LORAL SPACE & COMMUNICATIONS INC. 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
INDEX
Topic Location
Overview Page 26
Consolidated Operating Results Page 32
Liquidity and Capital Resources:
Loral Page 35
Telesat Page 36
Statements of Cash` Flows Page 39
Affiliate Matters Page 39
Commitments and Contingencies Page 39
Other Matters Page 39
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
Overview
As previously disclosed, on
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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, 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
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
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
In connection with the Transaction, on
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
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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
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
Telesat continues to advance its Telesat Lightspeed plans:
In
In
In
The government of
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Government Grant
In
During the three months ended
Repurposing of C-Band Spectrum
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 use C-band spectrum in a
number of countries, including the
In
A similar repurposing of C-band spectrum is currently underway in
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.
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
In 2021, Telesat remains focused on increasing utilization of its existing satellites, the development of the Telesat Lightspeed 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.
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Telesat's operating results are subject to fluctuations as a result of exchange
rate variations. For the three months ended
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.
Telesat Subsequent Event Debt Offering
On
Interest on the 5.625% Senior Secured Notes will be payable on
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
Other
We own 56% of the ordinary membership interests of XTAR, a joint venture between
us and
On
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COVID-19
On
Although the COVID-19 pandemic has had a limited impact on Telesat's and our ability to operate our respective businesses, Telesat's customers in the maritime and aeronautical markets have been significantly impacted by the pandemic. At the request of some of these customers, Telesat amended the terms of certain of their contracts to mitigate the adverse financial impact that COVID-19 is having on their respective businesses. These arrangements have had an adverse impact on Telesat's revenues and will continue to adversely impact Telesat's revenues in the near term. While not sufficient to offset adverse impacts referred to above, Telesat experienced some increased demand for services as a result of COVID-19, primarily from rural broadband connectivity services.
On
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Consolidated Operating Results
See Critical Accounting Matters in our latest Annual Report on Form 10-K filed
with the
Changes in Critical Accounting Policies - There have been no changes in our
critical accounting policies during the three months ended
Three Months Ended
The following compares our consolidated results for the three months ended
General and Administrative Expenses
Three Months Ended
March 31,
2021 2020
(In thousands)
General and administrative expenses
General and administrative expenses were comparable for the three months ended
Interest and Investment Income
Three Months Ended
March 31,
2021 2020
(In thousands)
Interest and investment income
Interest and investment income decreased by
Other Expense
Three Months Ended
March 31,
2021 2020
(In thousands)
Other expense $ 2,375 $ 1,437 For the three months ended
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Income Tax Benefit (Provision)
Three Months Ended
March 31,
2021 2020
(In thousands)
Income tax benefit (provision)
For the three months ended
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
three-month periods ended
During 2021, the statute of limitations for assessment of additional tax will
expire with regard to certain UTPs, potentially resulting in a
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 (Loss) of Affiliates
Three Months Ended
March 31,
2021 2020
(In thousands)Telesat$ 34,602 $ (117,074)
As of
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The following is a reconciliation of the changes in our investment in Telesat
for the three months ended
Three Months Ended
March 31, 2021
(In thousands)
Balance, January 1, 2021 $ 192,664
Components of equity in net income of Telesat:
Equity in net income of Telesat $ 33,517
Eliminations of affiliate transactions and related 1,085
amortization 34,602
Proportionate share of Telesat other comprehensive loss (2,133)
Balance, March 31, 2021 $ 225,133 Summary financial information for Telesat in accordance with
March 31, December 31, March 31, December 31,
2021 2020 2021 2020
(In Canadian dollars) (In U.S. dollars)
Balance Sheet Data:
Current assets 954,395 894,835 759,747 703,210
Total assets 5,048,272 5,018,579 4,018,684 3,943,875
Current liabilities 197,371 165,233 157,117 129,849
Long-term debt 3,120,043 3,159,944 2,483,716 2,483,256
Total liabilities 3,967,239 3,996,600 3,158,126 3,140,747
Shareholders' equity 1,081,033 1,021,979 860,558 803,128
Period end exchange rate for
translating Canadian
dollars to U.S. dollars (1 U.S. 1.2562 1.2725
dollar equals)
Three Months Ended Three Months Ended
March 31, March 31,
2021 2020 2021 2020
(In Canadian dollars) (In U.S. dollars)
Statement of Operations Data:
Revenues 191,269 209,450 150,054 158,565
Operating expenses (40,203) (46,650) (31,540) (35,316)
Depreciation and amortization (54,446) (59,992) (42,713) (45,417)
Other operating expense (631) (221) (495) (167)
Operating income 95,989 102,587 75,306 77,665
Interest expense (42,191) (54,880) (33,100) (41,547)
Foreign exchange gain (loss) 34,960 (292,771) 27,427 (221,643)Gain (loss) on financial instruments 2,020 (9,253) 1,585 (7,005) Other (loss) income
(1,015) 4,676 (797) 3,539
Income tax (provision) benefit (21,555) 900 (16,910) 682 Net income (loss)
68,208 (248,741) 53,511 (188,309)
Average exchange rate for translating
Canadian dollars 1.2747 1.3211
to U.S. dollars (1 U.S. dollar
equals)
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Telesat's revenue decreased by
Telesat's operating expenses decreased by
Telesat's depreciation and amortization decreased by
Backlog
Telesat's backlog as of
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
Loral did not have a credit facility as of
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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 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
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
Under the terms of the Transaction Agreement, Loral is required to make a
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
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
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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
Debt
Telesat's debt as of
March 31, December 31,
Maturity Currency 2021 2020
(In thousands)
Senior Secured Credit
Facilities:
Revolving credit facility USD or CAD $ - $ -
December 2024 equivalent
Term Loan B - U.S. facility December 2026 USD 1,552,815 1,552,815
6.5% Senior notes October 2027 USD 550,000 550,000
4.875% Senior secured notes June 2027 USD 400,000 400,000
2,502,815 2,502,815
Less: Deferred financing
costs and
prepayment options 1,869 1,824
Total debt under
international financial
reporting standards 2,504,684 2,504,639
U.S. GAAP adjustments (20,968) (21,383)
Total debt under U.S. GAAP 2,483,716 2,483,256
Current portion - -
Long-term portion $ 2,483,716 $ 2,483,256 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.
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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
ii - Term Loan B -
Telesat's term loan B -
In
Senior Notes
Telesat's senior notes, in the amount of
As of
Senior Secured Notes
Telesat's senior secured notes, in the amount of
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
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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
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
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
Statements of Cash Flows
Net cash used in operating activities was
Net cash used in operating activities was
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 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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