Telesat(TSAT) - 2022 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides Telesat Corporation's unaudited interim condensed consolidated financial information, including financial statements, management's discussion and analysis, and market risk disclosures Item 1. Financial Statements This section presents Telesat Corporation's unaudited interim condensed consolidated financial statements for the three months ended March 31, 2022, including statements of income, comprehensive income, changes in shareholders' equity, balance sheets, and cash flows, along with detailed notes on accounting policies, segment information, operating expenses, indebtedness, and other financial disclosures Unaudited Interim Condensed Consolidated Statements of Income Telesat Corporation reported a significant increase in net income for Q1 2022 compared to Q1 2021, driven by a gain on extinguishment of debt and positive changes in the fair value of financial instruments, despite a slight decrease in revenue Consolidated Statements of Income (Q1 2022 vs. Q1 2021) | Metric (CAD millions) | 2022 | 2021 | Change | % Change | | :-------------------- | :--- | :--- | :----- | :------- | | Revenue | $185.8 | $190.5 | $(4.7) | -2.48% | | Operating income | $68.4 | $95.0 | $(26.6) | -28.01% | | Interest expense | $(48.5) | $(42.0) | $(6.5) | 15.49% | | Gain on debt extinguishment | $21.0 | — | $21.0 | N/A | | Gain (loss) on financial instruments | $2.4 | $(25.1) | $27.5 | N/A | | Net income | $60.6 | $41.3 | $19.3 | 46.72% | | Basic EPS | $1.16 | $0.83 | $0.33 | 39.76% | | Diluted EPS | $1.13 | $0.83 | $0.30 | 36.14% | Unaudited Interim Condensed Consolidated Statements of Comprehensive Income Total comprehensive income increased significantly year-over-year, primarily due to the higher net income, despite a larger foreign currency translation loss in the current period Consolidated Statements of Comprehensive Income (Q1 2022 vs. Q1 2021) | Metric (CAD millions) | 2022 | 2021 | Change | % Change | | :-------------------- | :--- | :--- | :----- | :------- | | Net income | $60.6 | $41.3 | $19.3 | 46.72% | | Foreign currency translation adjustments | $(17.5) | $(14.1) | $(3.4) | 24.40% | | Total comprehensive income | $43.1 | $27.2 | $15.9 | 58.29% | Unaudited Interim Condensed Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity increased from December 31, 2021, to March 31, 2022, primarily due to net income and share-based compensation, partially offset by other comprehensive loss Key Changes in Shareholders' Equity (Q1 2022) | Metric (CAD millions) | As at Dec 31, 2021 | Net Income | Share-based Compensation | Other Comprehensive Loss | As at Mar 31, 2022 | | :----------------------------------- | :----------------- | :--------- | :----------------------- | :----------------------- | :----------------- | | Total Telesat Corporation shareholders' equity | $415.7 | $14.0 | $6.4 | $(4.2) | $431.5 | | Non-controlling interest | $1,280.6 | $46.6 | $17.7 | $(13.3) | $1,331.7 | | Total shareholders' equity | $1,696.3 | $60.6 | $24.1 | $(17.5) | $1,763.1 | Unaudited Interim Condensed Consolidated Balance Sheets Telesat's total assets slightly decreased from December 31, 2021, to March 31, 2022, while total liabilities also decreased, leading to an increase in total shareholders' equity Consolidated Balance Sheet Highlights (As at March 31, 2022 vs. Dec 31, 2021) | Metric (CAD millions) | March 31, 2022 | December 31, 2021 | Change | % Change | | :-------------------- | :------------- | :---------------- | :----- | :------- | | Total assets | $6,329.7 | $6,362.5 | $(32.7) | -0.51% | | Total liabilities | $4,566.6 | $4,666.2 | $(99.6) | -2.13% | | Total shareholders' equity | $1,763.1 | $1,696.3 | $66.8 | 3.94% | | Cash and cash equivalents | $1,512.6 | $1,449.6 | $63.0 | 4.35% | | Long-term indebtedness | $3,712.6 | $3,792.6 | $(80.0) | -2.11% | Unaudited Interim Condensed Consolidated Statements of Cash Flows Net cash from operating activities decreased significantly year-over-year, while investing activities generated cash due to C-band clearing proceeds. Financing activities used cash primarily for debt repurchases Consolidated Statements of Cash Flows (Q1 2022 vs. Q1 2021) | Metric (CAD millions) | 2022 | 2021 | Change | % Change | | :-------------------- | :--- | :--- | :----- | :------- | | Net cash from operating activities | $43.4 | $99.1 | $(55.6) | -56.14% | | Net cash generated from (used in) investing activities | $46.6 | $(20.0) | $66.6 | N/A | | Net cash used in financing activities | $(12.1) | $(2.3) | $(9.7) | 416.21% | | Increase in cash and cash equivalents | $63.0 | $64.7 | $(1.7) | -2.65% | | C-band clearing proceeds | $64.7 | — | $64.7 | N/A | | Repurchase of Senior Unsecured Notes | $(14.9) | — | $(14.9) | N/A | Notes to the Unaudited Interim Condensed Consolidated Financial Statements The notes provide detailed context and breakdowns for the financial statements, covering company background, accounting policies, segment performance, operational expenses, debt structure, equity, and risk management, highlighting key changes and significant events during the period Note 1. BACKGROUND OF THE COMPANY Telesat Corporation, a global satellite operator headquartered in Ottawa, Canada, provides mission-critical communications solutions using its fleet of 14 geostationary satellites and the Canadian payload on Viasat-1. The company is also developing the Telesat Lightspeed LEO constellation and began trading on Nasdaq and TSX in November 2021 following a significant transaction - Telesat Corporation is a global satellite operator with 14 geostationary satellites and a Canadian payload on Viasat-1, providing mission-critical communications solutions[13] - The company is developing 'Telesat Lightspeed,' a low earth orbit (LEO) satellite constellation, with its first LEO satellite launched in January 2018 to demonstrate low latency broadband capabilities[14] - Telesat Corporation began trading on the Nasdaq Global Select Market and Toronto Stock Exchange on November 19, 2021, following a transaction involving Loral Space & Communications Inc. and Public Sector Pension Investment Board[15] Note 2. BASIS OF PRESENTATION The financial statements are prepared in accordance with IAS 34, Interim Financial Reporting, on a consolidated basis, including subsidiaries where the company has control. They should be read in conjunction with the December 31, 2021 consolidated financial statements, with specific attention to changes in accounting policies outlined in Note 3 - The financial statements are prepared in accordance with International Accounting Standard 34, Interim Financial Reporting (IAS 34)[19] - Consolidated financial statements include Telesat and its controlled subsidiaries, where control is defined by power over an entity, exposure to variable returns, and the ability to affect returns[22] - The statements use the same basis of presentation and significant accounting policies as the December 31, 2021 consolidated financial statements, except for changes noted in Note 3 and policies in Note 4[21] Note 3. CHANGES IN ACCOUNTING POLICIES Telesat retroactively adopted the IFRIC agenda decision on Software as a Service (SaaS) arrangements, resulting in adjustments to accumulated earnings, satellites, property and other equipment, intangible assets, and net income per common share for prior periods - Telesat retroactively adopted the IFRIC agenda decision clarifying accounting for Software as a Service (SaaS) arrangements[29] Impact of SaaS Accounting Policy Change on Balance Sheet (Dec 31, 2021) | Item | Impact (CAD thousands) | | :--------------------------------- | :--------------------- | | Satellites, property and other equipment | $(2,087) | | Intangible assets | $(1,419) | | Accumulated earnings | $3,506 | Impact of SaaS Accounting Policy Change on Q1 2021 Financial Statements | Item | Impact (CAD thousands) | | :--------------------------------- | :--------------------- | | Operating expenses | $411 | | Satellites, property and other equipment | $(411) | | Net income per common share (Basic) | $(0.01) | | Net income per common share (Diluted) | $(0.01) | Note 4. SIGNIFICANT ACCOUNTING POLICIES The company's significant accounting policies are consistent with those in its 2021 consolidated financial statements, with updates regarding SaaS arrangements. Management judgment is required to determine if SaaS configuration or customization creates an intangible asset. Future changes to IAS 1 and IAS 12 are being evaluated, with IAS 1 amendments expected to impact disclosures and IAS 12 amendments having no impact - The accounting policy for SaaS arrangements requires management judgment to determine if configuration or customization results in an intangible asset under IAS 38[36] - Amendments to IAS 1 (effective Jan 1, 2023) will require disclosure of material accounting policies, impacting the level of disclosures in financial statements[38][40] - Amendments to IAS 12 (effective Jan 1, 2023) clarify deferred tax recognition for transactions with equal deductible and taxable temporary differences, but will have no impact on Telesat's condensed consolidated financial statements[42][43] Note 5. SEGMENT INFORMATION Telesat operates in a single segment providing satellite-based services, categorized into Broadcast, Enterprise, and Consulting and other. Revenue decreased overall, with declines in Broadcast and Enterprise services, partially offset by growth in Consulting and other. Geographically, Canada and Latin America & Caribbean saw revenue decreases, while the United States and Asia & Australia experienced increases - Telesat operates in a single segment, providing satellite-based services globally, categorized into Broadcast, Enterprise, and Consulting and other[44] Revenue by Service (Q1 2022 vs. Q1 2021) | Service | 2022 (CAD millions) | 2021 (CAD millions) | Change (CAD millions) | % Change | | :------------------- | :------------------ | :------------------ | :-------------------- | :------- | | Broadcast | $97.0 | $99.0 | $(2.0) | -1.99% | | Enterprise | $85.4 | $88.6 | $(3.2) | -3.63% | | Consulting and other | $3.4 | $2.9 | $0.5 | 15.80% | | Total Revenue | $185.8 | $190.5 | $(4.7) | -2.48% | Revenue by Geographic Region (Q1 2022 vs. Q1 2021) | Region | 2022 (CAD millions) | 2021 (CAD millions) | Change (CAD millions) | % Change | | :--------------------------- | :------------------ | :------------------ | :-------------------- | :------- | | Canada | $81.6 | $87.8 | $(6.2) | -7.01% | | United States | $75.0 | $70.2 | $4.8 | 6.84% | | Europe, Middle East & Africa | $7.9 | $9.4 | $(1.5) | -16.42% | | Latin America & Caribbean | $12.3 | $14.7 | $(2.4) | -16.36% | | Asia & Australia | $9.0 | $8.4 | $0.6 | 6.86% | | Total Revenue | $185.8 | $190.5 | $(4.7) | -2.48% | - Two significant customers each represented more than 10% of consolidated revenue for the three months ended March 31, 2022 and 2021[48] Note 6. OPERATING EXPENSES Total operating expenses increased significantly year-over-year, primarily driven by higher compensation and employee benefits due to increased share-based compensation, and higher other operating expenses, partially offset by a decrease in cost of sales Operating Expenses (Q1 2022 vs. Q1 2021) | Expense Category (CAD millions) | 2022 | 2021 | Change | % Change | | :------------------------------ | :--- | :--- | :----- | :------- | | Compensation and employee benefits | $43.1 | $22.2 | $20.9 | 93.94% | | Other operating expenses | $13.5 | $8.4 | $5.0 | 59.97% | | Cost of sales | $7.8 | $9.7 | $(1.9) | -19.54% | | Total Operating Expenses | $64.4 | $40.4 | $24.0 | 59.46% | - Compensation and employee benefits increased primarily due to higher non-cash share-based compensation from new restricted share units issued in Q2 2021, partially offset by capitalized engineering costs for the Telesat Lightspeed program[175] - Other operating expenses increased due to a reversal of a bad debt provision in Q1 2021 and higher expenses associated with being a public company[176] Note 7. INTEREST EXPENSE Total interest expense increased year-over-year, mainly due to higher interest on indebtedness, particularly from the 2026 Senior Secured Notes issued in April 2021, partially offset by a decrease in interest on derivative instruments Interest Expense (Q1 2022 vs. Q1 2021) | Expense Category (CAD millions) | 2022 | 2021 | Change | % Change | | :------------------------------ | :--- | :--- | :----- | :------- | | Interest on indebtedness | $41.2 | $32.2 | $9.0 | 27.97% | | Interest on derivative instruments | $1.8 | $3.6 | $(1.7) | -48.50% | | Interest on significant financing component | $4.4 | $5.0 | $(0.5) | -11.05% | | Total Interest Expense | $48.5 | $42.0 | $6.5 | 15.49% | - The increase in interest expense was primarily due to interest on the 2026 Senior Secured Notes issued in April 2021, partially offset by the maturity of an interest rate swap in September 2021[180] Note 8. INCOME TAXES Total tax expense decreased year-over-year, primarily due to lower operating income and higher interest expense, partially offset by the gain on extinguishment of debt. The effective income tax rate decreased from 34.50% in Q1 2021 to 24.27% in Q1 2022 Income Taxes (Q1 2022 vs. Q1 2021) | Metric (CAD millions) | 2022 | 2021 | Change | % Change | | :-------------------- | :--- | :--- | :----- | :------- | | Current tax expense | $21.6 | $24.1 | $(2.5) | -10.34% | | Deferred tax recovery | $(2.2) | $(2.4) | $0.2 | -6.71% | | Total Tax Expense | $19.4 | $21.8 | $(2.3) | -10.73% | | Effective income tax rate | 24.27% | 34.50% | -10.23% | -29.65% | - The decrease in tax expense was primarily due to lower operating income and higher interest expense, partially offset by the gain on extinguishment of debt[191] Note 9. SATELLITES, PROPERTY AND OTHER EQUIPMENT Additions to satellites, property and other equipment significantly decreased year-over-year, primarily related to acquisitions for the LEO program Additions to Satellites, Property and Other Equipment (Q1 2022 vs. Q1 2021) | Metric (CAD millions) | 2022 | 2021 | Change | % Change | | :-------------------- | :--- | :--- | :----- | :------- | | Additions | $7.5 | $43.0 | $(35.5) | -82.56% | - The additions were primarily related to acquisitions associated with the LEO program[54] Note 10. GOODWILL Goodwill is tested for impairment annually or more frequently if circumstances indicate. A review in Q1 2022 identified an increase in discount rates for Geo and U.S. C-band clearing proceeds from 7.5% to 9.0%, but no impairment was recognized - Goodwill is tested for impairment annually or more frequently if circumstances indicate[55] - In Q1 2022, discount rates for Geo and U.S. C-band clearing proceeds increased from 7.5% to 9.0%[56] - Despite the change in discount rates, no impairment on goodwill was identified[57] Note 11. LEASE LIABILITIES The expected undiscounted contractual cash flows for lease liabilities as of March 31, 2022, total $50.7 million, including $15.3 million in interest payments, with the majority due in later years Expected Undiscounted Contractual Lease Liabilities (As at March 31, 2022) | Period | Amount (CAD millions) | | :------------- | :-------------------- | | Remainder 2022 | $2.7 | | 2023 | $3.6 | | 2024 | $3.4 | | 2025 | $3.2 | | 2026 | $3.0 | | Thereafter | $34.9 | | Total | $50.7 | - The total undiscounted contractual cash flows for lease liabilities include $15.3 million of interest payments[58] Note 12. INDEBTEDNESS Telesat's long-term indebtedness decreased from December 31, 2021, to March 31, 2022, primarily due to the repurchase and retirement of Senior Unsecured Notes, which also resulted in a gain on extinguishment of debt Long-term Indebtedness (As at March 31, 2022 vs. Dec 31, 2021) | Debt Instrument (CAD millions) | March 31, 2022 | December 31, 2021 | Change (CAD millions) | % Change | | :----------------------------- | :------------- | :---------------- | :-------------------- | :------- | | Term Loan B – U.S. Facility | $1,941.8 | $1,962.3 | $(20.5) | -1.04% | | Senior Unsecured Notes | $652.3 | $695.0 | $(42.8) | -6.15% | | 2026 Senior Secured Notes | $625.3 | $631.9 | $(6.6) | -1.04% | | Senior Secured Notes | $500.2 | $505.5 | $(5.3) | -1.04% | | Total Long-term Indebtedness | $3,712.6 | $3,792.6 | $(80.0) | -2.11% | - In March 2022, Telesat repurchased $40.0 million (US$32.0 million) principal amount of Senior Unsecured Notes for $19.4 million (US$15.6 million), resulting in a $21.0 million (US$16.8 million) gain on extinguishment of debt[61][62] Note 13. SHARE CAPITAL Telesat's total share capital increased slightly from December 31, 2021, to March 31, 2022, primarily due to the settlement of Restricted Share Units (RSUs) into Telesat Public Shares. The company also has outstanding Special Voting Shares and Limited Partnership units Outstanding Shares and Stated Value (As at March 31, 2022 vs. Dec 31, 2021) | Share Type | March 31, 2022 (Number of shares) | March 31, 2022 (Stated value CAD thousands) | December 31, 2021 (Number of shares) | December 31, 2021 (Stated value CAD thousands) | | :-------------------- | :-------------------------------- | :------------------------------------------ | :----------------------------------- | :--------------------------------------------- | | Telesat Public Shares | 11,920,059 | $36,845 | 11,907,246 | $36,501 | | Class C Shares | 112,841 | $6,340 | 112,841 | $6,340 | | Total | 12,032,900 | $43,185 | 12,020,087 | $42,841 | - During Q1 2022, 27,573 Restricted Share Units (RSUs) were settled for 12,813 Telesat Public Shares on a net settlement basis[65] Outstanding Limited Partnership Units (As at March 31, 2022) | LP Unit Type | Number of units | Stated value (CAD thousands) | | :------------------ | :-------------- | :--------------------------- | | Class A and Class B LP Units | 19,428,491 | $53,169 | | Class C LP Units | 18,098,362 | $59,683 | | Total | 37,526,853 | $112,852 | Note 14. NON-CONTROLLING INTEREST Non-controlling interests represent equity interests in Telesat Partnership LP not attributable to Telesat Corporation. As of March 31, 2022, the Corporation held approximately 24% economic interest, with the remaining 76% held by limited partnership unit holders - Non-controlling interests represent equity interests in Telesat Partnership LP not attributable to Telesat Corporation[67] - As of March 31, 2022, Telesat Corporation held approximately 24% economic interest in the Partnership, with non-controlling interests holding the remaining 76% through exchangeable units[67] - Net income attributable to non-controlling interests for 2022 reflects their portion of the Partnership's net income[68] Note 15. EARNINGS PER SHARE Basic and diluted earnings per share calculations reflect the net income attributable to Telesat Corporation shareholders and the weighted average number of shares outstanding, including the effect of diluted securities like stock options and RSUs Net Income Attributable to Telesat Common Shares (Q1 2022 vs. Q1 2021) | Metric (CAD millions) | 2022 | 2021 | Change | % Change | | :--------------------------------------- | :--- | :--- | :----- | :------- | | Net income attributable to Telesat Common Shares | $14.0 | $41.3 | $(27.3) | -66.16% | | Effect of diluted securities | $1.3 | — | $1.3 | N/A | | Diluted net income attributable to Telesat Common Shares | $15.3 | $41.3 | $(26.0) | -62.91% | Weighted Average Common Shares Outstanding (Q1 2022 vs. Q1 2021) | Metric | 2022 | 2021 | Change | % Change | | :------------------------------------------------------- | :----------- | :----------- | :----------- | :------- | | Basic total weighted average number of Telesat Common Shares outstanding | 12,023,077 | 49,546,692 | (37,523,615) | -75.73% | | Effect of diluted securities (Stock options) | 15,321 | 237,810 | (222,489) | -93.56% | | Effect of diluted securities (RSUs) | 1,523,862 | 27,573 | 1,496,289 | 5426.58% | | Diluted total weighted average number of Telesat Common Shares outstanding | 13,562,260 | 49,812,075 | (36,249,815) | -72.77% | Note 16. GOVERNMENT GRANT Telesat recorded $4.2 million in government grant contributions for Q1 2022, related to the Telesat Lightspeed Constellation development, with amounts allocated as a reduction to satellites, property and other equipment, and operating expenses - Telesat has an agreement for a non-refundable government contribution of up to $85 million by July 31, 2023, for the Telesat Lightspeed Constellation[73] Government Grant Recorded (Q1 2022 vs. Q1 2021) | Metric (CAD millions) | 2022 | 2021 | Change | % Change | | :-------------------- | :--- | :--- | :----- | :------- | | Total recorded | $4.2 | $1.6 | $2.6 | 162.50% | - For Q1 2022, $3.0 million was recorded as a reduction to satellites, property and other equipment, and $1.2 million as a reduction to operating expenses[74] Note 17. CAPITAL DISCLOSURES Telesat's Senior Secured Credit Facilities, Senior Secured Notes, and 2026 Senior Secured Notes are secured by substantially all company assets. As of March 31, 2022, the first lien net leverage ratio was 4.66:1.00, well below the maximum test ratio of 5.75:1.00, indicating compliance with debt covenants - The Senior Secured Credit Facilities, Senior Secured Notes, and 2026 Senior Secured Notes are secured by substantially all of the Company's assets, excluding assets of unrestricted subsidiaries[75] - As at March 31, 2022, the first lien net leverage ratio was 4.66:1.00, which is below the maximum test ratio of 5.75:1.00, indicating compliance with covenants[75] - The company manages interest rate risk on variable interest rate debt through interest rate swaps[76] Note 18. FINANCIAL INSTRUMENTS Telesat is exposed to credit, foreign exchange, and interest rate risks, which it manages through various strategies including investing cash with high-quality institutions, using derivative instruments, and monitoring credit exposures. The fair value of financial instruments is determined using a hierarchy of inputs, with most indebtedness and derivatives valued using Level 2 inputs - Maximum exposure to credit risk as at March 31, 2022, was $1,596.2 million, primarily from cash and cash equivalents, and trade receivables[78] - A 5% increase (decrease) in the Canadian dollar against the U.S. dollar would have decreased (increased) net income by $168.6 million and increased (decreased) other comprehensive income by $56.2 million as at March 31, 2022[83] - A 0.25% change in variable interest rates would impact net income by $1.2 million for Q1 2022[86] Fair Value Hierarchy of Financial Assets and Liabilities (As at March 31, 2022) | Item | Fair Value (CAD millions) | Fair Value Hierarchy | | :--------------------------------- | :------------------------ | :------------------- | | Cash and cash equivalents | $1,512.6 | Level 1 | | Trade and other receivables | $68.8 | (3) | | Other long-term financial assets | $14.0 | Level 1, Level 2 | | Other current financial liabilities | $(54.1) | Level 2 | | Indebtedness | $(2,615.9) | Level 2 | Fair Value of Derivative Assets and Liabilities (As at March 31, 2022) | Derivative Type | Other long-term financial assets (CAD thousands) | Other current financial liabilities (CAD thousands) | Total (CAD thousands) | | :------------------ | :----------------------------------------------- | :-------------------------------------------------- | :-------------------- | | Interest rate swaps | — | $(1,955) | $(1,955) | | Prepayment options | $37 | — | $37 | | Total | $37 | $(1,955) | $(1,918) | Note 19. EMPLOYEE BENEFIT PLANS Employee benefit plan expenses for Q1 2022 included $1.7 million in operating expenses and a net interest income of $(0.07) million. The balance sheet reflects both pension plan assets and post-employment benefit liabilities Employee Benefit Plan Expenses (Q1 2022 vs. Q1 2021) | Expense Category (CAD millions) | 2022 (Pension Plans) | 2022 (Other Post-employment Benefit Plans) | 2021 (Pension Plans) | 2021 (Other Post-employment Benefit Plans) | | :------------------------------- | :------------------- | :----------------------------------------- | :------------------- | :----------------------------------------- | | Operating expenses | $1.7 | $0.2 | $2.0 | $0.04 | | Interest (income) expense | $(0.07) | $0.2 | $0.2 | $0.1 | Balance Sheet Obligations for Employee Benefit Plans (As at March 31, 2022) | Item (CAD millions) | Pension Plans (Total) | Other Post-employment Benefit Plans (Total) | | :------------------------------- | :-------------------- | :------------------------------------------ | | Included in other long-term liabilities | $18.0 | $27.3 | | Included in other long-term assets | $30.0 | — | Note 20. SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow information details the composition of cash and cash equivalents, income taxes paid, interest paid, and a reconciliation of liabilities arising from financing activities, including the impact of debt repurchases and foreign exchange Cash and Cash Equivalents Composition (As at March 31, 2022 vs. 2021) | Item (CAD millions) | 2022 | 2021 | Change | % Change | | :------------------ | :--- | :--- | :----- | :------- | | Cash | $1,508.7 | $818.4 | $690.3 | 84.35% | | Short-term investments | $3.9 | $64.7 | $(60.8) | -94.01% | | Total | $1,512.6 | $883.1 | $629.5 | 71.28% | Reconciliation of Liabilities from Financing Activities (Q1 2022) | Item (CAD millions) | Indebtedness | Satellite performance incentive payments | Lease liabilities | | :------------------- | :----------- | :--------------------------------------- | :---------------- | | Balance as at Jan 1, 2022 | $3,792.6 | $30.3 | $35.7 | | Cash outflows | $(14.9) | $(1.4) | $(0.4) | | Gain on extinguishment of debt | $(21.0) | — | — | | Impact of foreign exchange | $(39.7) | $(0.3) | $(0.0) | | Balance as at Mar 31, 2022 | $3,717.2 | $28.7 | $35.3 | Note 21. COMMITMENTS AND CONTINGENT LIABILITIES Telesat has significant off-balance sheet contractual obligations totaling $204.7 million, including property leases, capital commitments for the Lightspeed constellation, and other operating commitments. The company also faces contingent liabilities from customer prepayments, indemnification agreements, and ongoing legal proceedings related to tax assessments in Brazil and Canada, for which no reserves have been established due to a belief in favorable outcomes Off-Balance Sheet Contractual Obligations (As at March 31, 2022) | Obligation Type (CAD millions) | Remaining 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | Total | | :------------------------------ | :------------- | :--- | :--- | :--- | :--- | :--------- | :---- | | Property leases | $0.7 | $1.1 | $1.1 | $1.0 | $1.0 | $11.9 | $16.7 | | Capital commitments | $22.3 | $20.7 | $39.8 | $50.1 | — | — | $133.0 | | Other operating commitments | $22.9 | $9.2 | $7.4 | $4.1 | $2.0 | $9.4 | $55.0 | | Total | $45.9 | $31.0 | $48.2 | $55.3 | $3.0 | $21.3 | $204.7 | - Customer prepayments of $351.9 million (Dec 31, 2021: $368.1 million) are reflected in other current and long-term liabilities, with a portion refundable under certain circumstances[114] - Telesat faces legal proceedings regarding Brazilian tax assessments ($86 million disputed) and Canadian tax reassessments ($11 million disputed) for Scientific Research and Experimental Development claims. The company believes a favorable outcome is more likely than not for both, so no reserves have been established[118][119] Note 22. RELATED PARTY TRANSACTIONS Related party transactions primarily involve inter-group transactions with subsidiaries, which are eliminated on consolidation. Compensation for executives and directors includes short-term benefits, post-employment benefits, and share-based compensation. Transactions with Loral Space & Communications Inc. ceased to be related party transactions after November 18, 2021, when Loral became a consolidated subsidiary - Inter-group transactions with subsidiaries, including satellite services, equipment sales, and management services, are eliminated on consolidation[121] - Compensation for executives and Board level directors includes salaries, bonuses, post-employment benefits, and share-based compensation[122] - Loral Space & Communications Inc. ceased to be a related party after November 18, 2021, becoming a fully consolidated subsidiary[124] Transactions with Loral (Q1 2021) | Metric | Sales of goods and services (CAD thousands) | Purchase of goods and services (CAD thousands) | | :-------------- | :------------------------------------------ | :--------------------------------------------- | | Revenue | $32 | — | | Operating expenses | — | $1,593 | Note 23. Subsequent event In April 2022, Telesat repurchased an additional $35.0 million (US$28.0 million) principal amount of Senior Unsecured Notes for $17.8 million (US$14.2 million), resulting in a $17.5 million (US$14.0 million) gain on extinguishment of debt - In April 2022, Telesat repurchased $35.0 million (US$28.0 million) principal amount of Senior Unsecured Notes for $17.8 million (US$14.2 million)[128] - This repurchase resulted in a $0.4 million (US$0.3 million) write-off of debt issue costs and prepayment options, and a $17.5 million (US$14.0 million) gain on extinguishment of debt[128] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This MD&A provides an overview of Telesat's business, operating highlights, future outlook, and a detailed review of financial performance for the three months ended March 31, 2022. It also discusses liquidity, capital resources, market risks, and non-IFRS financial measures, emphasizing the company's focus on its LEO constellation development and debt management OVERVIEW OF THE BUSINESS Telesat is a leading global satellite services operator, providing mission-critical communications through its 14 geostationary satellites and the Canadian payload on ViaSat-1. The company is developing the Telesat Lightspeed LEO constellation to revolutionize global broadband connectivity and operates under various governmental authorizations - Telesat is a leading global satellite services operator, providing mission-critical communications since the 1960s[145] - The company operates 14 in-orbit geostationary satellites and the Canadian payload on the ViaSat-1 satellite, also managing operations for third-party satellites[148] - Telesat is developing 'Telesat Lightspeed,' a low earth orbit (LEO) satellite constellation, with a Phase 1 LEO satellite launched in 2018 demonstrating low latency broadband capabilities[149] OPERATING HIGHLIGHTS Key operating highlights include the repurchase of Senior Unsecured Notes, a NASA contract award for LEO constellation demonstration, and the renewal of Anik F3 Ku-band capacity with Dish Network and a mobility service provider - Telesat repurchased $40.0 million (US$32.0 million) principal amount of Senior Unsecured Notes in Q1 2022 and an additional $35.0 million (US$28.0 million) in April 2022 for retirement[157][158] - NASA awarded Telesat U.S. Services LLC a US$30.65 million contract to demonstrate Ka-band transmission and space relay connectivity for its Communications Services Project (CSP), paving the way for Telesat Lightspeed network use[159] - An agreement was concluded with Dish Network L.L.C. for the renewal of over half of the Anik F3 Ku-band capacity for a two-year term, with remaining capacity contracted to a mobility service provider[160] FUTURE OUTLOOK Telesat aims to profitably grow its business by increasing satellite utilization and deploying expansion capacity, particularly through the development of its global Telesat Lightspeed constellation, while maintaining operating discipline - Telesat's focus is on profitably growing its business by increasing the utilization of in-orbit satellites and deploying expansion satellite capacity where strong market demand is anticipated[161] - The company is poised to revolutionize global broadband connectivity by developing the Telesat Lightspeed LEO constellation[162] - Telesat actively pursues opportunities to develop new satellites, especially with customers committed to long-term service agreements, and only procures new satellites with a demonstrated need and sound business plan[163] RESULTS OF OPERATIONS Telesat's net income increased significantly in Q1 2022 due to a gain on debt extinguishment and favorable changes in financial instrument fair values, despite a slight revenue decline. Operating expenses rose due to higher share-based compensation and public company costs, while interest expense increased from new debt. Foreign exchange gains remained positive Net Income (Q1 2022 vs. Q1 2021) | Metric (CAD millions) | 2022 | 2021 | Change | % Change | | :-------------------- | :--- | :--- | :----- | :------- | | Net income | $60.6 | $41.3 | $19.3 | 46.73% | - The positive variation in net income was principally due to a positive variation on changes in fair value of financial instruments combined with the gain on extinguishment of debt, partially offset by higher share-based compensation expense and higher interest expense[165] Revenue by Service (Q1 2022 vs. Q1 2021) | Service | 2022 (CAD millions) | 2021 (CAD millions) | % Increase (Decrease) | | :------------------- | :------------------ | :------------------ | :-------------------- | | Broadcast | $97.0 | $99.0 | (2.0)% | | Enterprise | $85.4 | $88.6 | (3.6)% | | Consulting and other | $3.4 | $2.9 | 15.8% | | Total Revenue | $185.8 | $190.5 | (2.5)% | Total Expenses (Q1 2022 vs. Q1 2021) | Expense Category (CAD millions) | 2022 | 2021 | % Increase (Decrease) | | :------------------------------ | :--- | :--- | :-------------------- | | Depreciation | $49.3 | $50.4 | (2.1)% | | Amortization | $3.7 | $4.1 | (10.1)% | | Operating expenses | $64.4 | $40.4 | 59.5% | | Other operating losses, net | — | $0.7 | (95.5)% | | Total expenses | $117.4 | $95.5 | 22.9% | - Gain on extinguishment of debt for Q1 2022 was $21.0 million, resulting from the repurchase of Senior Unsecured Notes[184] - Gain on changes in fair value of financial instruments was $2.4 million in Q1 2022, a positive change of $27.5 million compared to a $25.1 million loss in Q1 2021[186] - Foreign exchange gain for Q1 2022 was $36.1 million, primarily due to a weaker U.S. dollar to Canadian dollar spot rate impacting U.S. dollar denominated indebtedness[188][189] Backlog Telesat's contracted revenue backlog as of March 31, 2022, was approximately $2.0 billion, primarily from long-term satellite capacity agreements, excluding any backlog from the Telesat Lightspeed program - Contracted revenue backlog as at March 31, 2022, was approximately $2.0 billion, excluding any backlog associated with the Telesat Lightspeed program[192] - The majority of the backlog is generated from contractual agreements for satellite capacity, with customers generally unable to terminate without paying substantially all due amounts[192][193] Expected Backlog Recognition (As at March 31, 2022) | Period (CAD millions) | Amount | | :-------------------- | :----- | | Remaining 2022 | $438.5 | | 2023 | $470.8 | | 2024 | $311.5 | | 2025 | $216.4 | | 2026 | $184.7 | | Thereafter | $372.1 | LIQUIDITY AND CAPITAL RESOURCES Telesat maintains strong liquidity with $1.5 billion in cash and short-term investments and available credit. Cash flows from operating activities decreased, while investing activities generated cash from C-band clearing proceeds. Financing activities used cash for debt repurchases. The company's debt facilities are secured by assets, and it is in compliance with financial covenants. Future satellite programs, especially Telesat Lightspeed, will require significant capital, potentially funded through diverse sources - As at March 31, 2022, Telesat had $1,512.6 million in cash and short-term investments, including $1,005.0 million in unrestricted subsidiaries, and approximately US$200.0 million in borrowing availability under its Revolving Credit Facility[195] Cash Flows Summary (Q1 2022 vs. Q1 2021) | Cash Flow Type (CAD millions) | 2022 | 2021 | Change | % Change | | :---------------------------- | :--- | :--- | :----- | :------- | | Operating activities | $43.4 | $99.1 | $(55.7) | -56.21% | | Investing activities | $46.6 | $(20.0) | $66.6 | N/A | | Financing activities | $(12.1) | $(2.3) | $(9.8) | 426.09% | - Cash generated from investing activities in Q1 2022 included $64.7 million from C-band clearing proceeds, partially offset by $8.4 million for Telesat Lightspeed and $9.6 million for other equipment[197] - The Government of Canada agreed to contribute up to $85.0 million to support the Telesat Lightspeed constellation development[201] - Telesat's Senior Secured Credit Facilities, Senior Secured Notes, and 2026 Senior Secured Notes are secured by substantially all company assets, and the company was in compliance with all debt covenants as of March 31, 2022[209][220] - The U.S. TLB Facility has US$1,552.8 million outstanding as of March 31, 2022, bearing floating interest rates[212] - Telesat repurchased $40.0 million (US$32.0 million) principal amount of Senior Unsecured Notes in March 2022 and an additional $35.0 million (US$28.0 million) in April 2022, resulting in gains on extinguishment of debt[217][219] MARKET RISK Telesat is exposed to credit, foreign exchange, and interest rate risks. Credit risk is mitigated by investing with high-quality institutions and monitoring receivables. Foreign exchange risk, primarily from U.S. dollar denominated debt, revenue, and expenses, is managed through derivatives, though none were outstanding as of March 31, 2022. Interest rate risk on variable debt is hedged with interest rate swaps - Credit risk is managed by investing cash and short-term investments with high-quality financial institutions and through credit evaluation processes for trade receivables[228] - Foreign exchange risk primarily stems from U.S. dollar denominated indebtedness, cash, and a portion of revenue and expenses[229] U.S. Dollar Denominated Revenue and Expenses (Q1 2022 vs. Q1 2021) | Metric | 2022 | 2021 | | :----------------------- | :----- | :----- | | Revenue | 53.5% | 51.5% | | Operating expenses | 27.8% | 38.6% | | Interest on indebtedness | 100.0% | 100.0% | - A 5% increase (decrease) in the U.S. dollar against the Canadian dollar would increase (decrease) indebtedness and (decrease) increase net income by $186.0 million as at March 31, 2022[232] - Interest rate risk on variable rate debt is hedged using interest rate swaps; as of March 31, 2022, one swap for US$450.0 million of U.S. TLB Facility borrowings was outstanding at a fixed rate of 2.04%[238] NON-IFRS MEASURES Telesat uses non-IFRS measures like Adjusted EBITDA and Consolidated EBITDA for Covenant Purposes to provide supplemental insights into operating performance and compliance with debt covenants. Adjusted EBITDA decreased in Q1 2022 due to lower revenues and higher operating expenses. The company was in compliance with its Consolidated Total Debt and Consolidated Total Secured Debt to Consolidated EBITDA for Covenant Purposes ratios as of March 31, 2022 - Adjusted EBITDA is a non-IFRS measure used to compare operating results by excluding depreciation, amortization, interest, taxes, and certain other expenses[242][243] Adjusted EBITDA (Q1 2022 vs. Q1 2021) | Metric (CAD millions) | 2022 | 2021 | Change | % Change | | :-------------------- | :--- | :--- | :----- | :------- | | Adjusted EBITDA | $145.6 | $152.0 | $(6.4) | -4.21% | | Revenue | $185.8 | $190.5 | $(4.7) | -2.47% | | Adjusted EBITDA Margin | 78.4% | 79.8% | -1.4% | -1.75% | - Consolidated EBITDA for Covenant Purposes is used to assess compliance with financial ratio covenants under Senior Secured Credit Facilities[247][248] Consolidated Debt Ratios for Covenant Purposes (As at March 31, 2022) | Ratio | Value | | :----------------------------------------------------------- | :-------- | | Consolidated Total Debt for Covenant Purposes to Consolidated EBITDA | 5.67:1.00 | | Consolidated Total Secured Debt to Consolidated EBITDA for Covenant Purposes | 4.66:1.00 | - Telesat was in compliance with its debt covenants as of March 31, 2022[260] Unaudited Interim Condensed Consolidating Financial Information This section provides unaudited interim condensed consolidating financial statements, including statements of income, comprehensive income, balance sheets, and cash flows, which reflect the investments of Telesat in its Issuers, Guarantor, and Non-Guarantor subsidiaries using the equity method of accounting - The consolidating financial information reflects investments using the equity method of accounting for Telesat in Issuers, and Issuers/Guarantors in their respective subsidiaries[261] - Balances of Telesat Partnership include those associated with Telesat Partnership LP, Telesat CanHoldco Corporation, Telesat Can ULC, Loral Space & Communications Inc., and Loral Skynet Corporation[262] CURRENT SHARE INFORMATION As of March 31, 2022, Telesat had 12,032,900 total shares outstanding, comprising Telesat Public Shares and Class C shares, with a total stated value of $43.185 million. Additionally, 37,526,853 Limited Partnership units were outstanding Outstanding Shares and Stated Value (As at March 31, 2022) | Share Type | Number of shares | Stated value (CAD thousands) | | :------------------ | :--------------- | :--------------------------- | | Telesat Public shares | 11,920,059 | $36,845 | | Class C shares | 112,841 | $6,340 | | Total | 12,032,900 | $43,185 | - During Q1 2022, 27,573 Restricted Share Units (RSUs) were settled for 12,813 Telesat Public Shares on a net settlement basis[272] Outstanding Limited Partnership Units (As at March 31, 2022) | LP Unit Type | Number of units | Stated value (CAD thousands) | | :------------------ | :-------------- | :--------------------------- | | Class A and Class B LP Units | 19,428,491 | $53,169 | | Class C LP Units | 18,098,362 | $59,683 | | Total | 37,526,853 | $112,852 | CRITICAL ACCOUNTING JUDGMENTS AND ESTIMATES The preparation of financial statements requires management to make estimates and assumptions, which are consistent with those outlined in the 2021 consolidated financial statements, with an update regarding the judgment required for Software as a Service (SaaS) arrangements - The critical accounting judgments and estimates are consistent with those in the December 31, 2021 consolidated financial statements[275] - Management judgment is required to determine whether configuration or customization of SaaS results in an intangible asset for Telesat[276] ACCOUNTING STANDARDS Telesat retroactively adopted the IFRIC agenda decision on Software as a Service (SaaS) arrangements, impacting prior period financial statements. The company is also evaluating future amendments to IAS 1, which will affect disclosure levels, and IAS 12, which is not expected to impact consolidated financial statements - Telesat retroactively adopted the IFRIC agenda decision clarifying accounting for Software as a Service (SaaS) arrangements[278] Impact of SaaS Accounting Policy Change on Balance Sheet (Dec 31, 2021) | Item | Impact (CAD thousands) | | :--------------------------------- | :--------------------- | | Satellites, property and other equipment | $(2,087) | | Intangible assets | $(1,419) | | Accumulated earnings | $3,506 | - Amendments to IAS 1 (effective Jan 1, 2023) will require disclosure of material accounting policies, impacting the level of disclosures in financial statements[279][281] - Amendments to IAS 12 (effective Jan 1, 2023) clarify deferred tax recognition but will have no impact on Telesat's consolidated financial statements[282][283] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section refers to the detailed discussion of market risks, including credit, foreign exchange, and interest rate risks, provided in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and qualitative disclosures about market risk are discussed in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, under the 'Market Risk' section[284] PART II. OTHER INFORMATION This section contains other required information, including legal proceedings, risk factors, equity sales, defaults, and exhibits Item 1. Legal Proceedings Telesat refers to its Annual Report on Form 20-F for the fiscal year ended December 31, 2021, for information on legal proceedings, noting no material developments since that filing - Legal proceedings are discussed in Telesat Canada's Annual Report on Form 20-F for the fiscal year ended December 31, 2021[286] - There have been no material developments in those proceedings since the filing of the Annual Report[286] Item 1A. Risk Factors Telesat's business is subject to significant known and unknown risks, with the most significant summarized in its Annual Report on Form 20-F. No material changes to these risk factors have occurred since that filing - The most significant known risks and uncertainties are summarized in the 'Risk Factors' section of Telesat Canada's Annual Report on Form 20-F for the fiscal year ended December 31, 2021[287] - There have been no material changes to those risk factors since the filing of that report[287] - Additional unknown or currently immaterial risks and uncertainties may also materially adversely affect the business[288] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report for the period - No unregistered sales of equity securities and use of proceeds to report[289] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities to report for the period - No defaults upon senior securities to report[290] Item 4. Reserved This item is reserved and contains no information - This item is reserved[291] Item 5. Other Information There is no other information to report for the period - No other information to report[291] Item 6. Exhibits There are no exhibits to report for the period - No exhibits to report[292]