The following discussion and analysis should be read in conjunction with our
unaudited condensed consolidated financial statements (the "financial
statements") included in Item 1 and our latest Annual Report on Form 10-K filed
with the Securities and Exchange Commission ("SEC").
INDEX
Topic Location
Overview Page 28
Consolidated Operating Results Page 33
Liquidity and Capital Resources: Page 39
Loral Page 39
Telesat Page 40
Statements of Cash` Flows Page 43
Affiliate Matters Page 43
Commitments and Contingencies Page 43
Other Matters Page 44
Loral Space & Communications Inc., a Delaware corporation, 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.
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 Commitments and
Contingencies section below and to our other periodic reports filed with the
SEC. We operate in an industry sector in which the value of securities may be
volatile and may be influenced by economic and other factors beyond our control.
We undertake no obligation to update any forward-looking statements.
Overview
On November 23, 2020, Loral entered into a Transaction Agreement and Plan of
Merger (as it may be amended from time to time, the "Transaction Agreement")
with Telesat Canada, a Canadian corporation ("Telesat"), Telesat Partnership LP,
a limited partnership formed under the laws of Ontario, Canada ("Telesat
Partnership"), Telesat Corporation, a newly formed corporation incorporated
under the laws of the Province of British Columbia, Canada and the sole general
partner of Telesat Partnership ("Telesat Corporation"), Telesat CanHold
Corporation, a corporation incorporated under the laws of British Columbia,
Canada and wholly owned subsidiary of Telesat Partnership ("Telesat CanHoldco"),
Lion Combination Sub Corporation, a Delaware corporation and wholly owned
subsidiary of the Company ("Merger Sub"), Public Sector Pension Investment
Board, a Canadian Crown corporation ("PSP"), and Red Isle Private Investments
Inc., a Canadian corporation and wholly owned subsidiary of PSP ("Red Isle"),
under which Merger Sub will merge with and into Loral, with Loral surviving the
merger as a wholly owned subsidiary of Telesat Partnership (the "Merger"), and
Loral stockholders receiving common shares of Telesat Corporation and/or units
of Telesat Partnership that will be exchangeable for common shares of Telesat
Corporation following the expiration of a six-month lock-up period (the
"Transaction").
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The Transaction Agreement contains a number of customary conditions that must be
fulfilled to complete the Transaction, including (i) approval of (A) a majority
of the outstanding Loral voting common stock and (B) a majority of the
outstanding Loral voting common stock not held by MHR Fund Management LLC
("MHR"), PSP, any other party to the Transaction Agreement or certain of their
respective affiliates; (ii) the parties having obtained certain regulatory
consents and approvals; (iii) no legal proceedings having been commenced that
would enjoin or prohibit the consummation of the Transaction; (iv) the listing
of the Class A and Class B shares of Telesat Corporation on a U.S. securities
exchange; (v) no "Material Adverse Effect" (as defined in the Transaction
Agreement) having occurred; (vi) Telesat remaining in good standing with respect
to its material debt obligations; (vii) the accuracy of certain representations
(subject to certain qualifications as to materiality) and material performance
of certain covenants by the parties, subject to specified exceptions;
(viii) effectiveness of a registration statement on Form F-4 in connection with
the Transaction (the "Registration Statement") and the issuance of a receipt for
each of the Canadian preliminary and final prospectuses in respect of the
Transaction; (ix) no U.S., Canadian or Spanish governmental agency having
commenced civil or criminal proceeding against Loral alleging that any member of
the "Loral Group" has criminally violated any law, and no member of the "Loral
Group" having been indicted or convicted for, or pled nolo contendere to, any
such alleged criminal violation; (x) Loral remaining solvent and not having
entered into any bankruptcy or related proceeding; and (xi) the delivery by the
parties of certain closing deliverables. If the parties have confirmed that all
the conditions are satisfied or waived (other than those conditions that by
their terms are to be satisfied at the closing of the Transaction (the
"Closing"), but which conditions are capable of being satisfied at the Closing),
then PSP and Loral will each have the right to extend the Closing for any number
of periods of up to 30 days each and no longer than 120 days in the aggregate,
from the date on which the Closing otherwise would have occurred. If the Closing
is extended, the Closing will occur on the first two consecutive business days
commencing on the fifth business day after the expiration of the final extension
period on which the conditions are satisfied or waived (other than the
conditions (i) with respect to no "Material Adverse Effect" (as defined in the
Transaction Agreement) having occurred, (ii) that by their terms are to be
satisfied at the Closing, but subject to the satisfaction or waiver of such
conditions at the Closing and (iii) if PSP extends the Closing, with respect to
a civil or criminal legal proceeding alleging that Loral or any of its
subsidiaries (excluding XTAR, LLC ("XTAR") and Globalstar de Mexico, S. de R.L.
de C.V. ("GdM") and their subsidiaries), has criminally violated a law).
On August 6, 2021, Loral was notified that the applications filed with the
Federal Communications Commission (the "FCC") for the transfer of control of
Telesat's and XTAR's FCC licenses in connection with the Transaction had been
approved. The FCC's approval is conditioned on Telesat's and certain of its
subsidiaries' compliance with a Letter of Agreement entered into with the
Department of Justice (the "DOJ") to address certain national security and law
enforcement risks identified by the DOJ and certain Executive Branch agencies.
On August 23, 2021, at a reconvened special meeting of stockholders of the
Company, Loral stockholders approved the Transaction and related proposals. In
addition, on August 23, 2021, Loral was notified by the Committee on Foreign
Investment in the United States ("CFIUS") that CFIUS had concluded its review of
the Transaction and had determined that there were no unresolved national
security concerns.
As of the date hereof, consummation of the Closing remains subject to the
satisfaction or waiver of certain conditions, including the issuance by the
applicable Canadian securities regulator of a receipt for the Canadian
prospectus in respect of the Transaction and the listing of the Class A common
shares and Class B variable voting shares of Telesat Corporation on a U.S.
securities exchange. Telesat has informed the parties to the Transaction
Agreement that it expects to satisfy those conditions later this month.
Accordingly, the parties currently expect that the two-day Closing provided for
in the Transaction Agreement will occur on November 18, 2021 and November 19,
2021, subject to the satisfaction or waiver of all of the conditions to Closing,
and Loral has announced that the election deadline for election by stockholders
of the Transaction consideration is 5:00 p.m. New York City time on November 15,
2021.
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Under the terms of the Transaction Agreement, each of Loral and PSP has the
right to terminate the Transaction Agreement after the Outside Date (defined as
the date that is twelve months following November 23, 2020 subject to certain
extension rights as specified in the Transaction Agreement) if the Closing has
not occurred by the proposed termination date. Because there can be no assurance
that the Closing will occur when currently expected, the parties to the
Transaction Agreement and the parties to the Voting Support Agreement, dated as
of November 23, 2020, by and among Telesat, Loral, PSP and certain affiliates of
MHR Fund Management LLC party thereto executed on November 3, 2021 a waiver,
waiving, among other things, until December 23, 2021, their rights to terminate
the Transaction Agreement as a result of the Closing not having occurred prior
to the Outside Date. The foregoing description of the waiver is not complete and
is qualified in its entirety by reference to the waiver, a copy of which is
filed as Exhibit 10.1 to this Report.
Upon satisfaction of the terms and subject to the conditions set forth in the
Transaction Agreement, the Transaction will result in the current stockholders
of Loral, PSP and the other shareholders in Telesat (principally current or
former management of Telesat) owning approximately the same percentage of equity
in Telesat indirectly through Telesat Corporation and/or Telesat Partnership as
they currently hold (indirectly in the case of Loral stockholders and PSP) in
Telesat, Telesat Corporation becoming the publicly traded general partner of
Telesat Partnership and Telesat Partnership indirectly owning all of the
economic interests in Telesat, except to the extent that the other shareholders
in Telesat elect to retain their direct interest in Telesat.
The Transaction Agreement provides certain termination rights for both Loral and
PSP and further provides that, in certain circumstances, Loral may be required
to pay to Red Isle a termination fee of $6.55 million or $22.91million or to pay
to PSP a "breach" fee of $40 million, in each case as provided in the
Transaction Agreement.
Description of Business
Loral has one operating segment consisting of satellite-based communications
services. Loral participates in satellite services operations primarily through
its ownership interest in Telesat, a leading global satellite operator. Telesat
provides its satellite and communication services from a fleet of geostationary
satellites that occupy Canadian and other orbital locations. Telesat is also
developing a planned global constellation of low earth orbit ("LEO") satellites
known as "Telesat Lightspeed." Loral holds a 62.6% economic interest and a 32.6%
voting interest in Telesat as of September 30, 2021.
Telesat's GEO Satellite Business
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 contractual
revenue backlog by entering into long-term contracts with some of its customers,
in some cases for all or substantially all of a satellite's orbital maneuver
life. Historically, this has resulted in revenue from the satellite services
business being fairly predictable.
As of September 30, 2021, Telesat provided satellite services to customers from
its fleet of 15 geostationary satellites, as well as the Canadian payload on the
ViaSat-1 satellite. Telesat also manages the operations of additional satellites
for third parties. As of September 30, 2021, Telesat's contracted backlog from
its geostationary satellite business was approximately $1.8 billion.
Telesat Lightspeed
Telesat has commenced the development of what it believes will be the world's
most advanced constellation of LEO satellites and integrated terrestrial
infrastructure, called "Telesat Lightspeed" - a platform designed to
revolutionize the provision of global broadband connectivity. In January 2018,
Telesat's first LEO satellite was successfully launched into orbit. This Phase 1
LEO satellite has demonstrated certain key features of the Telesat Lightspeed
system design, specifically the capability of the satellite and customer
terminals to deliver a low latency broadband experience. Telesat also installed
ground infrastructure at its teleport in Allan Park in Canada to support testing
with a variety of existing and prospective customers and potential suppliers of
the Telesat Lightspeed system hardware who have been participating in trials
since the second half of 2018.
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Telesat continues to advance its Telesat Lightspeed plans:
Government Grant
In May 2019, Telesat entered into an agreement with the government of Canada
pursuant to which the government of Canada will contribute up to CAD 85 million
through July 31, 2023 to support the development of the Telesat Lightspeed
constellation. In return for the grant, Telesat made a number of commitments to
the government of Canada, including commitments to conduct over CAD 200 million
of research and development activities in Canada as well as to expand Telesat's
Canadian workforce. As of September 30, 2021, Telesat claimed CAD 27.4 million
against the government grant and incurred CAD 277.3 million in connection with
this program.
During the nine months ended September 30, 2021, Telesat claimed CAD 10.4
million against the government grant and incurred CAD 142.6 million in
connection with this program.
On August 9, 2021, Telesat and the Government of Ontario announced that they
have partnered to bridge the digital divide in Ontario by leveraging Telesat's
planned advanced, state-of-the-art LEO satellite network, Telesat Lightspeed.
Under this CAD 109 million, five-year partnership, a dedicated Telesat
Lightspeed capacity pool will be made available at substantially reduced rates
to Canadian Internet service providers ("ISPs"), including Indigenous owned and
operated ISPs, as well as mobile network operators to expand high-speed Internet
and LTE/5G networks to Ontario's unserved and underserved communities. The
transaction is subject to the entering into of a further, definitive agreement.
On August 12, 2021, Telesat announced that it expects to receive a $1.44 billion
investment from the Government of Canada to support Telesat Lightspeed. Under
the terms of the agreement, the Government of Canada would provide a loan of CAD
790 million and make a CAD 650 million preferred equity investment in Telesat
Lightspeed. In return, Telesat will commit to make certain minimum capital and
operating expenditures in Canada in connection with the program and, in
addition, to create hundreds of Canadian high-quality, full-time jobs and co-ops
and provide academic scholarships. With the investment from the Government of
Canada and other financing sources already in place, Telesat now has
arrangements for approximately $4 billion in funding for the program. These
arrangements, including the Government of Canada investment, are subject to a
number of conditions, including the entering into of further, definitive
agreements.
Thales Alenia Space ("TAS"), Telesat's proposed primary vendor for the
Lightspeed program, has advised Telesat that global supply chain constraints on
the availability of certain components required for the development and
construction of Telesat's Lightspeed constellation are likely to extend the
expected construction timeline and delay entry into service of the Lightspeed
constellation. Telesat is working with TAS to assess the impact of, and
potential mitigants to, these supply chain issues. This development has delayed
Telesat's ability to finalize financing agreements with certain export credit
agencies, which may also negatively impact the timeline.
Telesat Outlook
Telesat's desirable spectrum rights, commitment to providing the highest level
of customer service, deep technical expertise and culture of innovation have
enabled it to successfully develop its business to date. Leveraging these
strengths and building on its existing contractual revenue backlog, Telesat's
focus is on profitably growing its business by increasing the utilization of its
in-orbit satellites and, in a disciplined manner, deploying expansion satellite
capacity where strong market demand is anticipated.
After decades of developing and successfully operating its geosynchronous
orbit-based satellite services business, Telesat is now poised to revolutionize
the provision of global broadband connectivity by developing Telesat Lightspeed,
which Telesat believes will be the world's most advanced constellation of LEO
satellites and integrated terrestrial infrastructure.
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Telesat believes that it is well positioned to serve its customers and the
markets in which it participates. Telesat actively pursues opportunities to
develop new satellites, particularly in conjunction with current or prospective
customers who will commit to long-term service agreements prior to the time the
satellite construction contract is signed. However, while Telesat regularly
pursues these opportunities, it does not procure additional or replacement
satellites until it believes there is a demonstrated need and a sound business
plan for such satellite capacity.
In 2021, Telesat remains focused on increasing utilization of its existing
satellites, the development of the Telesat Lightspeed constellation and
identifying and pursuing opportunities to invest in other expansion of satellite
capacity, all while maintaining operating discipline.
Telesat's operating results are subject to fluctuations as a result of exchange
rate variations. For the nine months ended September 30, 2021, approximately
53.1% of Telesat's revenues, 33.8% of its operating expenses, 100% of its
interest expense and a significant portion of its capital expenditures were
denominated in U.S. dollars. The most significant impact of variations in the
exchange rate is on the U.S. dollar denominated indebtedness and cash and
short-term investments. As of September 30, 2021, Telesat's U.S. dollar
denominated debt totaled $3.0 billion. As of September 30, 2021, a five percent
increase (decrease) in the Canadian dollar against the U.S. dollar on financial
assets and liabilities would have increased (decreased) Telesat's net income by
approximately $116.4 million. This analysis assumes all other variables, in
particular interest rates, remain constant.
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.
Other
We own 56% of the ordinary membership interests of XTAR, a joint venture between
us and Hisdesat Servicios Estrategicos, S.A. ("Hisdesat") of Spain. Hisdesat
owns the remaining 44% of the ordinary membership interests and all of XTAR's
Class A membership interests, which have liquidation priority over the ordinary
membership interests. Prior to July 1, 2020, XTAR owned and operated an X-band
satellite, XTAR-EUR (the "Satellite") located at the 29° E.L. orbital slot (the
"Orbital Slot"). In addition, prior to July 1, 2020, XTAR leased from Hisdesat
7.2 72MHz X-band transponders on the Spainsat satellite located at 30° W.L. (the
"Transponder Lease"). For services provided by Loral, XTAR, until December 31,
2013, was charged a quarterly management fee under a management agreement with
Loral (the "Loral Management Agreement").
On July 1, 2020, Loral, XTAR and Hisdesat restructured their relationship,
including, among other things, the following: (i) Hisdesat purchased the
Satellite and certain assets related to operation of the Satellite (the
"Purchased Assets") from XTAR; (ii) XTAR's agreement with Hisdesat to operate
the Satellite at the Orbital Slot was terminated and the rights and licenses to
operate the Satellite at the Orbital Slot reverted to Hisdesat; (iii) the
Transponder Lease was terminated; (iv) XTAR and Hisdesat entered into an
agreement under which XTAR will continue to market and sell capacity on the
Satellite and on the Spainsat satellite; (v) XTAR and Loral terminated the Loral
Management Agreement; and (vi) Loral granted to Hisdesat an option to acquire
for nominal consideration, subject to receipt of all required regulatory
approvals, Loral's membership interests in XTAR. As of the date of this report,
Hisdesat has not exercised this option. On July 2, 2020, Loral received from
XTAR $5.9 million from the proceeds of the sale of the Purchased Assets in full
and final settlement of the past due receivable outstanding of $6.6 million
under the Loral Management Agreement.
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COVID-19
On March 11, 2020, the World Health Organization designated the COVID-19
coronavirus as a global pandemic. Various policies and initiatives have been
implemented worldwide to reduce the global transmission of COVID-19, including
the promotion of social distancing and the adoption of remote working policies.
The COVID 19 pandemic has had a limited impact on our ability to operate our
business.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act was
signed into law, and on April 24, 2020, the Paycheck Protection Program and
Healthcare Enhancement Act was signed into law (collectively, the "COVID-19
Acts") The COVID-19 Acts provided substantial stimulus and assistance packages
intended to address the impact of the COVID-19 pandemic, including tax relief
and government loans, grants and investments. The COVID-19 Acts reduced our
income tax provision for the three and nine months ended September 30, 2020 by
approximately $2.2 million and $5.7 million, respectively. We continue to
monitor any other effects that may result from the COVID-19 Acts.
Consolidated Operating Results
See Critical Accounting Matters in our latest Annual Report on Form 10-K filed
with the SEC and Note 2 to the financial statements.
Changes in Critical Accounting Policies - There have been no changes in our
critical accounting policies during the nine months ended September 30, 2021.
Three Months Ended September 30, 2021 Compared with Three Months Ended September
30, 2020
The following compares our consolidated results for the three months ended
September 30, 2021 and 2020 as presented in our financial statements:
Operating (loss) income
Three Months Ended
September 30,
2021 2020
(In thousands)
General and administrative expenses $ (8,745) $ (1,725)
Recovery of affiliate doubtful receivable - 5,854
Operating (loss) income
$ (8,745) $ 4,129
General and administrative expenses increased by $7.0 million for the three
months ended September 30, 2021 as compared to the three months ended September
30, 2021, primarily due to a $7.2 million severance and related expense in
connection with the termination of the employment of each Loral employee at
Closing. For the three months ended September 30, 2020, we had operating income
of $4.1 million primarily due to the receipt of $5.9 million from XTAR in full
and final settlement of the past due receivable outstanding of $6.6 million
under the Loral Management Agreement.
Other Expense
Three Months Ended
September 30,
2021 2020
(In thousands)
Other expense $ 2,362 $ 2,300For the three months ended September 30, 2021 and 2020, other expense primarily
includes Transaction related expenses.
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Income Tax Benefit (Provision)
Three Months Ended
September 30,
2021 2020
(In thousands)
Income tax benefit (provision) $ 829 $ (309)
For the three months ended September 30, our income tax provision is summarized
as follows: (i) for 2021, we recorded a current provision of $0.3 million and a
deferred tax benefit of $1.1 million, resulting in a net tax benefit of $0.8
million and (ii) for 2020, we recorded a current provision of $0.3 million and
an insignificant deferred tax provision, resulting in a net tax provision of
$0.3 million. Our deferred income tax provision for 2020 included a benefit of
$2.2 million from the COVID-19 Acts.
Our income tax provision for each period is computed by applying an expected
effective annual tax rate against the pre-tax results for the nine month periods
ended September 30, 2021 and 2020 (after adjusting for certain tax items that
are discrete to each period). This amount is then reduced by the tax benefit
(provision) recorded for the six months ended June 30, 2021 and 2020. The
current income tax provision for each period includes our anticipated income tax
liability related to Global Intangible Low Taxed Income ("GILTI") from Telesat
and our provision for uncertain tax positions ("UTPs"). After utilizing our net
operating loss ("NOL") carryforwards and allowable tax credits, federal income
tax on GILTI from Telesat was zero for each period. The deferred income tax
benefit (provision) for each period includes the impact of equity in net (loss)
income of affiliates from our condensed consolidated statement of operations and
the periodic effect of our accounting for GILTI. Since our deferred tax assets
related to the investment in Telesat will be realized from the future
recognition of GILTI, the federal portion of these deferred tax assets was
valued at zero as of September 30, 2021 and December 31, 2020.
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,
subject to the provisions of the Transaction Agreement, in order to prevent
federal net operating losses from expiring and realize the benefit of all
remaining deferred tax assets.
Equity in Net (Loss) Income of Affiliates
Three Months Ended
September 30,
2021 2020
(In thousands)
Telesat $ (14,924) $ 49,645
As of September 30, 2021, we held a 62.6% economic interest and a 32.6% voting
interest in Telesat. Loral's equity in net (loss) income of Telesat is based on
our proportionate share of Telesat's results in accordance with accounting
principles generally accepted in the United States of America ("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 of
Telesat. Our equity in net income 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 Space Systems/Loral, LLC
(formerly known as Space Systems/Loral, Inc.) ("SSL") and on Loral's sale to
Telesat in April 2011 of its portion of the payload on the ViaSat-1 satellite
and related assets.
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Summary financial information for Telesat in accordance with U.S. GAAP and in
Canadian dollars and U.S. dollars for the three months ended September 30, 2021
and 2020 follows (in thousands):
Three Months Ended Three Months Ended
September 30, September 30,
2021 2020 2021 2020
(In Canadian dollars) (In U.S. dollars)
Statement of Operations Data:
Revenues 193,110 202,830 153,334 152,081
Operating expenses (41,735) (43,088) (33,099) (32,325)
Depreciation and amortization (54,679) (59,884) (43,410) (44,888)
Other operating expense (30) (34) (23) (26)
Operating income 96,666 99,824 76,802 74,842
Interest expense (50,981) (50,288) (40,501) (37,715)
Foreign exchange (loss) gain (68,965) 66,909 (55,138) 48,943
Gain on financial instruments 4,970 419 3,955 246
Other (loss) income (112) 678 (88) 527
Income tax provision (13,356) (12,140) (10,590) (9,053)
Net (loss) income (31,778) 105,402 (25,560) 77,790
Average exchange rate for translating
Canadian dollars 1.2597 1.3345
to U.S. dollars ( 1 U.S. dollar
equals)
Telesat's revenue increased by $1.3 million for the three months ended September
30, 2021 as compared to the three months ended September 30, 2020 due primarily
to an increase in enterprise revenue associated with short-term services
provided to another satellite operator and the impact of the change in the U.S.
dollar/Canadian dollar exchange rate on Canadian dollar denominated revenue,
partially offset by a slight reduction in service for a North American DTH
customer and lower consulting activities. The foreign exchange rate change
increased Telesat's revenue by $3.9 million for the three months ended September
30, 2021 as compared to the three months ended September 30, 2020.
Telesat's operating expenses increased by $0.8 million for the three months
ended September 30, 2021 as compared to the three months ended September 30,
2020 primarily due to higher share-based compensation expense, higher consulting
costs principally associated with a contract with the U.S. government, a higher
provision for bad debt expense and the impact of the change in the U.S.
dollar/Canadian dollar exchange rate on Canadian dollar denominated expenses,
partially offset by higher capitalized engineering costs and lower professional
fees. The foreign exchange rate change increased Telesat's operating expenses by
$1.2 million for the three months ended September 30, 2021 as compared to the
three months ended September 30, 2020.
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Nine Months Ended September 30, 2021 Compared with Nine Months Ended September
30, 2020
The following compares our consolidated results for the nine months ended
September 30, 2021 and 2020 as presented in our financial statements:
Operating (loss) income
Nine Months Ended
September 30,
2021 2020
(In thousands)
General and administrative expenses $ (12,374) $ (5,174)
Recovery of affiliate doubtful receivable - 5,854
Operating (loss) income
$ (12,374) $ 680
General and administrative expenses increased by $7.2 million for the nine
months ended September 30, 2021 as compared to the nine months ended September
30, 2020, primarily due to a $7.2 million severance and related expense in
connection with the termination of the employment of each Loral employee at
Closing. For the nine months ended September 30, 2020, we had operating income
of $0.7 million primarily due to the receipt of $5.9 million from XTAR in full
and final settlement of the past due receivable outstanding of $6.6 million
under the Loral Management Agreement.
Interest and Investment Income
Nine Months Ended
September 30,
2021 2020
(In thousands)
Interest and investment income $ 5 $ 1,045
Interest and investment income decreased by $1.0 million for the nine months
ended September 30, 2021 as compared to the nine months ended September 30, 2020
due to the lower cash balance resulting primarily from payment of cash dividends
of $170.1 million and $46.4 million in May 2020 and December 2020, respectively,
and lower interest rates earned on the cash balance during the nine months ended
September 30, 2021 as compared to the nine months ended September 30, 2020.
Other Expense
Nine Months Ended
September 30,
2021 2020
(In thousands)
Other expense $ 6,834 $ 6,440
For the nine months ended September 30, 2021 and 2020, other expense primarily
includes Transaction related expenses.
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Income Tax Benefit (Provision)
Nine Months Ended
September 30,
2021 2020
(In thousands)
Income tax benefit (provision) $ 1,252 $ (956)
For the nine months ended September 30, our income tax benefit (provision) is
summarized as follows: (i) for 2021, we recorded a current provision of $0.9
million and a deferred tax benefit of $2.2 million, resulting in a net tax
benefit of $1.3 million and (ii) for 2020, we recorded a current provision of
$1.2 million and a deferred tax benefit of $0.2 million, resulting in a net tax
provision of $1.0 million. Our deferred income tax benefit for 2020 included a
benefit of $5.7 million from the COVID-19 Acts.
Our income tax benefit (provision) for each period is computed by applying an
expected effective annual tax rate against the pre-tax results for the nine
month periods ended September 30, 2021 and 2020 (after adjusting for certain tax
items that are discrete to each period). The current income tax provision for
each period includes our anticipated income tax liability related to GILTI from
Telesat and our provision for UTPs. After utilizing our NOL carryforwards and
allowable tax credits, federal income tax on GILTI from Telesat was zero for
each period. The deferred income tax benefit for each period includes the impact
of equity in net (loss) income of affiliates from our condensed consolidated
statement of operations and the periodic effect of our accounting for GILTI.
Since our deferred tax assets related to the investment in Telesat will be
realized from the future recognition of GILTI, the federal portion of these
deferred tax assets was valued at zero as of September 30, 2021 and December 31,
2020.
In October 2021, the statute of limitations for assessment of additional tax
expired with regard to certain UTPs, which is expected to result in a reduction
to our income tax provision for the fourth quarter of approximately $19.7
million.
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,
subject to the provisions of the Transaction Agreement, in order to prevent
federal net operating losses from expiring and realize the benefit of all
remaining deferred tax assets
Equity in Net Income of Affiliates
Nine Months Ended
September 30,
2021 2020
(In thousands)
Telesat $ 44,969 $ 9,086The following is a reconciliation of the changes in our investment in Telesat
for the nine months ended September 30, 2021:
Nine Months Ended
September 30, 2021
(In thousands)
Balance, January 1, 2021 $ 192,664
Components of equity in net income of Telesat:
Equity in net income of Telesat $ 41,713
Eliminations of affiliate transactions and related 3,256
amortization 44,969
Equity in Telesat-related other comprehensive income 3,866
Balance, September 30, 2021 $ 241,499
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Summary financial information for Telesat in accordance with U.S. GAAP and in
Canadian dollars and U.S. dollars as of September 30, 2021 and December 31, 2020
and for the nine months ended September 30, 2021 and 2020 follows (in
thousands):
September 30, December 31, September 30, December 31,
2021 2020 2021 2020
(In Canadian dollars) (In U.S. dollars)
Balance Sheet Data:
Current assets 1,654,493 894,835 1,304,567 703,210
Total assets 5,708,944 5,018,579 4,501,504 3,943,875
Current liabilities 191,342 165,233 150,873 129,849
Long-term debt 3,778,967 3,159,944 2,979,716 2,483,256
Total liabilities 4,562,279 3,996,600 3,597,358 3,140,747
Shareholders' equity 1,146,665 1,021,979 904,146 803,128
Period end exchange rate for
translating Canadian
dollars to U.S. dollars (1 U.S. 1.2680 1.2725
dollar equals)
Nine Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(In Canadian dollars) (In U.S. dollars)
Statement of Operations Data:
Revenues 573,005 620,890 457,052 460,407
Operating expenses (144,920) (136,347) (115,594) (101,106)
Depreciation and amortization (165,460) (179,812) (131,977) (133,336)
Other operating expense (735) (246) (587) (182)
Operating income 261,890 304,485 208,894 225,783
Interest expense (139,809) (156,363) (111,517) (115,947)
Foreign exchange gain (loss) 1,138 (100,315) 908 (74,387)
Gain (loss) on financial instruments 9,715 (15,701) 7,749 (11,643)
Other (loss) income
(1,460) 6,558 (1,164) 4,865
Income tax provision (47,982) (24,961) (38,273) (18,509)
Net income 83,492 13,703 66,597 10,162
Average exchange rate for translating
Canadian dollars 1.2542 1.3495
to U.S. dollars (1 U.S. dollar
equals)
Telesat's revenue decreased by $3.4 million for the nine months ended September
30, 2021 as compared to the nine months ended September 30, 2020 due primarily
to decreases from the COVID-19 pandemic combined with the termination or
reduction of service for certain other enterprise customers, a slight reduction
in service for a North American DTH customer and lower consulting activities,
partially offset by an increase in enterprise revenue associated with short-term
services provided to another satellite operator and the impact of the change in
the U.S. dollar/Canadian dollar exchange rate on Canadian dollar denominated
revenue. The foreign exchange rate change increased Telesat's revenue by $15.1
million for the nine months ended September 30, 2021 as compared to the nine
months ended September 30, 2020.
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Telesat's operating expenses increased by $14.5 million for the nine months
ended September 30, 2021 as compared to the nine months ended September 30, 2020
primarily due to higher share-based compensation expense, higher wages primarily
associated with the hiring of additional employees to support the Telesat
Lightspeed program, higher consulting costs principally associated with a
contract with the U.S. government and the impact of the change in the U.S.
dollar/Canadian dollar exchange rate on Canadian dollar denominated expenses,
partially offset by higher capitalized engineering costs, reversal of a bad debt
provision that was recorded during the nine months ended September 30, 2020 and
lower professional fees. The foreign exchange rate change increased Telesat's
operating expenses by $5.4 million for the nine months ended September 30, 2021
as compared to the nine months ended September 30, 2020.
Backlog
Telesat's backlog as of September 30, 2021 and December 31, 2020 was $1.8
billion and $2.1 billion, respectively.
Liquidity and Capital Resources
Loral
As described above, Loral's principal asset is a 62.6% economic interest in
Telesat. The operations of Telesat are not consolidated but are presented using
the equity method of accounting. Loral has no debt. Telesat has third party debt
with financial institutions. Cash is maintained at Loral and Telesat 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.
Cash and Available Credit
At September 30, 2021, Loral had $20.0 million of cash and cash equivalents and
no debt. The Company's cash and cash equivalents as of September 30, 2021
decreased by $11.6 million from December 31, 2020 due primarily to corporate
expenses of $4.7 million adjusted for changes in working capital and net of
consulting fees from Telesat, payments of $6.3 million related to strategic
initiatives and pension and other post-retirement funding of $0.6 million. A
discussion of cash changes by activity is set forth in the sections "Net Cash
Used in Operating Activities" and "Net Cash Used in Financing Activities."
Loral did not have a credit facility as of September 30, 2021 and December 31,
2020.
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 primarily in two liquid government AAA money market
funds. The dispersion across funds reduces the exposure of a default at any one
fund.
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Liquidity
We believe that our cash and cash equivalents will be sufficient to fund
projected expenditures for the next 12 months or until the Closing of the
Transaction, if sooner. We expect that our major cash outlays during the next 12
months will include general corporate expenses net of consulting fees from
Telesat and costs associated with completing the Transaction, including employee
severance costs and professional fees. Loral receives consulting fees from
Telesat of $1.25 million per quarter under a consulting agreement which expired
on October 31, 2021.
Under the terms of the Transaction Agreement, Loral is required to make a $7
million payment to Red Isle at Closing. Telesat Corporation is obligated to make
this payment as well as costs associated with completing the Transaction if
Loral does not have sufficient cash at Closing.
Risks to Cash Flow
In 2012, we sold our former subsidiary, SSL, to MDA. Under the terms of the
purchase agreement, we are obligated to indemnify MDA from liabilities with
respect to certain pre-closing taxes the total amount of which has not yet been
determined. Where appropriate, we intend vigorously to contest the underlying
tax assessments, but there can be no assurance that we will be successful.
Although no assurance can be provided, we do not believe that these tax-related
matters will have a material adverse effect on our financial position or results
of operations.
Telesat
Cash and Available Credit
As of September 30, 2021, Telesat had CAD 1.56 billion of cash and short-term
investments as well as approximately $200 million of borrowing availability
under its revolving credit facility.
Liquidity
A large portion of Telesat's annual cash receipts are reasonably predictable
because they are primarily derived from an existing backlog of long-term
customer contracts and high contract renewal rates. Telesat believes its cash
and short-term investments as of September 30, 2021, cash flows from operating
activities, and drawings on the revolving credit facility under its senior
secured credit facilities will be adequate to meet Telesat's expected cash
requirements for at least the next 12 months for activities in the normal course
of business, including required interest and principal payments on debt and
Telesat's capital requirements. This includes the commitments Telesat has made
to date for the Telesat Lightspeed program, but does not include the capital
that would be required to complete construction of the constellation.
The construction of any satellite replacement or expansion program will require
significant capital expenditures, and in particular Telesat currently estimates
that its planned Telesat Lightspeed constellation will require a capital
investment of approximately $5 billion for satellites, launch vehicles,
insurance and related ground systems. Cash required for any future satellite
programs may be funded from a range of sources including: cash and short-term
investments; cash flow from operating activities; cash flow from customer
prepayments; through borrowings on the revolving credit facility under Telesat's
senior secured credit facilities; vendor financing; equity investments,
including through the issuance of public equity; export credit agency financing;
additional secured or unsecured debt financing; proceeds received from
repurposing U.S. C-band spectrum, and from government sources. 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. 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 programs.
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Debt
Telesat's debt as of September 30, 2021 and December 31, 2020 was as follows:
September 30, December 31,
Maturity Currency 2021 2020
(In thousands)
Senior Secured Credit
Facilities:
Revolving credit facility December USD or CAD $ - $ -
2024 equivalent
Term Loan B - U.S. facility December USD 1,552,815 1,552,815
2026
October USD 550,000 550,000
6.5% Senior notes 2027
December USD 500,000 -
5.625% Senior secured notes 2026
4.875% Senior secured notes June 2027 USD 400,000 400,000
3,002,815 2,502,815
Deferred financing costs and prepayment (1,779) 1,824
options
Total debt under international financial 3,001,036 2,504,639
reporting standards
U.S. GAAP adjustments (21,320) (21,383)
Total debt under U.S. GAAP 2,979,716 2,483,256
Current portion - -
Long term portion $ 2,979,716 $ 2,483,256
As of September 30, 2021, Telesat was in compliance with the financial covenants
of its senior secured credit facilities, the indenture governing its 4.875%
Senior Secured Notes, the indenture governing its 5.625% Senior Secured Notes
and the indenture governing its senior notes.
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 subsidiaries (the
"Guarantors"). The credit agreement contains covenants that restrict the ability
of Telesat and the Guarantors to take specified actions, including, among other
things and subject to certain significant exceptions: creating liens, incurring
indebtedness, making investments, engaging in mergers, selling property, paying
dividends, entering into sale-leaseback transactions, creating subsidiaries,
repaying subordinated debt or amending organizational documents. The credit
agreement also requires Telesat and the Guarantors to comply with a maximum
first lien leverage ratio and contains customary events of default and
affirmative covenants, including an excess cash sweep, that may require Telesat
to repay a portion of the outstanding principal under its senior secured credit
facilities prior to the stated maturity.
Telesat's senior secured credit facilities are comprised of the following
facilities:
i - Revolving Credit Facility
Telesat's revolving credit facility ("Revolving Facility") is a $200 million
loan facility available in either U.S. dollar or Canadian dollar equivalent,
maturing in December 2024. Loans under the Revolving Facility bear interest at a
floating interest rate. For Canadian Prime Rate and Alternative Base Rate
("ABR") loans, an applicable margin ranging from 0.75% to 1.25% is applied to
the Prime Rate and ABR as these interest rates are defined in the senior credit
facilities. For Bankers' Acceptance ("BA") Loans and Eurodollar Loans, an
applicable margin ranging from 1.75% to 2.25% is applied to either the BA
interest rate or LIBOR. The rates on the Revolving Facility vary depending upon
the results of the first lien leverage ratio. Telesat's Revolving Facility
currently has an unused commitment fee that ranges from 25 to 37.5 basis points
per annum, depending upon the result of the total leverage ratio. As of
September 30, 2021, other than CAD 0.2 million in drawings related to letters of
credit, there were no borrowings under this facility.
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ii - Term Loan B - U.S. Facility
Telesat's term loan B - U.S. facility ("U.S. TLB Facility") is a $1,908.5
million facility maturing in December 2026. As of September 30, 2021, $1,552.8
million of this facility was outstanding, which represents the full amount
available. The borrowings under Telesat's U.S. TLB Facility bear interest at a
floating rate of either: (i) LIBOR as periodically determined for interest rate
periods selected by Telesat in accordance with the terms of the senior secured
credit facilities plus an applicable margin of 2.75%; or (ii) Alternative Base
Rate as determined in accordance with the terms of the senior secured credit
facilities plus an applicable margin of 1.75%.
In December 2020, Telesat made a $341.4 million prepayment on its outstanding
term loans under its U.S. TLB Facility. The mandatory principal repayments on
Telesat's U.S. TLB Facility are one quarter of 1.00% of the value of the loan,
which must be paid on the last day of each quarter. As a result of the
prepayment made in December 2020, mandatory quarterly principal repayments will
no longer be required.
Senior Secured Notes
Telesat has senior secured notes, in the amount of $400.0 million, which bear
interest at an annual rate of 4.875% and are due in June 2027 (the "4.875%
Senior Secured Notes"). The 4.875% Senior Secured Notes indenture includes
covenants or terms that restrict Telesat's ability to, among other things, incur
additional indebtedness, incur liens, pay dividends or make certain other
restricted payments, investments or acquisitions, enter into certain
transactions with affiliates, modify or cancel its satellite insurance, effect
mergers with another entity, and redeem its 4.875% Senior Secured Notes, without
penalty, before December 1, 2024, in each case subject to exceptions provided in
the 4.875% Senior Secured Notes indenture.
On April 27, 2021, Telesat issued senior secured notes in the amount of $500
million at an annual rate of 5.625%, which are due in December 2026 (the "5.625%
Senior Secured Notes"). The 5.625% Senior Secured Notes indenture includes
covenants and terms that restrict Telesat's ability to, among other things,
incur additional indebtedness, incur liens, pay dividends or make certain other
restricted payments, investments or acquisitions, enter into certain
transactions with affiliates, modify or cancel its satellite insurance, effect
mergers with another entity, and redeem the 5.625% Senior Secured Notes, without
penalty, before December 6, 2022, in each case subject to exceptions provided in
the 5.625% Senior Secured Notes indenture. Telesat incurred debt issuance costs
of CAD 6.8 million in connection with the issuance of the 5.625% Senior Secured
Notes.
Senior Notes
Telesat's senior notes, in the amount of $550 million, bear interest at an
annual rate of 6.5% and are due in October 2027. They include covenants or terms
that restrict Telesat's ability to, among other things, incur additional
indebtedness, incur liens, pay dividends or make certain other restricted
payments, investments or acquisitions, enter into certain transactions with
affiliates, modify or cancel its satellite insurance, effect mergers with
another entity, and redeem its senior notes, without penalty, before October 15,
2024, in each case subject to exceptions provided in the senior notes indenture.
Debt Service Cost
The interest expense on Telesat's senior secured credit facilities, senior
notes, senior secured notes and interest rate swaps, excluding the impact of the
amortization of deferred financing costs, prepayment options and loss on
repayment for the year ended December 31, 2021, is expected to be approximately
CAD 162.4 million.
Derivatives
Telesat uses, from time to time, interest rate and currency derivatives to
manage its exposure to changes in interest rates and foreign exchange rates.
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As of September 30, 2021, Telesat had one outstanding interest rate swap which
hedges the interest rate risk on $450 million of U.S. denominated Term Loan B
borrowings. The contract, which matures in September 2022, is at a fixed
interest rate of 2.04%, excluding applicable margin. As of September 30, 2021,
the fair value of the interest rate swap was a liability of $5.8 million.
Telesat also has foreign currency embedded derivatives in its purchase contracts
with suppliers and sales contracts with customers as a result of some of these
contracts being denominated in a currency other than the functional currency of
the substantial parties to the respective contract. The fair value of these
foreign currency embedded derivatives as of September 30, 2021 was a net
liability of $6.7 million.
Capital Expenditures
Telesat has entered into contracts for the development of Telesat Lightspeed
constellation and other capital expenditures. The outstanding commitments
associated with these contracts were approximately CAD 181.3 million as of
September 30, 2021. 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
credit facility.
Statements of Cash Flows
Net Cash Used in Operating Activities
Net cash used in operating activities was $11.6 million for the nine months
ended September 30, 2021, consisting primarily of a $19.0 million cash use
attributable to net income adjusted for non-cash operating items and a $1.0
million decrease in pension and other post-retirement liabilities, partially
offset by a $7.6 million increase in accrued employment costs and other current
liabilities primarily due to the accrual of $7.2 million in severance and
related costs payable to Loral employees upon termination of their employment at
Closing and a $0.8 million increase in other liabilities.
Net cash used in operating activities was $5.6 million for the nine months ended
September 30, 2020, consisting primarily of a $10.8 million cash use
attributable to net income adjusted for non-cash operating items and a $0.9
million decrease in income taxes payable, net of refunds receivable, and a $1.8
million decrease in pension and other post-retirement liabilities, partially
offset by a receipt of $5.9 million from XTAR for a past due receivable and a
$2.2 million increase in other liabilities.
Net Cash Used in Financing Activities
Net cash used in financing activities was $170.1 million for the nine months
ended September 30, 2020 attributable to the payment of a cash dividend to
common shareholders in May 2020.
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 our financial statements for further information on affiliate matters).
Commitments and Contingencies
Our business and operations are subject to a number of significant risks, the
most significant of which are summarized in Part II, Item 1A - Risk Factors and
also in Note 13 to our condensed consolidated financial statements.
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Other Matters
Recent Accounting Pronouncements
There are no accounting pronouncements that have been issued but not yet adopted
that we believe will have a significant impact on our financial statements.
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