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.
INDEX
Topic Location
Overview Page 23
Consolidated Operating Results Page 27
Liquidity and Capital Resources?
Loral Page 30
Telesat Page 31
Statements of Cash` Flows Page 34
Affiliate Matters Page 35
Commitments and Contingencies Page 35
Other Matters Page 35
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
Securities and Exchange Commission ("SEC"). We operate in an industry sector in
which the value of securities may be volatile and may be influenced by economic
and other factors beyond our control. We undertake no obligation to update any
forward-looking statements.
Overview
Business
Loral has one operating segment consisting of satellite-based communications
services. Loral participates in satellite services operations primarily through
its ownership interest in Telesat Canada ("Telesat"), a leading global satellite
operator. Telesat provides its satellite and communication services from a fleet
of satellites that occupy Canadian and other orbital locations. Loral holds a
62.7% economic interest and a 32.6% voting interest in Telesat as of March 31,
2020.
At March 31, 2020, Telesat, with approximately $2.3 billion of backlog, provided
satellite services to customers from its fleet of 16 in-orbit geostationary
satellites and the Canadian Ka-band payload on the ViaSat1 satellite. Telesat
is also developing a global constellation of low earth orbit ("LEO") satellites.
In January 2018, Telesat launched a Ka-band satellite into low earth orbit as
part of its plans to deploy an advanced, global LEO constellation. This
satellite is being used to perform testing and live demonstrations of certain
features of Telesat's LEO system design with existing Telesat customers and
potential suppliers of Telesat LEO system hardware. These satellite leaders will
be able to experience key advantages of Telesat's LEO system - including
ultra-low latency and high speeds - and assess the role Telesat's constellation
can play in their next-generation broadband networks.
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On July 24, 2019, Telesat announced that it had entered into a memorandum of
understanding with the Government of Canada ("GoC") regarding a partnership
intended to ensure access to affordable high-speed internet connectivity across
rural and remote areas of Canada through the development of the Telesat LEO
constellation. The partnership is expected to generate CAD 1.2 billion in
revenue for Telesat over 10 years, which includes a contribution of up to CAD
600 million from the GoC.
In May 2019, Telesat entered into an agreement with the GoC pursuant to which
the GoC will contribute up to CAD 85 million through July 31, 2023 to support
the development of the Telesat LEO constellation. For the three months ended
March 31, 2020, Telesat received CAD 4.0 million relating to the agreement from
the GoC.
In a number of countries, regulators plan to adopt new spectrum allocations for
terrestrial mobile broadband and 5G, including certain C-band spectrum currently
allocated to satellite services. Telesat currently uses C-band spectrum in a
number of countries, including the United States and Canada. To the extent that
Telesat's C-band spectrum is made available for use for terrestrial mobile
broadband and 5G, Telesat may be entitled to certain compensation.
On February 28, 2020, the Federal Communications Commission ("FCC") approved its
Report and Order on Expanding Flexible Use of the 3.7 to 4.2 GHz Band, which
Report and Order was released on March 3, 2020. The Report and Order indicated
that Telesat could receive as much as $344.4 million from the repurposing of
Cband spectrum in the United States. In addition, Telesat will be entitled to
reimbursement of reasonable clearing costs. Telesat's ability to receive any
proceeds would be subject to meeting certain conditions as set out in that
Report and Order, including a requirement that satellite operators who wish to
receive accelerated relocation payments must make an election with the FCC by
May 29, 2020 and meet the Phase 1 and Phase 2 clearing dates of December 5, 2021
and 2023, respectively. The FCC will make accelerated relocation payments
available only if satellite operators who are entitled to at least 80% of
accelerated relocation payments make such elections. While Telesat intends to
make that election, as a practical matter, accelerated relocation payments will
be available if and only if both Intelsat and SES make such elections. The FCC
stated that it will announce whether sufficient elections have been made by June
5, 2020, and thus it is not known if both SES and Intelsat will make the
election. Further, in the course of the proceeding a number of parties raised
issues with aspects of the Report and Order, and thus the Report and Order may
be subject to challenge. In addition, there are members of the United States
Senate and House of Representatives who oppose the FCC's current plans and are
seeking to modify or overturn them. There are also technical challenges to
clearing C-band spectrum. There can be no assurance that Telesat will receive
any proceeds from the FCC process or, if it were to receive proceeds, the amount
or timing of receipt.
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.
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. In 2018, Telesat launched a
Ka-band satellite into low earth orbit in furtherance of its plans to develop a
state-of-the-art, high capacity LEO constellation that will deliver
transformative, low latency, fiber-like broadband to commercial and government
users worldwide.
Telesat 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.
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In 2020, Telesat remains focused on increasing utilization of its existing
satellites, the development of its global LEO constellation, identifying and
pursuing opportunities to invest in other expansion of satellite capacity and
leveraging the value of its spectrum rights, all while maintaining operating
discipline.
Telesat's operating results are subject to fluctuations as a result of exchange
rate variations. For the three months ended March 31, 2020, approximately 51.2%
of Telesat's revenues, 47.1% of its operating expenses, 100% of its interest
expense and the majority of its capital expenditures were denominated in U.S.
dollars. The most significant impact of variations in the exchange rate is on
the U.S. dollar denominated indebtedness and cash and short term investments. As
of March 31, 2020, Telesat's U.S. dollar denominated debt totaled $2.85 billion.
As of March 31, 2020, a five percent increase (decrease) in the Canadian dollar
against the U.S. dollar on financial assets and liabilities would have
(decreased) increased Telesat's net loss by approximately $132.6 million. This
analysis assumes all other variables, in particular interest rates, remain
constant.
COVID-19
On March 11, 2020, the World Health Organization designated the recent novel
coronavirus ("COVID-19") as a global pandemic. Various policies and initiatives
have been implemented worldwide to reduce the global transmission of COVID19,
including the promotion of social distancing and the adoption of remote working
policies.
Telesat's and our corporate headquarters, and many of Telesat's other offices
and facilities, are located in jurisdictions that have, as a result of the
COVID-19 pandemic, instituted work from home and social distancing requirements.
These restrictions have adversely impacted the ability of Telesat's and our
respective employees to travel to their places of work, and, in the case of
Telesat employees, to customer locations and to supplier facilities. Many of
Telesat's customers and suppliers have been similarly impacted.
The extent of the impact of the COVID-19 pandemic on Telesat's or our
operations, business prospects and financial performance is subject to change
and dependent on many factors, including, among others, the duration of the
pandemic, continuation of the current measures to prevent the spread of
COVID-19, and new restrictions that may be implemented by, or that may be
imposed upon, us, Telesat and Telesat's customers and suppliers in response to
the pandemic, and is therefore difficult to predict. For additional details on
risks associated with the current outbreak of COVID-19, refer to Part II, Other
Information - Item 1A. Risk Factors.
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 provide a substantial stimulus and assistance package
intended to address the impact of the COVID-19 pandemic, including tax relief
and government loans, grants and investments. The COVID-19 Acts did not have a
material impact on our condensed consolidated financial statements for the three
months ended March 31, 2020. We continue to monitor any effects that may result
from the COVID-19 Acts.
General
Our principal asset is our majority economic ownership interest in Telesat. In
an effort to maximize shareholder value, we have been exploring, and are in
advanced discussions with our Canadian co-owner in Telesat, Public Sector
Pension Investment Board ("PSP") regarding, potential strategic transactions to
alter the status quo in our ownership of Telesat. Subject to market conditions
and the cooperation of PSP, we continue to explore the combination of Loral and
Telesat into one public company. Also, as described more fully below, we have
exercised our right to require that Telesat initiate a public offering, and we
may further pursue this right in the event that the combination transaction that
we are pursuing is not likely to be achievable in a timely manner or on
satisfactory terms. There can be no assurance as to whether or when we will be
able to conclude any strategic transaction or that any strategic initiatives or
transaction involving Telesat or Loral may occur, or that any particular
economic, tax, structural or other objectives or benefits with respect to any
initiative or transaction involving Telesat or Loral's interest therein will be
achieved.
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In 2017, we received $242.7 million in cash from Telesat, representing our share
of an aggregate approximately $400 million distribution from Telesat to its
shareholders and stock option holders. On April 30, 2020, our Board of Directors
declared a special dividend of $5.50 per share for an aggregate dividend of
approximately $170.5 million, representing a significant portion of the proceeds
that we received from Telesat. The special dividend is payable on May 28, 2020
to holders of record of Loral voting and non-voting common stock as of the close
of business on May 14, 2020. We intend to make an additional distribution to our
stockholders, net of reasonable reserves for working capital and other
liabilities. The timing and amount of any such additional distribution will be
determined in part by the status of the combination transaction that we are
pursuing. There can be no assurance as to the amount and timing of any such
additional distribution, and such additional distribution may be impacted by the
outcome of our discussions regarding, and the structure of, the strategic
combination transaction that we are pursuing.
As mentioned above, we have the right under the Telesat Shareholders Agreement
to require Telesat to conduct an initial public offering of its equity shares,
and, in July 2015, we exercised this right. Specifically, we requested that
Telesat issue not more than 25 million newly issued shares of Telesat voting
common stock. We also requested the termination of the Shareholders Agreement
and the elimination of certain provisions in Telesat's Articles of
Incorporation, both of which we believe are important for a successful public
offering. If those provisions are eliminated, an impediment to the conversion of
our non-voting Telesat shares to voting shares would be eliminated. Termination
or modification of the Shareholders Agreement and conversion of our non-voting
shares to voting shares would enable us, after a Telesat IPO and subject to the
receipt of any necessary regulatory approvals, to obtain majority voting control
of Telesat. To date, we and PSP have not reached agreement on governance matters
following a Telesat IPO. In the event a transaction to combine Loral and Telesat
into one public company that we are pursuing is not likely to be achievable in a
timely manner or on satisfactory terms, we may further pursue our right to a
Telesat IPO. There can be no assurance as to whether, when or on what terms a
Telesat IPO, termination or modification of the Shareholders Agreement or any
requested changes to Telesat's Articles of Incorporation may occur or that any
particular economic, tax, structural or other objectives or benefits with
respect to a Telesat IPO will be achieved. If a Telesat IPO is expected to
proceed under unfavorable terms or at an unfavorable price, we may withdraw our
demand for a Telesat IPO.
Depending upon the outcome of the strategic initiatives discussed above, we may
assert certain claims against PSP for actions we believe violated our rights
relating to the affairs of Telesat under the Telesat Shareholders Agreement and
otherwise. In response to our claims, PSP has informed us that it believes that
it may have claims against us, although we are not aware of the legal or factual
basis for any such claims. We and PSP have agreed that, pending the outcome of
our discussions relating to Telesat, it would be beneficial to delay the
commencement of any action relating to either party's claims and have entered
into an agreement (the "Tolling Agreement") which preserves the parties' rights
to assert against one another legal claims relating to Telesat. We also included
Telesat as a party to the Tolling Agreement because, as a technical matter of
Canadian law and for purposes of potentially seeking equitable relief, Telesat
may be a necessary party. There can be no assurance that if the Tolling
Agreement lapses that we and PSP will not pursue legal claims against one
another relating to Telesat. If we pursue claims against PSP, there can be no
assurance that our claims will be successful or that the relief we seek will be
granted. If PSP pursues claims against us, there can be no assurance that PSP
will not prevail on its claims.
Loral may, from time to time, explore and evaluate other possible strategic
transactions and alliances which may include joint ventures and strategic
relationships as well as business combinations or the acquisition or disposition
of assets. In order to pursue certain of these opportunities, additional funds
are likely to be required. There can be no assurance that we will enter into
additional strategic transactions or alliances, nor do we know if we will be
able to obtain the necessary financing for transactions that require additional
funds on favorable terms, if at all.
In connection with the acquisition of our ownership interest in Telesat in 2007,
Loral has agreed that, subject to certain exceptions described in the
Shareholders Agreement, for so long as Loral has an interest in Telesat, it will
not compete in the business of leasing, selling or otherwise furnishing fixed
satellite service, broadcast satellite service or audio and video broadcast
direct-to-home service using transponder capacity in the C-band, Ku-band and
Ka-band (including in each case extended band) frequencies and the business of
providing end-to-end data solutions on networks comprised of earth terminals,
space segment, and, where appropriate, networking hubs.
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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 three months ended March 31, 2020.
Three Months Ended March 31, 2020 Compared with Three Months Ended March 31,
2019
The following compares our consolidated results for the three months ended March
31, 2020 and 2019 as presented in our financial statements:
General and Administrative Expenses
Three Months Ended
March 31,
2020 2019
(In thousands)
General and administrative expenses $ 1,648 $ 1,803
General and administrative expenses decreased by $0.2 million for the three
months ended March 31, 2020 as compared to the three months ended March 31, 2019
primarily due to severance expense of $0.2 million during the three months ended
March 31, 2019.
Interest and Investment Income
Three Months Ended
March 31,
2020 2019
(In thousands)
Interest and investment income $ 937 $ 1,602
Interest and investment income decreased by $0.7 million for the three months
ended March 31, 2020 as compared to the three months ended March 31, 2019
primarily due to lower interest rates earned on the cash balance during the
first three months of 2020 as compared to 2019.
Other Expense
Three Months Ended
March 31,
2020 2019
(In thousands)
Other expense $ 1,437 $ 1,216
Other expense for the three months ended March 31, 2020 and 2019 was primarily
comprised of expenses related to the evaluation of strategic initiatives.
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Income Tax Provision
Three Months Ended
March 31,
2020 2019
(In thousands)
Income tax provision $ (2,116) $ (2,066)
For the three months ended March 31, our income tax provision is summarized as
follows: (i) for 2020, we recorded a current and deferred tax provision of $0.5
million and $1.6 million, respectively, resulting in a total tax provision of
$2.1 million and (ii) for 2019, we recorded a current and deferred tax provision
of $0.6 million and $1.5 million, respectively, resulting in a total tax
provision of $2.1 million.
Our income tax provision for each period is computed by applying an expected
effective annual tax rate against the pre-tax results for the three month
periods ended March 31, 2020 and 2019 (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 Global
Intangible Low Taxed Income ("GILTI") from Telesat and our provision for
uncertain tax positions. The deferred income tax 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.
To the extent that profitability from operations is not sufficient to realize
the benefit from our remaining net deferred tax assets, we would generate
sufficient taxable income from the appreciated value of our Telesat investment
in order to prevent federal net operating losses from expiring and realize the
benefit of all remaining deferred tax assets.
Equity in Net (Loss) Income of Affiliates
Three Months Ended
March 31,
2020 2019
(In thousands)
Telesat $ (117,074) $ 42,004
As of March 31, 2020, we held a 62.7% 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.
The following is a reconciliation of the changes in our investment in Telesat
for the three months ended March 31, 2020:
Three Months Ended
March 31, 2020
(In thousands)
Balance, January 1, 2020 $ 90,184
Components of equity in net loss of Telesat:
Equity in net loss of Telesat $ (117,979)
Eliminations of affiliate transactions and related 905
amortization (117,074)
Proportionate share of Telesat other comprehensive income 31,063
Balance, March 31, 2020 $ 4,173
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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 March 31, 2020 and December 31, 2019 and
for the three months ended March 31, 2020 and 2019 follows (in thousands):
March 31, December 31, March 31, December 31,
2020 2019 2020 2019
(In Canadian dollars) (In U.S. dollars)
Balance Sheet Data:
Current assets 1,313,407 1,139,605 934,012 877,294
Total assets 5,538,863 5,365,307 3,938,886 4,130,337
Current liabilities 202,281 161,357 143,850 124,217
Long-term debt, including current 3,985,426 3,684,873 2,834,182 2,836,700
portion
Total liabilities 4,877,453 4,552,467 3,468,535 3,504,594
Shareholders' equity 661,410 812,840 470,351 625,743
Period end exchange rate for
translating Canadian
dollars to U.S. dollars (1 U.S. 1.4062 1.2990
dollar equals)
Three Months Ended Three Months Ended
March 31, March 31,
2020 2019 2020 2019
(In Canadian dollars) (In U.S. dollars)
Statement of Operations Data:
Revenues 209,450 223,090 158,565 167,644
Operating expenses (47,362) (53,988) (35,855) (40,569)
Depreciation and amortization (59,992) (68,143) (45,417) (51,208)
Other operating expense (221) (73) (167) (55)
Operating income 101,875 100,886 77,126 75,812
Interest expense (54,880) (62,336) (41,547) (46,843)
Foreign exchange (loss) gain (292,771) 69,822 (221,643) 52,469
Loss on financial instruments (9,253) (20,110) (7,005) (15,112)
Other income 5,388 5,102 4,078 3,834
Income tax benefit (provision) 900 (6,061) 682 (4,555)
Net (loss) income (248,741) 87,303 (188,309) 65,605
Average exchange rate for translating
Canadian dollars 1.3211 1.3311
to U.S. dollars (1 U.S. dollar
equals)
Telesat's revenue decreased by $9.1 million for the three months ended March 31,
2020 as compared to the three months ended March 31, 2019 due primarily to the
reduction of service for a North American DTH customer and lower revenue due to
the completion of an agreement that provided for a prepayment for enterprise
services which was accounted for as having significant financing component.
These decreases were partially offset by higher equipment sales, new revenue
from services provided to users impacted by a failure of a competitor's
satellite, higher consulting revenue 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 $0.6 million for the
three months ended March 31, 2020 as compared to the three months ended March
31, 2019.
Telesat's operating expenses decreased by $4.7 million for the three months
ended March 31, 2020 as compared to the three months ended March 31, 2019
primarily due to lower expenses related to development of Telesat's planned LEO
constellation, net of amounts to be reimbursed under a grant from the Canadian
government, partially offset by higher bad debt expense, higher in-orbit
insurance and higher professional fees. The foreign exchange rate change
increased Telesat's operating expenses by an insignificant amount for the three
months ended March 31, 2020 as compared to the three months ended March 31,
2019.
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Telesat's depreciation, amortization and stock-based compensation decreased by
$5.8 million for the three months ended March 31, 2020 as compared to the three
months ended March 31, 2019 primarily due to the end of useful life, for
accounting purposes, of the Anik F2 satellite in the fourth quarter of 2019.
In the third quarter of 2019, we recorded an out-of-period correction to
decrease our investment in Telesat and increase other comprehensive loss by
$22.1 million. This non-cash adjustment was made to record the cumulative
translation adjustment on our investment in Telesat from November 2007, when we
first acquired our ownership interest in Telesat, to December 31, 2018. The
adjustment resulted from translating our share of Telesat's equity from Canadian
dollars to U.S. dollars at historical foreign exchange rates in accordance with
ASC 830, Foreign Currency Matters, as required by ASC 323, Investments - Equity
Method and Joint Ventures. Previously, we translated our share of Telesat's
equity from Canadian dollars to U.S. dollars at current foreign exchange rates
at each balance sheet date. This adjustment had no effect on our equity in net
income (loss) of Telesat for any current or prior reporting period. The Company
has not revised its financial statements for prior periods for this adjustment,
including for the three months ended March 31, 2019, based on its belief that
the effect of such adjustment is not material to the financial statements taken
as a whole.
On January 1, 2019, Telesat adopted Accounting Standards Codification ("ASC")
842, Leases, for its U.S. GAAP reporting which we use to record our equity
income in Telesat. Telesat adopted the new guidance using the modified
retrospective approach with the cumulative effect of initially applying the
standard being recorded on the balance sheet. As a result, on January 1, 2019,
Telesat recognized a right-of-use asset of $19.6 million and lease liability of
$20.0 million on its condensed consolidated balance sheet.
Backlog
Telesat's backlog as of March 31, 2020 and December 31, 2019 was $2.3 billion
and $2.5 billion, respectively.
Liquidity and Capital Resources
Loral
As described above, Loral's principal asset is a 62.7% 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 March 31, 2020, Loral had $255.2 million of cash and cash equivalents and no
debt. The Company's cash and cash equivalents as of March 31, 2020 decreased by
$3.9 million from December 31, 2019 due primarily to corporate expenses of $3.5
million adjusted for changes in working capital and net of consulting fees from
Telesat, payments of $1.3 million related to strategic initiatives and pension
and other post-retirement funding of $0.3 million, partially offset by $1.2
million of interest and investment income. A discussion of cash changes by
activity is set forth in the section "Net Cash Used in Operating Activities."
Loral did not have a credit facility as of March 31, 2020 and December 31, 2019.
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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 shortterm 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 two Government AAA money market funds. The
dispersion across funds reduces the exposure of a default at one fund.
Liquidity
We believe that our cash and cash equivalents will be sufficient to fund
projected expenditures for the next 12 months. We expect that our major cash
outlays for the next 12 months will include payment of a special dividend and
general corporate expenses net of consulting fees from Telesat.
In the first quarter of 2017, we received $242.7 million in cash from Telesat,
representing our share of an aggregate approximately $400 million distribution
from Telesat to its shareholders and stock option holders. On April 30, 2020,
our Board of Directors declared a special dividend of $5.50 per share for an
aggregate dividend of approximately $170.5 million, representing a significant
portion of the proceeds that we received from Telesat. The special dividend is
payable on May 28, 2020 to holders of record of Loral voting and non-voting
common stock as of the close of business on May 14, 2020. We intend to make an
additional distribution to our stockholders, net of reasonable reserves for
working capital and other liabilities. The timing and amount of any such
additional distribution will be determined in part by the status of the
combination transaction that we are pursuing. There can be no assurance as to
the amount and timing of any such additional distribution, and such additional
distribution may be impacted by the outcome of our discussions regarding, and
the structure of, the strategic combination transaction with respect to our
interest in Telesat that we are pursuing.
Risks to Cash Flow
In 2012, we sold our former subsidiary, SSL, to MDA Communications Holdings,
Inc., a subsidiary of Maxar Technologies Inc. (formerly known as MacDonald,
Dettwiler and Associates Ltd.) ("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 March 31, 2020, Telesat had CAD 1.2 billion of cash and short-term
investments as well as approximately $200 million of borrowing availability
under its revolving credit facility.
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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 March 31, 2020, cash flows from operating
activities, and drawings on the revolving credit facility under its senior
secured credit facilities will be adequate to meet Telesat's expected cash
requirements for at least the next 12 months for activities in the normal course
of business, including capital requirements and required interest and principal
payments on debt.
The construction of any satellite replacement or expansion programs, including
the planned LEO constellation, will require signi?cant capital expenditures.
Cash required for any future satellite programs may be funded by Telesat from a
range of sources including: cash and short-term investments; cash ?ows from
operating activities; cash ?ows from customer prepayments; through borrowings on
the revolving credit facility under Telesat's senior secured credit facilities;
vendor ?nancing; equity investments; export credit agency ?nancing; additional
secured or unsecured ?nancing; proceeds received from repurposing C-band
spectrum; and from government sources. In addition, Telesat may sell certain
satellite assets and, in accordance with the terms and conditions of its senior
secured credit facilities, reinvest the proceeds in new or replacement satellite
programs or pay down indebtedness under the 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. Telesat may seek to complete the
development of, fund, and operate its planned LEO constellation through a
current or future unrestricted subsidiary.
Debt
Telesat's debt as of March 31, 2020 and December 31, 2019 was as follows:
March 31, December 31,
Maturity Currency 2020 2019
(In thousands)
Senior Secured Credit
Facilities:
Revolving credit facility December 2024 USD or CAD $ - $ -
equivalent
Term Loan B - U.S. facility December 2026 USD 1,903,729 1,908,500
4.875% Senior secured notes June 2027 USD 400,000 400,000
6.5% Senior notes October 2027 USD 550,000 550,000
2,853,729 2,858,500
Less: Deferred financing
costs and
prepayment options (210) (302)
Total debt under
international financial
reporting standards 2,853,519 2,858,198
U.S. GAAP adjustments (19,337) (21,498)
Total debt under U.S. GAAP 2,834,182 2,836,700
Current portion 16,621 16,480
Long-term portion $ 2,817,561 $ 2,820,220
On October 11, 2019, Telesat issued $550.0 million of 6.5% senior notes maturing
in October 2027. The 6.5% senior notes are effectively subordinated to Telesat's
secured indebtedness, including the obligations under its senior secured credit
facilities and its 4.875% senior secured notes.
On October 11, 2019, Telesat used the net proceeds from the 6.5% senior notes
offering together with available cash on hand to redeem its $500 million 8.875%
senior notes due November 15, 2024 by repaying all outstanding amounts,
including principal, redemption premium and discounted interest to November 15,
2019.
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On December 6, 2019, Telesat entered into amended senior secured credit
facilities which provide for term loan borrowings of $1,908.5 million which
mature in December 2026 and revolving credit facilities of up to $200 million
(or Canadian dollar equivalent) which mature in December 2024. Telesat also
issued, through a private placement, $400 million of 4.875% senior secured notes
which mature in June 2027.
On December 6, 2019, Telesat repaid all outstanding amounts, including related
fees and expenses, under its former senior secured credit facilities.
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 March
31, 2020, other than approximately CAD 0.1 million in drawings related to
letters of credit, there were no borrowings under this facility.
ii- Term Loan B - U.S. Facility
Telesat's term loan B - U.S. facility ("U.S. TLB Facility") is a $1,908.5
million facility maturing in December 2026. As of March 31, 2020, $1,903.7
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%.
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.
Senior Secured Notes
Telesat's senior secured notes, in the amount of $400.0 million, bear interest
at an annual rate of 4.875% and are due in June 2027. The 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 senior secured notes, without
penalty, before December 1, 2024, in each case subject to exceptions provided in
the indenture.
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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.
As at March 31, 2020, Telesat was in compliance with the financial covenants of
its senior secured credit facilities, the indenture governing its senior secured
notes and the indenture governing its senior notes.
Debt Service Cost
Telesat's interest expense for the year ending December 31, 2020 is expected to
be approximately CAD 189.4 million. The interest expense excludes the
amortization of Telesat's deferred financing costs and prepayment options.
Derivatives
Telesat uses, from time to time, interest rate and currency derivatives to
manage its exposure to changes in interest rates and foreign exchange rates.
As of March 31, 2020, Telesat had three outstanding interest rate swaps which
hedge the interest rate risk associated with the variable interest rate on
$1.35 billion of U.S. denominated Term Loan B borrowings. These contracts, which
mature between September 2020 and September 2022, are at fixed interest rates
ranging from 1.84% to 2.04%, excluding applicable margin. As of March 31, 2020,
the fair value of the interest rate swaps was a liability of $20.5 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 March 31, 2020 was a net asset of
$6.4 million.
Development Costs and Capital Expenditures
Telesat has entered into contracts for the development of its LEO constellation
and other capital expenditures. The outstanding commitments associated with
these contracts were approximately CAD 47.0 million as of March 31, 2020. 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 $3.9 million for the three months
ended March 31, 2020, consisting primarily of a $2.4 million cash use
attributable to net loss adjusted for non-cash operating items, a $1.5 million
decrease in accrued employment costs and other current liabilities, a $0.9
million increase in income tax refund receivable, a $0.4 million decrease in
pension and other post-retirement liabilities and a $0.3 million increase in
other current assets, partially offset by a $1.6 million increase in other
liabilities.
Net cash used in operating activities was $0.1 million for the three months
ended March 31, 2019, consisting primarily of a $1.8 million cash use
attributable to net income adjusted for non-cash operating items, a $1.3 million
decrease in accrued employment costs and other current liabilities and a $0.6
million increase in other current assets, partially offset by a $3.0 million
decrease in income tax refund receivable, primarily due to the receipt of
refunds, and a $0.4 million increase in other liabilities.
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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.
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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