,020 | ||||
| 2020 | $ | 11,695 | $ | 1,058 | ||||
| 2021 to 2025 | $ | 70,595 | $ | 6,740 | ||||
Benefit payments include obligations to 2025 only as obligations beyond this date are not quantifiable.
| F-83 |
Telesat Holdings Inc.
Notes to the 2015 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 are allocated as follows between the various types of investments:
| As at December 31, | 2015 | 2014 | ||||||
| Equity securities | ||||||||
| Canada | 21.5 | % | 21.1 | % | ||||
| United States | 14.6 | % | 15.0 | % | ||||
| International (other than United States) | 19.6 | % | 18.5 | % | ||||
| Fixed income instruments | ||||||||
| Canada | 41.7 | % | 42.8 | % | ||||
| Cash and cash equivalents | ||||||||
| Canada | 2.6 | % | 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, | 2015 | 2015 | 2014 | 2014 | ||||||||||||
| Actuarial benefit obligation | ||||||||||||||||
| Discount rate | 4.00 | % | 4.00 | % | 5.00 | % | 3.75% to 5.00 | % | ||||||||
| Benefit costs for the year ended | ||||||||||||||||
| Discount rate | 4.00 | % | 3.75% to 4.00 | % | 5.00 | % | 4.50% to 5.00 | % | ||||||||
| Future salary growth | 2.50 | % | N/A | 3.00 | % | 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 7.0% in 2016, decreasing by 0.25% per annum, to a rate of 4.5% in 2026 and thereafter.
| F-84 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
29. EMPLOYEE BENEFIT PLANS – (continued)
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, 2015 and 2014 would have increased or decreased as a result of the change in the respective assumptions by one percent.
| Pension | Other | |||||||||||||||
| As at December 31, 2015 | 1% increase | 1% decrease | 1% increase | 1% decrease | ||||||||||||
| Discount rate | $ | (37,222 | ) | $ | 46,173 | $ | (2,714 | ) | $ | 3,370 | ||||||
| Future salary growth | $ | 7,865 | $ | (7,951 | ) | N/A | N/A | |||||||||
| Medical and dental trend rates | N/A | N/A | $ | 1,658 | $ | (1,364 | ) | |||||||||
| Pension | Other | |||||||||||||||
| As at December 31, 2014 | 1% increase | 1% decrease | 1% increase | 1% decrease | ||||||||||||
| Discount rate | $ | (35,949 | ) | $ | 46,355 | $ | (3,134 | ) | $ | 3,922 | ||||||
| Future salary growth | $ | 8,892 | $ | (7,948 | ) | N/A | N/A | |||||||||
| Medical and dental trend rates | N/A | N/A | $ | 2,352 | $ | (1,898 | ) | |||||||||
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 $8.4 million to the defined benefit plans and $0.1 million to the defined contribution plan during the next fiscal year.
| F-85 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
30. SUPPLEMENTAL CASH FLOW INFORMATION
Cash and cash equivalents were comprised of the following:
| As at December 31, | 2015 | 2014 | 2013 | |||||||||
| Cash | $ | 476,700 | $ | 162,968 | $ | 63,816 | ||||||
| Short-term investments, original maturity three months or less (1) | 214,026 | 334,388 | 234,897 | |||||||||
| Cash and cash equivalents | $ | 690,726 | $ | 497,356 | $ | 298,713 | ||||||
| (1) | Consists of short-term investments with an original maturity of three months or less or which are available upon demand with no penalty for early redemption. |
Income taxes paid, net of income taxes received was comprised of the following:
| Year ended December 31, | 2015 | 2014 | 2013 | |||||||||
| Income taxes paid | $ | (159,256 | ) | $ | (83,310 | ) | $ | (12,569 | ) | |||
| Income taxes received | 4,233 | 2,511 | — | |||||||||
| $ | (155,023 | ) | $ | (80,799 | ) | $ | (12,569 | ) | ||||
Interest paid, net of capitalized interest and interest received was comprised of the following:
| Year ended December 31, | 2015 | 2014 | 2013 | |||||||||
| Interest paid | $ | (176,312 | ) | $ | (200,029 | ) | $ | (215,674 | ) | |||
| Capitalized interest | 9,268 | 4,430 | 3,361 | |||||||||
| Interest received | 5,130 | 2,702 | 1,172 | |||||||||
| $ | (161,914 | ) | $ | (192,897 | ) | $ | (211,141 | ) | ||||
The net change in operating assets and liabilities shown in the consolidated statements of cash flows was comprised of the following:
| As at December 31, | 2015 | 2014 | 2013 | |||||||||
| Restated (Note 3) | Restated (Note 3) | |||||||||||
| Trade and other receivables | $ | 4,944 | $ | 3,821 | $ | 16,134 | ||||||
| Financial assets | (4,590 | ) | 15,534 | (2,385 | ) | |||||||
| Other assets | (12,346 | ) | (19 | ) | 3,342 | |||||||
| Trade and other payables | (4,722 | ) | (2,029 | ) | (3,865 | ) | ||||||
| Financial liabilities | 8,396 | (7,432 | ) | (1,712 | ) | |||||||
| Other liabilities | 11,666 | (18,582 | ) | (11,126 | ) | |||||||
| $ | 3,348 | $ | (8,707 | ) | $ | 388 | ||||||
| F-86 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
30. SUPPLEMENTAL CASH FLOW INFORMATION – (continued)
Non-cash investing and financing activities were comprised of:
| Year ended December 31, | 2015 | 2014 | 2013 | |||||||||
| Satellites, property and other equipment | $ | 51,587 | $ | 16,539 | $ | 4,069 | ||||||
| Intangible assets | $ | 11,569 | $ | 2,661 | $ | 1,061 | ||||||
31. COMMITMENTS AND CONTINGENT LIABILITIES
The following is a summary of the Company’s off-balance sheet contractual obligations as at December 31, 2015:
| 2016 | 2017 | 2018 | 2019 | 2020 | Thereafter | Total | ||||||||||||||||||||||
| Operating property leases | $ | 6,573 | $ | 5,979 | $ | 5,556 | $ | 2,022 | $ | 481 | $ | 1,556 | $ | 22,167 | ||||||||||||||
| Capital commitments | 213,734 | 171,020 | 28,343 | — | — | — | 413,097 | |||||||||||||||||||||
| Other operating commitments | 20,968 | 8,682 | 7,134 | 5,390 | 5,045 | 4,791 | 52,010 | |||||||||||||||||||||
| $ | 241,275 | $ | 185,681 | $ | 41,033 | $ | 7,412 | $ | 5,526 | $ | 6,347 | $ | 487,274 | |||||||||||||||
Operating property leases consist of off-balance sheet contractual obligations for land or building usage, while capital commitments include commitments for capital projects. Other operating commitments consist 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 include the future minimum payments for the expected duration of each respective obligation, which have various terms and expire between 2016 to 2043. The aggregate expense related to operating property lease commitments for the year ended December 31, 2015 was $7.4 million (December 31, 2014 — $7.1 million, December 31, 2013 — $7.2 million).
The Company has entered into contracts for the construction of two satellites and other capital expenditures. The total outstanding commitments at December 31, 2015 were included in capital commitments.
The Company has agreements with various customers for prepaid revenue on several service agreements which take effect when the spacecraft is placed into service. The Company is responsible for operating and controlling these satellites. As at December 31, 2015, customer prepayments of $323.1 million (December 31, 2014 — $339.2 million), a portion of which is refundable under certain circumstances, were reflected in current and 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.
| F-87 |
Telesat Holdings Inc.
Notes to the 2015 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.
In Brazil, 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 $32.0 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. Loral has agreed to indemnify the Company with respect to certain of the assessments issued in Brazil.
The Company was re-assessed by Canadian tax authorities for income taxes and interest of approximately $16.5 million relating to the deductibility of certain expenses for the 2007 tax year and the Company is challenging these re-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 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, 2015 was as follows:
| Company | Country | Method of Consolidation |
% voting rights | |||
| Telesat Canada | Canada | Fully consolidated | 100 | |||
| Infosat Communications LP | 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 | |||
| Able Infosat Communications, 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, 2014.
| F-88 |
Telesat Holdings Inc.
Notes to the 2015 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 communication 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. Any balances and transactions between the Company and its subsidiaries have been eliminated on consolidation and therefore have not been disclosed.
Compensation of executives and Board level directors
| Year ended December 31, | 2015 | 2014 | 2013 | |||||||||
| Short-term benefits (including salaries) | $ | 7,132 | $ | 7,543 | $ | 7,293 | ||||||
| Special payments (1) | — | 980 | 2,162 | |||||||||
| Post-employment benefits | 3,268 | 1,922 | 1,814 | |||||||||
| Share-based payments (2) | 4,674 | 8,931 | 12,705 | |||||||||
| $ | 15,074 | $ | 19,376 | $ | 23,974 | |||||||
| (1) | In 2012, the Board authorized special payments to certain employees which would be paid over three years subject to certain conditions being met. All special payments were expensed and paid as at December 31, 2014. |
| (2) | During 2013, 2014 and 2015, the Board authorized the grant of stock options to certain key management personnel pursuant to the stock incentive plan. A total of 3,701,027, 150,000 and 348,606 stock options were granted to key management personnel in 2013, 2014 and 2015, respectively. Share-based payments also include all expenses associated with stock options previously issued under the 2008 stock incentive plan. |
Stock option repurchase and exercise of share appreciation rights
In April 2013, a member of senior management exercised 83,204 SARs in relation to the stock options granted under the Company’s stock incentive plan and received 24,638 Non-Voting Participating Preferred Shares.
Defined benefit pension plans
The Company funds certain defined benefit pension plans. Contributions made to the defined benefit pension plans for the year ended December 31, 2015 were $9.1 million (December 31, 2014 — $10.0 million).
| F-89 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
33. RELATED PARTY TRANSACTIONS – (continued)
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. There were no transactions or balances outstanding with Red Isle during any of the years presented.
During the year, 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 | |||||||||||||||||||||||
| Year ended December 31, | 2015 | 2014 | 2013 | 2015 | 2014 | 2013 | ||||||||||||||||||
| Revenue | $ | 129 | $ | 215 | $ | — | $ | — | $ | — | $ | — | ||||||||||||
| Operating expenses | — | — | — | 7,547 | 6,663 | 6,267 | ||||||||||||||||||
| Interest expense | — | — | — | — | — | 66 | ||||||||||||||||||
| Interest and other expenses | — | — | — | — | 1,070 | — | ||||||||||||||||||
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, | 2015 | 2014 | 2015 | 2014 | ||||||||||||
| Current receivables/payables | $ | 119 | $ | 178 | $ | 529 | $ | 293 | ||||||||
The amounts outstanding are unsecured and will be settled in cash.
34. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The 6.0% Senior Notes and 12.5% Senior Subordinated Notes, which were fully redeemed on May 1, 2013, were co-issued by Telesat LLC and Telesat Canada, (“the Issuers”) which are 100% owned subsidiaries of Telesat, and were guaranteed fully and unconditionally, on a joint and several basis, by Telesat and the Guarantors.
The condensed consolidating financial information reflects the investments, using the equity method of accounting, of Telesat and Telesat Interco Inc. in the Issuers, of the Issuers in their respective Guarantor and Non-Guarantor subsidiaries, and of the Guarantors in their Non-Guarantor subsidiaries.
The comparative condensed consolidating financial information has been restated to present the financial information of Telesat Interco Inc., separately from the other Guarantors as Telesat Interco Inc. is a parent Guarantor.
A change in accounting policy was made for the presentation of the loss on foreign exchange on the statements of cash flows. For more information on the impact of the change, refer to Note 3.
A restatement of comparative figures, for the issuance and repayment of loans between Telesat, Telesat Canada, Guarantor subsidiaries and Non-Guarantor subsidiaries, is reflected in the statements of cash flows for 2014 and 2013 to conform to the presentation adopted during the current year.
In addition, a restatement of comparative figures was also performed for the treatment of capitalized interest and corresponding depreciation and foreign currency translation adjustment for 2014 and 2013 to conform to the presentation adopted in the current year.
| F-90 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
34. CONDENSED CONSOLIDATING FINANCIAL INFORMATION – (continued)
Condensed Consolidating Statements of (Loss) Income
For the year ended December 31, 2015
Telesat Holdings Inc. | Telesat Interco Inc. | Telesat LLC | Telesat Canada | Guarantor subsidiaries | Non-guarantor subsidiaries | Adjustments | Consolidated | |||||||||||||||||||||||||
| Revenue | $ | — | $ | — | $ | — | $ | 911,712 | $ | 140,345 | $ | 18,846 | $ | (115,996 | ) | $ | 954,907 | |||||||||||||||
| Operating expenses | — | — | — | (158,416 | ) | (121,929 | ) | (19,220 | ) | 115,286 | (184,279 | ) | ||||||||||||||||||||
| — | — | — | 753,296 | 18,416 | (374 | ) | (710 | ) | 770,628 | |||||||||||||||||||||||
| Depreciation | — | — | — | (175,366 | ) | (32,291 | ) | (80 | ) | (98 | ) | (207,835 | ) | |||||||||||||||||||
| Amortization | — | — | — | (25,825 | ) | (2,077 | ) | — | — | (27,902 | ) | |||||||||||||||||||||
| Other operating gains (losses), net | — | — | — | 4,999 | 23,178 | — | (28,207 | ) | (30 | ) | ||||||||||||||||||||||
| Operating income (loss) | — | — | — | 557,104 | 7,226 | (454 | ) | (29,015 | ) | 534,861 | ||||||||||||||||||||||
| Loss (income) from equity investments | (221,127 | ) | (221,127 | ) | — | 8,403 | (5,201 | ) | — | 439,052 | — | |||||||||||||||||||||
| Interest expense | — | — | — | (191,510 | ) | (1,014 | ) | (2 | ) | 9,229 | (183,297 | ) | ||||||||||||||||||||
| Interest and other income | — | — | — | 3,238 | 1,392 | 31 | — | 4,661 | ||||||||||||||||||||||||
| Gain on changes in fair value of financial instruments | — | — | — | 6,035 | — | — | — | 6,035 | ||||||||||||||||||||||||
| (Loss) gain on foreign exchange | (3 | ) | — | — | (511,510 | ) | (23,804 | ) | 20,870 | (26,023 | ) | (540,470 | ) | |||||||||||||||||||
| (Loss) income before tax | (221,130 | ) | (221,127 | ) | — | (128,240 | ) | (21,401 | ) | 20,445 | 393,243 | (178,210 | ) | |||||||||||||||||||
| Tax (expense) recovery | — | — | — | (92,887 | ) | 4,336 | (178 | ) | — | (88,729 | ) | |||||||||||||||||||||
| Net (loss) income | $ | (221,130 | ) | $ | (221,127 | ) | $ | — | $ | (221,127 | ) | $ | (17,065 | ) | $ | 20,267 | $ | 393,243 | $ | (266,939 | ) | |||||||||||
| F-91 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
34. CONDENSED CONSOLIDATING FINANCIAL INFORMATION – (continued)
Condensed Consolidating Statements of Comprehensive (Loss) Income
For the year ended December 31, 2015
Telesat Holdings Inc. | Telesat Interco Inc. | Telesat LLC | Telesat Canada | Guarantor subsidiaries | Non-guarantor subsidiaries | Adjustments | Consolidated | |||||||||||||||||||||||||
| Net (loss) income | $ | (221,130 | ) | $ | (221,127 | ) | $ | — | $ | (221,127 | ) | $ | (17,065 | ) | $ | 20,267 | $ | 393,243 | $ | (266,939 | ) | |||||||||||
| Other comprehensive income (loss) | ||||||||||||||||||||||||||||||||
| Items that may be reclassified into profit or loss | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | 45,310 | (2,046 | ) | 1,476 | 44,740 | |||||||||||||||||||||||
| Foreign currency translation reclassified into profit or loss | — | — | — | — | (30,695 | ) | 4,672 | 26,023 | — | |||||||||||||||||||||||
| Other comprehensive income (loss) from equity investments | 17,241 | 17,241 | — | 17,241 | 2,626 | — | (54,349 | ) | — | |||||||||||||||||||||||
| Items that will not be reclassified into profit or loss | ||||||||||||||||||||||||||||||||
| Actuarial gains on employee benefit plans | — | — | — | 4,992 | 233 | — | — | 5,225 | ||||||||||||||||||||||||
| Tax expense | — | — | — | (1,328 | ) | (97 | ) | — | — | (1,425 | ) | |||||||||||||||||||||
| Other comprehensive income from equity investments | 3,800 | 3,800 | — | 136 | — | — | (7,736 | ) | — | |||||||||||||||||||||||
| Other comprehensive income (loss) | 21,041 | 21,041 | — | 21,041 | 17,377 | 2,626 | (34,586 | ) | 48,540 | |||||||||||||||||||||||
| Total comprehensive (loss) income | $ | (200,089 | ) | $ | (200,086 | ) | $ | — | $ | (200,086 | ) | $ | 312 | $ | 22,893 | $ | 358,657 | $ | (218,399 | ) | ||||||||||||
| F-92 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
34. CONDENSED CONSOLIDATING FINANCIAL INFORMATION – (continued)
Condensed Consolidating Statements of Income (Loss)
For the year ended December 31, 2014
Telesat Holdings Inc. | Telesat Interco Inc. | Telesat LLC | Telesat Canada | Guarantor subsidiaries | Non-guarantor subsidiaries | Adjustments | Consolidated | |||||||||||||||||||||||||
| Revenue | $ | — | $ | — | $ | — | $ | 855,312 | $ | 157,810 | $ | 18,212 | $ | (108,463 | ) | $ | 922,871 | |||||||||||||||
| Operating expenses | — | — | — | (151,264 | ) | (127,227 | ) | (17,761 | ) | 108,463 | (187,789 | ) | ||||||||||||||||||||
| — | — | — | 704,048 | 30,583 | 451 | — | 735,082 | |||||||||||||||||||||||||
| Depreciation | — | — | — | (184,870 | ) | (31,350 | ) | (120 | ) | (156 | ) | (216,496 | ) | |||||||||||||||||||
| Amortization | — | — | — | (28,986 | ) | (1,839 | ) | — | — | (30,825 | ) | |||||||||||||||||||||
| Other operating (losses) gains, net | — | — | — | (314 | ) | 14 | (4 | ) | — | (304 | ) | |||||||||||||||||||||
| Operating income (loss) | — | — | — | 489,878 | (2,592 | ) | 327 | (156 | ) | 487,457 | ||||||||||||||||||||||
| Income (loss) from equity investments | 8,930 | 8,930 | — | (11,983 | ) | (2,223 | ) | — | (3,654 | ) | — | |||||||||||||||||||||
| Interest expense | — | — | — | (210,369 | ) | (632 | ) | (839 | ) | 4,907 | (206,933 | ) | ||||||||||||||||||||
| Interest and other income | — | — | — | 627 | 2,906 | — | (477 | ) | 3,056 | |||||||||||||||||||||||
| Gain on changes in fair value of financial instruments | — | — | — | 48,931 | — | — | — | 48,931 | ||||||||||||||||||||||||
| (Loss) gain on foreign exchange | — | — | — | (240,370 | ) | (9,267 | ) | 8,550 | — | (241,087 | ) | |||||||||||||||||||||
| Income (loss) before tax | 8,930 | 8,930 | — | 76,714 | (11,808 | ) | 8,038 | 620 | 91,424 | |||||||||||||||||||||||
| Tax expense | — | — | — | (67,784 | ) | (10,190 | ) | (246 | ) | — | (78,220 | ) | ||||||||||||||||||||
| Net income (loss) | $ | 8,930 | $ | 8,930 | $ | — | $ | 8,930 | $ | (21,998 | ) | $ | 7,792 | $ | 620 | $ | 13,204 | |||||||||||||||
| F-93 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
34. CONDENSED CONSOLIDATING FINANCIAL INFORMATION – (continued)
Condensed Consolidating Statements of Comprehensive (Loss) Income
For the year ended December 31, 2014
Telesat Holdings Inc. | Telesat Interco Inc. | Telesat LLC | Telesat Canada | Guarantor subsidiaries | Non-guarantor subsidiaries | Adjustments | Consolidated | |||||||||||||||||||||||||
| Net income (loss) | $ | 8,930 | $ | 8,930 | $ | — | $ | 8,930 | $ | (21,998 | ) | $ | 7,792 | $ | 620 | $ | 13,204 | |||||||||||||||
| Other comprehensive (loss) income | ||||||||||||||||||||||||||||||||
| Items that may be reclassified into profit or loss | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | 207 | 3,294 | 292 | 3,793 | ||||||||||||||||||||||||
| Other comprehensive income from equity investments | 3,501 | 3,501 | — | 3,501 | 3,294 | — | (13,797 | ) | — | |||||||||||||||||||||||
| Items that will not be reclassified into profit or loss | ||||||||||||||||||||||||||||||||
| Actuarial losses on employee benefit plans | — | — | — | (22,871 | ) | (475 | ) | — | — | (23,346 | ) | |||||||||||||||||||||
| Tax recovery | — | — | — | 5,589 | 188 | — | — | 5,777 | ||||||||||||||||||||||||
| Other comprehensive loss from equity investments | (17,569 | ) | (17,569 | ) | — | (287 | ) | — | — | 35,425 | — | |||||||||||||||||||||
| Other comprehensive (loss) income | (14,068 | ) | (14,068 | ) | — | (14,068 | ) | 3,214 | 3,294 | 21,920 | (13,776 | ) | ||||||||||||||||||||
| Total comprehensive (loss) income | $ | (5,138 | ) | $ | (5,138 | ) | $ | — | $ | (5,138 | ) | $ | (18,784 | ) | $ | 11,086 | $ | 22,540 | $ | (572 | ) | |||||||||||
| F-94 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
34. CONDENSED CONSOLIDATING FINANCIAL INFORMATION – (continued)
Condensed Consolidating Statements of Income
For the year ended December 31, 2013
Telesat Holdings Inc. | Telesat Interco Inc. | Telesat LLC | Telesat Canada | Guarantor subsidiaries | Non-guarantor subsidiaries | Adjustments | Consolidated | |||||||||||||||||||||||||
| Revenue | $ | — | $ | — | $ | — | $ | 837,358 | $ | 152,306 | $ | 16,879 | $ | (109,647 | ) | $ | 896,896 | |||||||||||||||
| Operating expenses | — | — | — | (170,865 | ) | (121,312 | ) | (18,532 | ) | 109,647 | (201,062 | ) | ||||||||||||||||||||
| — | — | — | 666,493 | 30,994 | (1,653 | ) | — | 695,834 | ||||||||||||||||||||||||
| Depreciation | — | — | — | (179,442 | ) | (31,342 | ) | (211 | ) | (156 | ) | (211,151 | ) | |||||||||||||||||||
| Amortization | — | — | — | (31,262 | ) | (1,358 | ) | (39 | ) | — | (32,659 | ) | ||||||||||||||||||||
| Other operating gains (losses), net | — | — | — | 15,721 | 9,733 | (119 | ) | — | 25,335 | |||||||||||||||||||||||
| Operating income (loss) | — | — | — | 471,510 | 8,027 | (2,022 | ) | (156 | ) | 477,359 | ||||||||||||||||||||||
| Income (loss) from equity investments | 67,696 | 67,696 | — | 8,240 | (1,962 | ) | — | (141,670 | ) | — | ||||||||||||||||||||||
| Interest expense | — | — | — | (223,424 | ) | (1,266 | ) | (5 | ) | 596 | (224,099 | ) | ||||||||||||||||||||
| Loss on financing | — | — | — | (18,487 | ) | — | — | — | (18,487 | ) | ||||||||||||||||||||||
| Interest and other income | — | — | — | 11,708 | — | 2 | (42 | ) | 11,668 | |||||||||||||||||||||||
| Gain on changes in fair value of financial instruments | — | — | — | 80,928 | — | — | — | 80,928 | ||||||||||||||||||||||||
| (Loss) gain on foreign exchange | (1 | ) | — | — | (190,562 | ) | (12,586 | ) | 8,240 | — | (194,909 | ) | ||||||||||||||||||||
| Income (loss) before tax | 67,695 | 67,696 | — | 139,913 | (7,787 | ) | 6,215 | (141,272 | ) | 132,460 | ||||||||||||||||||||||
| Tax (expense) recovery | — | — | — | (72,217 | ) | 7,902 | (52 | ) | — | (64,367 | ) | |||||||||||||||||||||
| Net income | $ | 67,695 | $ | 67,696 | $ | — | $ | 67,696 | $ | 115 | $ | 6,163 | $ | (141,272 | ) | $ | 68,093 | |||||||||||||||
| F-95 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
34. CONDENSED CONSOLIDATING FINANCIAL INFORMATION – (continued)
Condensed Consolidating Statements of Comprehensive Income (Loss)
For the year ended December 31, 2013
Telesat Holdings Inc. | Telesat Interco Inc. | Telesat LLC | Telesat Canada | Guarantor subsidiaries | Non-guarantor subsidiaries | Adjustments | Consolidated | |||||||||||||||||||||||||
| Net income | $ | 67,695 | $ | 67,696 | $ | — | $ | 67,696 | $ | 115 | $ | 6,163 | $ | (141,272 | ) | $ | 68,093 | |||||||||||||||
| Other comprehensive income (loss) | ||||||||||||||||||||||||||||||||
| Items that may be reclassified into profit or loss | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | (908 | ) | (382 | ) | 9 | (1,281 | ) | |||||||||||||||||||||
| Other comprehensive loss from equity investments | (1,290 | ) | (1,290 | ) | — | (1,290 | ) | (382 | ) | — | 4,252 | — | ||||||||||||||||||||
| Items that will not be reclassified into profit or loss | ||||||||||||||||||||||||||||||||
| Actuarial gains (losses) on employee benefit plans | — | — | — | 25,360 | (4,130 | ) | — | — | 21,230 | |||||||||||||||||||||||
| Tax (expense) recovery | — | — | — | (6,754 | ) | 1,474 | — | — | (5,280 | ) | ||||||||||||||||||||||
| Other comprehensive income (loss) from equity investments | 15,950 | 15,950 | — | (2,656 | ) | — | — | (29,244 | ) | — | ||||||||||||||||||||||
| Other comprehensive income (loss) | 14,660 | 14,660 | — | 14,660 | (3,946 | ) | (382 | ) | (24,983 | ) | 14,669 | |||||||||||||||||||||
| Total comprehensive income (loss) | $ | 82,355 | $ | 82,356 | $ | — | $ | 82,356 | $ | (3,831 | ) | $ | 5,781 | $ | (166,255 | ) | $ | 82,762 | ||||||||||||||
| F-96 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
34. CONDENSED CONSOLIDATING FINANCIAL INFORMATION – (continued)
Condensed Consolidating Balance Sheets
As at December 31, 2015
Telesat Holdings Inc. | Telesat Interco Inc. | Telesat LLC | Telesat Canada | Guarantor subsidiaries | Non-guarantor subsidiaries | Adjustments | Consolidated | |||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | — | $ | — | $ | — | $ | 623,931 | $ | 63,656 | $ | 3,139 | $ | — | $ | 690,726 | ||||||||||||||||
| Trade and other receivables | — | — | — | 36,543 | 13,284 | 954 | — | 50,781 | ||||||||||||||||||||||||
| Other current financial assets | — | — | — | 94 | 1,073 | 19 | — | 1,186 | ||||||||||||||||||||||||
| Intercompany receivables | — | — | — | 355,022 | 103,230 | 184,766 | (643,018 | ) | — | |||||||||||||||||||||||
| Prepaid expenses and other current assets | — | — | — | 12,140 | 4,920 | 40 | — | 17,100 | ||||||||||||||||||||||||
| Total current assets | — | — | — | 1,027,730 | 186,163 | 188,918 | (643,018 | ) | 759,793 | |||||||||||||||||||||||
| Satellites, property and other equipment | — | — | — | 1,310,977 | 598,604 | — | 15,684 | 1,925,265 | ||||||||||||||||||||||||
| Deferred tax assets | — | — | — | — | 8,569 | 261 | (1,039 | ) | 7,791 | |||||||||||||||||||||||
| Other long-term financial assets | — | — | — | 33,005 | 6,800 | 557 | — | 40,362 | ||||||||||||||||||||||||
| Other long-term assets | — | — | — | 12,484 | 954 | — | — | 13,438 | ||||||||||||||||||||||||
| Intangible assets | — | — | — | 754,239 | 57,158 | — | — | 811,397 | ||||||||||||||||||||||||
| Investment in affiliates | 965,084 | 965,084 | — | 1,461,718 | 45,576 | — | (3,437,462 | ) | — | |||||||||||||||||||||||
| Goodwill | — | — | — | 2,078,056 | 343,876 | 24,671 | — | 2,446,603 | ||||||||||||||||||||||||
| Total assets | $ | 965,084 | $ | 965,084 | $ | — | $ | 6,678,209 | $ | 1,247,700 | $ | 214,407 | $ | (4,065,835 | ) | $ | 6,004,649 | |||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||
| Trade and other payables | $ | — | $ | — | $ | — | $ | 9,562 | $ | 33,805 | $ | 799 | $ | — | $ | 44,166 | ||||||||||||||||
| Other current financial liabilities | — | — | — | 31,648 | 3,620 | 1,157 | — | 36,425 | ||||||||||||||||||||||||
| Intercompany payables | 30,507 | — | — | 194,551 | 415,456 | 2,504 | (643,018 | ) | — | |||||||||||||||||||||||
| Other current liabilities | — | — | — | 79,056 | 1,387 | 194 | — | 80,637 | ||||||||||||||||||||||||
| Current indebtedness | — | — | — | 87,386 | — | — | — | 87,386 | ||||||||||||||||||||||||
| Total current liabilities | 30,507 | — | — | 402,203 | 454,268 | 4,654 | (643,018 | ) | 248,614 | |||||||||||||||||||||||
| Long-term indebtedness | — | — | — | 3,975,835 | — | — | — | 3,975,835 | ||||||||||||||||||||||||
| Deferred tax liabilities | — | — | — | 469,010 | — | — | (1,039 | ) | 467,971 | |||||||||||||||||||||||
| Other long-term financial liabilities | — | — | — | 64,400 | 29,432 | 358 | — | 94,190 | ||||||||||||||||||||||||
| Other long-term liabilities | — | — | — | 279,229 | 20,682 | — | — | 299,911 | ||||||||||||||||||||||||
| Total liabilities | 30,507 | — | — | 5,190,677 | 504,382 | 5,012 | (644,057 | ) | 5,086,521 | |||||||||||||||||||||||
| Shareholders’ equity | 934,577 | 965,084 | — | 1,487,532 | 743,318 | 209,395 | (3,421,778 | ) | 918,128 | |||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 965,084 | $ | 965,084 | $ | — | $ | 6,678,209 | $ | 1,247,700 | $ | 214,407 | $ | (4,065,835 | ) | $ | 6,004,649 | |||||||||||||||
| F-97 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
34. CONDENSED CONSOLIDATING FINANCIAL INFORMATION – (continued)
Condensed Consolidating Balance Sheets
As at December 31, 2014
Telesat Holdings Inc. | Telesat Interco Inc. | Telesat LLC | Telesat Canada | Guarantor subsidiaries | Non-guarantor subsidiaries | Adjustments | Consolidated | |||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | — | $ | — | $ | — | $ | 450,280 | $ | 44,188 | $ | 2,888 | $ | — | $ | 497,356 | ||||||||||||||||
| Trade and other receivables | — | — | — | 31,419 | 16,497 | 1,618 | — | 49,534 | ||||||||||||||||||||||||
| Other current financial assets | — | — | — | 25 | 687 | 53 | — | 765 | ||||||||||||||||||||||||
| Intercompany receivables | — | — | — | 366,317 | 174,888 | 167,251 | (708,456 | ) | — | |||||||||||||||||||||||
| Prepaid expenses and other current assets | — | — | — | 12,099 | 4,987 | 127 | (11 | ) | 17,202 | |||||||||||||||||||||||
| Total current assets | — | — | — | 860,140 | 241,247 | 171,937 | (708,467 | ) | 564,857 | |||||||||||||||||||||||
| Satellites, property and other equipment | — | — | — | 1,479,324 | 374,172 | 378 | 7,141 | 1,861,015 | ||||||||||||||||||||||||
| Deferred tax assets | — | — | — | — | 3,183 | — | — | 3,183 | ||||||||||||||||||||||||
| Other long-term financial assets | — | — | — | 36,509 | 1,466 | 467 | — | 38,442 | ||||||||||||||||||||||||
| Other long-term assets | — | — | — | 2,817 | 1,080 | 134 | (861 | ) | 3,170 | |||||||||||||||||||||||
| Intangible assets | — | — | — | 769,780 | 50,792 | — | — | 820,572 | ||||||||||||||||||||||||
| Investment in affiliates | 1,154,518 | 1,154,518 | — | 1,244,606 | 25,266 | 261 | (3,579,169 | ) | — | |||||||||||||||||||||||
| Goodwill | — | — | — | 2,078,056 | 343,876 | 24,671 | — | 2,446,603 | ||||||||||||||||||||||||
| Total assets | $ | 1,154,518 | $ | 1,154,518 | $ | — | $ | 6,471,232 | $ | 1,041,082 | $ | 197,848 | $ | (4,281,356 | ) | $ | 5,737,842 | |||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||
| Trade and other payables | $ | — | $ | — | $ | — | $ | 13,838 | $ | 21,528 | $ | 1,348 | $ | — | $ | 36,714 | ||||||||||||||||
| Other current financial liabilities | — | — | — | 32,539 | 1,705 | 1,389 | — | 35,633 | ||||||||||||||||||||||||
| Intercompany payables | 30,491 | — | — | 226,280 | 413,455 | 38,230 | (708,456 | ) | — | |||||||||||||||||||||||
| Other current liabilities | — | — | — | 120,951 | 3,203 | — | (9 | ) | 124,145 | |||||||||||||||||||||||
| Current indebtedness | — | — | — | 58,820 | 2 | — | — | 58,822 | ||||||||||||||||||||||||
| Total current liabilities | 30,491 | — | — | 452,428 | 439,893 | 40,967 | (708,465 | ) | 255,314 | |||||||||||||||||||||||
| Long-term indebtedness | — | — | — | 3,486,857 | — | — | — | 3,486,857 | ||||||||||||||||||||||||
| Deferred tax liabilities | — | — | — | 485,619 | — | — | (861 | ) | 484,758 | |||||||||||||||||||||||
| Other long-term financial liabilities | — | — | — | 54,698 | 5,964 | 91 | — | 60,753 | ||||||||||||||||||||||||
| Other long-term liabilities | — | — | — | 314,665 | 4,321 | 6 | — | 318,992 | ||||||||||||||||||||||||
| Total liabilities | 30,491 | — | — | 4,794,267 | 450,178 | 41,064 | (709,326 | ) | 4,606,674 | |||||||||||||||||||||||
| Shareholders’ equity | 1,124,027 | 1,154,518 | — | 1,676,965 | 590,904 | 156,784 | (3,572,030 | ) | 1,131,168 | |||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 1,154,518 | $ | 1,154,518 | $ | — | $ | 6,471,232 | $ | 1,041,082 | $ | 197,848 | $ | (4,281,356 | ) | $ | 5,737,842 | |||||||||||||||
| F-98 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
34. CONDENSED CONSOLIDATING FINANCIAL INFORMATION – (continued)
Condensed Consolidating Statements of Cash Flows
For the year ended December 31, 2015
Telesat Holdings Inc. | Telesat Interco Inc. | Telesat LLC | Telesat Canada | Guarantor subsidiaries | Non-guarantor subsidiaries | Adjustments | Consolidated | |||||||||||||||||||||||||
| Cash flows from operating activities | ||||||||||||||||||||||||||||||||
| Net (loss) income | $ | (221,130 | ) | $ | (221,127 | ) | $ | — | $ | (221,127 | ) | $ | (17,065 | ) | $ | 20,267 | $ | 393,243 | $ | (266,939 | ) | |||||||||||
| Adjustments to reconcile net (loss) income to cash flows from operating activities | ||||||||||||||||||||||||||||||||
| Depreciation | — | — | — | 175,366 | 32,291 | 80 | 98 | 207,835 | ||||||||||||||||||||||||
| Amortization | — | — | — | 25,825 | 2,077 | — | — | 27,902 | ||||||||||||||||||||||||
| Tax expense (recovery) | — | — | — | 92,887 | (4,336 | ) | 178 | — | 88,729 | |||||||||||||||||||||||
| Interest expense | — | — | — | 191,510 | 1,014 | 2 | (9,229 | ) | 183,297 | |||||||||||||||||||||||
| Interest income | — | — | — | (3,417 | ) | (1,093 | ) | (33 | ) | — | (4,543 | ) | ||||||||||||||||||||
| Loss (gain) on foreign exchange | 3 | — | — | 511,510 | 23,804 | (20,870 | ) | 26,023 | 540,470 | |||||||||||||||||||||||
| Gain on changes in fair value of financial instruments | — | — | — | (6,035 | ) | — | — | — | (6,035 | ) | ||||||||||||||||||||||
| Share-based compensation | — | — | — | 3,760 | 1,609 | — | — | 5,369 | ||||||||||||||||||||||||
| Loss from equity investments | 221,127 | 221,127 | — | (8,403 | ) | 5,201 | — | (439,052 | ) | — | ||||||||||||||||||||||
| Loss (gain) on disposal of assets | — | — | — | (4,999 | ) | (23,178 | ) | — | 28,207 | 30 | ||||||||||||||||||||||
| Other | — | — | — | (39,976 | ) | (173 | ) | (15 | ) | — | (40,164 | ) | ||||||||||||||||||||
| Income taxes paid, net of income taxes received | — | — | — | (154,165 | ) | (782 | ) | (76 | ) | — | (155,023 | ) | ||||||||||||||||||||
| Interest paid, net of capitalized interest and interest received | — | — | — | (171,596 | ) | 421 | 32 | 9,229 | (161,914 | ) | ||||||||||||||||||||||
| Operating assets and liabilities | — | — | — | (19,838 | ) | 22,114 | 362 | 710 | 3,348 | |||||||||||||||||||||||
| Net cash from (used in) operating activities | $ | — | $ | — | $ | — | $ | 371,302 | $ | 41,904 | $ | (73 | ) | $ | 9,229 | $ | 422,362 | |||||||||||||||
| Cash flows used in investing activities | ||||||||||||||||||||||||||||||||
| Satellite programs, including capitalized interest | $ | — | $ | — | $ | — | $ | — | $ | (174,186 | ) | $ | — | $ | (9,229 | ) | $ | (183,415 | ) | |||||||||||||
| Purchase of other property and equipment | — | — | — | (6,650 | ) | (3,795 | ) | — | — | (10,445 | ) | |||||||||||||||||||||
| Purchase of intangible assets | — | — | — | — | (5 | ) | — | — | (5 | ) | ||||||||||||||||||||||
| Repayment of loans receivable from affiliates | — | — | — | 19,900 | — | — | (19,900 | ) | — | |||||||||||||||||||||||
| Loans receivable from affiliates | — | — | — | (1,646 | ) | — | — | 1,646 | — | |||||||||||||||||||||||
| Return of capital to shareholder | — | — | — | 6,300 | — | — | (6,300 | ) | — | |||||||||||||||||||||||
| Investment in affiliates | — | — | — | (185,703 | ) | — | — | 185,703 | — | |||||||||||||||||||||||
| Net cash used in investing activities | $ | — | $ | — | $ | — | $ | (167,799 | ) | $ | (177,986 | ) | $ | — | $ | 151,920 | $ | (193,865 | ) | |||||||||||||
| Cash flows (used in) from financing activities | ||||||||||||||||||||||||||||||||
| Repayment of indebtedness | $ | — | $ | — | $ | — | $ | (73,864 | ) | $ | — | $ | — | $ | — | $ | (73,864 | ) | ||||||||||||||
| Dividends paid on preferred shares | (10 | ) | — | — | — | — | — | — | (10 | ) | ||||||||||||||||||||||
| Satellite performance incentive payments | — | — | — | (6,624 | ) | (78 | ) | — | — | (6,702 | ) | |||||||||||||||||||||
| Repayment of loans payable to affiliates | — | — | — | — | (19,900 | ) | 19,900 | — | ||||||||||||||||||||||||
| Loans payable to affiliates | 10 | — | — | — | 1,627 | 9 | (1,646 | ) | — | |||||||||||||||||||||||
| Return of capital to shareholder | — | — | — | — | (6,300 | ) | — | 6,300 | — | |||||||||||||||||||||||
| Proceeds from issuance of share capital | — | — | — | — | 185,703 | — | (185,703 | ) | — | |||||||||||||||||||||||
| Net cash (used in) from financing activities | $ | — | $ | — | $ | — | $ | (80,488 | ) | $ | 161,052 | $ | 9 | $ | (161,149 | ) | $ | (80,576 | ) | |||||||||||||
| Effect of changes in exchange rates on cash and cash equivalents | $ | — | $ | — | $ | — | $ | 50,636 | $ | (5,502 | ) | $ | 315 | $ | — | $ | 45,449 | |||||||||||||||
| Increase in cash and cash equivalents | $ | — | $ | — | $ | — | $ | 173,651 | $ | 19,468 | $ | 251 | $ | — | $ | 193,370 | ||||||||||||||||
| Cash and cash equivalents, beginning of year | — | — | — | 450,280 | 44,188 | 2,888 | — | 497,356 | ||||||||||||||||||||||||
| Cash and cash equivalents, end of year | $ | — | $ | — | $ | — | $ | 623,931 | $ | 63,656 | $ | 3,139 | $ | — | $ | 690,726 | ||||||||||||||||
| F-99 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
34. CONDENSED CONSOLIDATING FINANCIAL INFORMATION – (continued)
Condensed Consolidating Statements of Cash Flows
For the year ended December 31, 2014
Telesat Holdings Inc. | Telesat Interco Inc. | Telesat LLC | Telesat Canada | Guarantor subsidiaries | Non-guarantor subsidiaries | Adjustments | Consolidated | |||||||||||||||||||||||||
| Cash flows (used in) from operating activities | ||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 8,930 | $ | 8,930 | $ | — | $ | 8,930 | $ | (21,998 | ) | $ | 7,792 | $ | 620 | $ | 13,204 | |||||||||||||||
| Adjustments to reconcile net income (loss) to cash flows (used in) from operating activities | ||||||||||||||||||||||||||||||||
| Depreciation | — | — | — | 184,870 | 31,350 | 120 | 156 | 216,496 | ||||||||||||||||||||||||
| Amortization | — | — | — | 28,986 | 1,839 | — | — | 30,825 | ||||||||||||||||||||||||
| Tax expense | — | — | — | 67,784 | 10,190 | 246 | — | 78,220 | ||||||||||||||||||||||||
| Interest expense | — | — | — | 210,369 | 632 | 839 | (4,907 | ) | 206,933 | |||||||||||||||||||||||
| Interest income | — | — | — | (2,205 | ) | (278 | ) | (705 | ) | 477 | (2,711 | ) | ||||||||||||||||||||
| Loss (gain) on foreign exchange | — | — | — | 240,370 | 9,267 | (8,550 | ) | — | 241,087 | |||||||||||||||||||||||
| Gain on changes in fair value of financial instruments | — | — | — | (48,931 | ) | — | — | — | (48,931 | ) | ||||||||||||||||||||||
| Share-based compensation | — | — | — | 8,704 | 1,314 | (363 | ) | — | 9,655 | |||||||||||||||||||||||
| (Income) loss from equity investments | (8,930 | ) | (8,930 | ) | — | 11,983 | 2,223 | — | 3,654 | — | ||||||||||||||||||||||
| Loss (gain) on disposal of assets | — | — | — | 314 | (14 | ) | 4 | — | 304 | |||||||||||||||||||||||
| Other | — | — | — | (48,900 | ) | (1,616 | ) | (141 | ) | — | (50,657 | ) | ||||||||||||||||||||
| Income taxes paid, net of income taxes received | — | — | — | (78,520 | ) | (2,103 | ) | (176 | ) | — | (80,799 | ) | ||||||||||||||||||||
| Interest paid, net of capitalized interest and interest received | — | — | — | (197,182 | ) | (12 | ) | (133 | ) | 4,430 | (192,897 | ) | ||||||||||||||||||||
| Operating assets and liabilities | (202 | ) | — | — | (34,422 | ) | 17,680 | 8,237 | — | (8,707 | ) | |||||||||||||||||||||
| Net cash (used in) from operating activities | $ | (202 | ) | $ | — | $ | — | $ | 352,150 | $ | 48,474 | $ | 7,170 | $ | 4,430 | $ | 412,022 | |||||||||||||||
| Cash flows used in investing activities | ||||||||||||||||||||||||||||||||
| Satellite programs, including capitalized interest | $ | — | $ | — | $ | — | $ | — | $ | (80,161 | ) | $ | — | $ | (4,430 | ) | $ | (84,591 | ) | |||||||||||||
| Purchase of other property and equipment | — | — | — | (8,762 | ) | (1,846 | ) | (87 | ) | — | (10,695 | ) | ||||||||||||||||||||
| Purchase of intangible assets | — | — | — | — | (185 | ) | — | — | (185 | ) | ||||||||||||||||||||||
| Proceeds from sale of assets | — | — | — | 311 | — | — | — | 311 | ||||||||||||||||||||||||
| Repayment of loans receivable from affiliates | — | — | — | 12,300 | — | 63 | (12,363 | ) | — | |||||||||||||||||||||||
| Loans receivable from affiliates | — | — | — | (2,008 | ) | — | (5,793 | ) | 7,801 | — | ||||||||||||||||||||||
| Return of capital to shareholder | — | — | — | 6,503 | — | — | (6,503 | ) | — | |||||||||||||||||||||||
| Investment in affiliates | — | — | — | (83,071 | ) | — | — | 83,071 | — | |||||||||||||||||||||||
| Net cash used in investing activities | $ | — | $ | — | $ | — | $ | (74,727 | ) | $ | (82,192 | ) | $ | (5,817 | ) | $ | 67,576 | $ | (95,160 | ) | ||||||||||||
| Cash flows from (used in) financing activities | ||||||||||||||||||||||||||||||||
| Repayment of indebtedness | $ | — | $ | — | $ | — | $ | (70,692 | ) | $ | — | $ | — | $ | — | $ | (70,692 | ) | ||||||||||||||
| Settlement of derivatives | — | — | — | (60,824 | ) | — | — | — | (60,824 | ) | ||||||||||||||||||||||
| Proceeds from exercise of stock options | 202 | — | — | — | — | — | — | 202 | ||||||||||||||||||||||||
| Dividends paid on preferred shares | (20 | ) | — | — | — | — | — | — | (20 | ) | ||||||||||||||||||||||
| Satellite performance incentive payments | — | — | — | (5,409 | ) | (43 | ) | — | — | (5,452 | ) | |||||||||||||||||||||
| Repayment of loans payable to affiliates | — | — | — | (63 | ) | (12,300 | ) | — | 12,363 | — | ||||||||||||||||||||||
| Loans payable to affiliates | 20 | — | — | 5,793 | 1,988 | — | (7,801 | ) | — | |||||||||||||||||||||||
| Return of capital to shareholder | — | — | — | — | (6,503 | ) | — | 6,503 | — | |||||||||||||||||||||||
| Proceeds from issuance of share capital | — | — | — | — | 83,071 | — | (83,071 | ) | — | |||||||||||||||||||||||
| Net cash from (used in) financing activities | $ | 202 | $ | — | $ | — | $ | (131,195 | ) | $ | 66,213 | $ | — | $ | (72,006 | ) | $ | (136,786 | ) | |||||||||||||
| Effect of changes in exchange rates on cash and cash equivalents | $ | — | $ | — | $ | — | $ | 19,821 | $ | (1,315 | ) | $ | 61 | $ | — | $ | 18,567 | |||||||||||||||
| Increase in cash and cash equivalents | $ | — | $ | — | $ | — | $ | 166,049 | $ | 31,180 | $ | 1,414 | $ | — | $ | 198,643 | ||||||||||||||||
| Cash and cash equivalents, beginning of year | — | — | — | 284,231 | 13,008 | 1,474 | — | 298,713 | ||||||||||||||||||||||||
| Cash and cash equivalents, end of year | $ | — | $ | — | $ | — | $ | 450,280 | $ | 44,188 | $ | 2,888 | $ | — | $ | 497,356 | ||||||||||||||||
| F-100 |
Telesat Holdings Inc.
Notes to the 2015 Consolidated Financial Statements
(all amounts in thousands of Canadian dollars, except where otherwise noted)
34. CONDENSED CONSOLIDATING FINANCIAL INFORMATION – (continued)
Condensed Consolidating Statements of Cash Flows
For the year ended December 31, 2013
Telesat Holdings Inc. | Telesat Interco Inc. | Telesat LLC | Telesat Canada | Guarantor subsidiaries | Non-guarantor subsidiaries | Adjustments | Consolidated | |||||||||||||||||||||||||
| Cash flows (used in) from operating activities | ||||||||||||||||||||||||||||||||
| Net income | $ | 67,695 | $ | 67,696 | $ | — | $ | 67,696 | $ | 115 | $ | 6,163 | $ | (141,272 | ) | $ | 68,093 | |||||||||||||||
| Adjustments to reconcile net income to cash flows (used in) from operating activities | ||||||||||||||||||||||||||||||||
| Depreciation | — | — | — | 179,442 | 31,342 | 211 | 156 | 211,151 | ||||||||||||||||||||||||
| Amortization | — | — | — | 31,262 | 1,358 | 39 | — | 32,659 | ||||||||||||||||||||||||
| Tax expense (recovery) | — | — | — | 72,217 | (7,902 | ) | 52 | — | 64,367 | |||||||||||||||||||||||
| Interest expense | — | — | — | 223,424 | 1,266 | 5 | (596 | ) | 224,099 | |||||||||||||||||||||||
| Interest income | — | — | — | (1,194 | ) | (136 | ) | — | 42 | (1,288 | ) | |||||||||||||||||||||
| Loss (gain) on foreign exchange | 1 | — | — | 190,562 | 12,586 | (8,240 | ) | — | 194,909 | |||||||||||||||||||||||
| Gain on changes in fair value of financial instruments | — | — | — | (80,928 | ) | — | — | — | (80,928 | ) | ||||||||||||||||||||||
| Share-based compensation | — | — | — | 12,065 | 1,050 | 402 | — | 13,517 | ||||||||||||||||||||||||
| (Income) loss from equity investments | (67,696 | ) | (67,696 | ) | — | (8,240 | ) | 1,962 | — | 141,670 | — | |||||||||||||||||||||
| Impairment reversal on intangible assets | — | — | — | (17,274 | ) | — | — | — | (17,274 | ) | ||||||||||||||||||||||
| Gain on other post-employment benefit plan amendment | — | — | — | — | (9,786 | ) | — | — | (9,786 | ) | ||||||||||||||||||||||
| Loss on disposal of assets | — | — | — | 1,553 | 53 | 119 | — | 1,725 | ||||||||||||||||||||||||
| Loss on financing | — | — | — | 18,487 | — | — | — | 18,487 | ||||||||||||||||||||||||
| Other | — | — | — | (46,007 | ) | (551 | ) | 128 | — | (46,430 | ) | |||||||||||||||||||||
| Income taxes paid, net of income tax received | — | — | — | (11,716 | ) | (824 | ) | (29 | ) | — | (12,569 | ) | ||||||||||||||||||||
| Interest paid, net of capitalized interest and interest received | — | — | — | (211,560 | ) | (135 | ) | — | 554 | (211,141 | ) | |||||||||||||||||||||
| Customer prepayments on future satellite services | — | — | — | 31,778 | 527 | — | — | 32,305 | ||||||||||||||||||||||||
| Repurchase of stock options and exercise of share appreciation rights | — | — | — | (701 | ) | (495 | ) | — | — | (1,196 | ) | |||||||||||||||||||||
| Operating assets and liabilities | (99 | ) | — | — | 21,462 | (19,506 | ) | (1,469 | ) | — | 388 | |||||||||||||||||||||
| Net cash (used in) from operating activities | $ | (99 | ) | $ | — | $ | — | $ | 472,328 | $ | 10,924 | $ | (2,619 | ) | $ | 554 | $ | 481,088 | ||||||||||||||
| Cash flows (used in) from investing activities | ||||||||||||||||||||||||||||||||
| Satellite programs, including capitalized interest | $ | — | $ | — | $ | — | $ | (32,816 | ) | $ | (37,808 | ) | $ | — | $ | (554 | ) | $ | (71,178 | ) | ||||||||||||
| Purchase of other property and equipment | — | — | — | (6,511 | ) | (2,199 | ) | (62 | ) | — | (8,772 | ) | ||||||||||||||||||||
| Purchase of intangible assets | — | — | — | — | (6 | ) | — | — | (6 | ) | ||||||||||||||||||||||
| Proceeds from sale of assets | — | — | — | 81 | — | 1,000 | — | 1,081 | ||||||||||||||||||||||||
| Repayment of loans receivable from affiliates | — | — | — | 11,500 | — | 19 | (11,519 | ) | — | |||||||||||||||||||||||
| Loans receivable from affiliates | — | — | — | (1,217 | ) | — | — | 1,217 | — | |||||||||||||||||||||||
| Return of capital from subsidiary | — | — | — | 4,394 | — | — | (4,394 | ) | — | |||||||||||||||||||||||
| Investment in affiliates | — | — | — | (36,823 | ) | — | — | 36,823 | — | |||||||||||||||||||||||
| Net cash (used in) from investing activities | $ | — | $ | — | $ | — | $ | (61,392 | ) | $ | (40,013 | ) | $ | 957 | $ | 21,573 | $ | (78,875 | ) | |||||||||||||
| Cash flows from (used in) financing activities | ||||||||||||||||||||||||||||||||
| Repayment of indebtedness | $ | — | $ | — | $ | — | $ | (271,448 | ) | $ | — | $ | — | $ | — | $ | (271,448 | ) | ||||||||||||||
| Settlement of derivatives | — | — | — | (1,219 | ) | — | — | — | (1,219 | ) | ||||||||||||||||||||||
| Payment of premium on early retirement of indebtedness | — | — | — | (13,793 | ) | — | — | — | (13,793 | ) | ||||||||||||||||||||||
| Payment of debt issue costs | — | — | — | (810 | ) | — | — | — | (810 | ) | ||||||||||||||||||||||
| Proceeds from exercise of stock options | 99 | — | — | — | — | — | — | 99 | ||||||||||||||||||||||||
| Dividends paid on preferred shares | (10 | ) | — | — | — | — | — | — | (10 | ) | ||||||||||||||||||||||
| Satellite performance incentive payments | — | — | — | (4,756 | ) | (14 | ) | — | — | (4,770 | ) | |||||||||||||||||||||
| Repayment of loans payable to affiliates | — | — | — | (19 | ) | (11,500 | ) | — | 11,519 | — | ||||||||||||||||||||||
| Loans payable to affiliates | 10 | — | — | — | 1,207 | — | (1,217 | ) | — | |||||||||||||||||||||||
| Return of capital to shareholder | — | — | — | — | (4,394 | ) | — | 4,394 | — | |||||||||||||||||||||||
| Proceeds from issuance of share capital | — | — | — | — | 36,823 | — | (36,823 | ) | — | |||||||||||||||||||||||
| Net cash from (used in) financing activities | $ | 99 | $ | — | $ | — | $ | (292,045 | ) | $ | 22,122 | $ | — | $ | (22,127 | ) | $ | (291,951 | ) | |||||||||||||
| Effect of changes in exchange rates on cash and cash equivalents | $ | — | $ | — | $ | — | $ | 6,824 | $ | 467 | $ | 199 | $ | — | $ | 7,490 | ||||||||||||||||
| Increase (decrease) in cash and cash equivalents | $ | — | $ | — | $ | — | $ | 125,715 | $ | (6,500 | ) | $ | (1,463 | ) | $ | — | $ | 117,752 | ||||||||||||||
| Cash and cash equivalents, beginning of year | — | — | — | 158,516 | 19,508 | 2,937 | — | 180,961 | ||||||||||||||||||||||||
| Cash and cash equivalents, end of year | $ | — | $ | — | $ | — | $ | 284,231 | $ | 13,008 | $ | 1,474 | $ | — | $ | 298,713 | ||||||||||||||||
| F-101 |