Telesat(TSAT) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Telesat Corporation's Q1 2023 unaudited interim condensed consolidated financial statements, including income, equity, balance sheets, cash flows, and detailed notes Unaudited Interim Condensed Consolidated Statements of Income (Loss) | (in thousands of Canadian dollars, except per share amounts) | 2023 | 2022 | | :------------------------------------------------ | :----- | :----- | | Revenue | $183,422 | $185,769 | | Operating income | $80,236 | $68,367 | | Interest expense | $(68,873) | $(48,503) | | Gain on extinguishment of debt | — | $21,030 | | Interest and other income | $15,467 | $660 | | Gain (loss) on foreign exchange | $10,136 | $36,147 | | Net income (loss) | $28,633 | $60,630 | | Net income (loss) per common share (Basic) | $0.62 | $1.16 | | Net income (loss) per common share (Diluted) | $0.60 | $1.13 | Unaudited Interim Condensed Consolidated Statements of Comprehensive Income (Loss) | (in thousands of Canadian dollars) | 2023 | 2022 | | :--------------------------------- | :----- | :----- | | Net income (loss) | $28,633 | $60,630 | | Foreign currency translation adjustments | $(5,457) | $(17,543) | | Total comprehensive income (loss) | $23,176 | $43,087 | Unaudited Interim Condensed Consolidated Statements of Changes in Shareholders' Equity | (in thousands of Canadian dollars) | March 31, 2023 | March 31, 2022 | | :--------------------------------- | :------------- | :------------- | | Total Telesat Corporation shareholders' equity | $510,505 | $431,479 | | Non-controlling interest | $1,356,795 | $1,331,654 | | Total shareholders' equity | $1,867,300 | $1,763,133 | Unaudited Interim Condensed Consolidated Balance Sheets | (in thousands of Canadian dollars) | March 31, 2023 | December 31, 2022 | | :--------------------------------- | :------------- | :---------------- | | Total current assets | $1,845,834 | $1,788,288 | | Total assets | $6,504,963 | $6,479,593 | | Total current liabilities | $192,022 | $171,396 | | Long-term indebtedness | $3,839,510 | $3,850,081 | | Total liabilities | $4,637,663 | $4,643,891 | | Total shareholders' equity | $1,867,300 | $1,835,702 | Unaudited Interim Condensed Consolidated Statements of Cash Flows | (in thousands of Canadian dollars) | 2023 | 2022 | | :--------------------------------- | :----- | :----- | | Net cash from operating activities | $62,649 | $43,443 | | Net cash (used in) generated from investing activities | $(24,959) | $46,598 | | Net cash (used in) generated from financing activities | $(2,052) | $(12,071) | | Changes in cash and cash equivalents | $31,785 | $62,997 | | Cash and cash equivalents, end of period | $1,709,577 | $1,512,590 | Notes to the Unaudited Interim Condensed Consolidated Financial Statements These notes provide detailed explanations for the interim condensed consolidated financial statements, covering company background, accounting policies, segment performance, operating expenses, debt, equity, and other financial disclosures 1. BACKGROUND OF THE COMPANY - Telesat Corporation, incorporated in October 2020 and headquartered in Ottawa, Canada, is a global satellite operator providing mission-critical communications solutions, operating a fleet of 15 geostationary satellites and the Canadian payload on Viasat-1[13][14] - The company is developing a low earth orbit (LEO) satellite constellation called 'Telesat Lightspeed,' with the first LEO satellite successfully launched in January 2018 to demonstrate low latency broadband capabilities[15] - Telesat Corporation began trading on Nasdaq and TSX on November 19, 2021, following a transaction where Loral Space & Communications Inc. and Public Sector Pension Investment Board exchanged interests for equity in the new public holding company[16][17] 2. BASIS OF PRESENTATION - The financial statements are prepared in accordance with International Accounting Standard 34, Interim Financial Reporting (IAS 34), and should be read in conjunction with the December 31, 2022 consolidated financial statements[20][21] 3. MATERIAL ACCOUNTING POLICY INFORMATION - The IASB amended IAS 1, Presentation of Financial Statements, in October 2022 to improve information on long-term debt covenants, specifying that only covenants to be complied with on or before the reporting date affect debt classification[24][25](index=25&type=chunk] - The amendments are effective for annual reporting periods beginning on or after January 1, 2024, with early adoption permitted[26] 4. SEGMENT INFORMATION - Telesat operates in a single segment, providing satellite-based services globally, categorized into Broadcast, Enterprise, and Consulting and other services[27][28] Revenue by Service Type (in thousands of Canadian dollars) | Three months ended March 31, | 2023 ($) | 2022 ($) | | :--------------------------- | :------- | :------- | | Broadcast | 85,578 | 96,983 | | Enterprise | 95,091 | 85,408 | | Consulting and other | 2,753 | 3,378 | | Total Revenue | 183,422 | 185,769 | Enterprise Equipment Sales (in thousands of Canadian dollars) | Three months ended March 31, | 2023 ($) | 2022 ($) | | :--------------------------- | :------- | :------- | | Enterprise equipment sales | 7,305 | 3,356 | Revenue by Geographic Region (in thousands of Canadian dollars) | Three months ended March 31, | 2023 ($) | 2022 ($) | | :--------------------------- | :------- | :------- | | Canada | 88,723 | 81,620 | | United States | 59,037 | 74,963 | | Latin America & Caribbean | 14,462 | 12,276 | | Asia & Australia | 12,147 | 9,014 | | Europe, Middle East & Africa | 9,053 | 7,896 | | Total Revenue | 183,422 | 185,769 | - For both Q1 2023 and Q1 2022, two significant customers each accounted for over 10% of consolidated revenue[32] 5. OPERATING EXPENSES Operating Expenses Breakdown (in thousands of Canadian dollars) | Three months ended March 31, | 2023 ($) | 2022 ($) | | :--------------------------- | :------- | :------- | | Compensation and employee benefits | 29,974 | 43,066 | | Other operating expenses | 12,586 | 13,458 | | Cost of sales | 10,912 | 7,842 | | Operating expenses | 53,472 | 64,366 | - Compensation and employee benefits include salaries, bonuses, commissions, post-employment benefits, and share-based compensation[35] - Other operating expenses cover general and administrative, marketing, in-orbit insurance, professional fees, and facility costs[36] - Cost of sales includes third-party satellite capacity, equipment sales, and other direct costs[36] 6. INTEREST EXPENSE Interest Expense Breakdown (in thousands of Canadian dollars) | Three months ended March 31, | 2023 ($) | 2022 ($) | | :--------------------------- | :------- | :------- | | Interest on indebtedness | 64,181 | 41,194 | | Interest on derivative instruments | — | 1,839 | | Interest on satellite performance incentive payments | 396 | 477 | | Interest on significant financing component | 4,110 | 4,411 | | Interest on employee benefit plans | (193) | 117 | | Interest on leases | 379 | 465 | | Interest expense | 68,873 | 48,503 | 7. INCOME TAXES Tax Expense (Recovery) (in thousands of Canadian dollars) | Three months ended March 31, | 2023 ($) | 2022 ($) | | :--------------------------- | :------- | :------- | | Current tax expense | 13,749 | 21,625 | | Deferred tax recovery | (5,416) | (2,196) | | Tax expense (recovery) | 8,333 | 19,429 | Income Before Taxes and Effective Tax Rate | Three months ended March 31, | 2023 | 2022 | | :--------------------------- | :----- | :----- | | Income (loss) before income taxes | $36,966 | $80,059 | | Statutory income tax rates | 26.44% | 26.46% | | Effective income tax rate | 22.54% | 24.27% | 8. SATELLITES, PROPERTY AND OTHER EQUIPMENT - Additions to satellites, property, and other equipment for Q1 2023 totaled $21.8 million, primarily due to geostationary satellite and LEO program acquisitions, an increase from $7.5 million in the prior year[39] 9. GOODWILL AND INTANGIBLE ASSETS - Goodwill and indefinite life intangible assets (excluding trade name) are tested for impairment annually or more frequently if circumstances indicate[40] - No impairment was recognized on goodwill, orbital slots, or trade name in Q1 2023, as assumptions from the end of 2022 valuation remained unchanged[41][42] 10. LEASE LIABILITIES Expected Undiscounted Contractual Cash Flows for Lease Liabilities (in thousands of Canadian dollars) | (in thousands of Canadian dollars) | Remaining 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | Total | | :--------------------------------- | :------------- | :--- | :--- | :--- | :--- | :--------- | :---- | | Expected undiscounted contractual cash flows | $2,696 | $3,473 | $3,192 | $2,957 | $2,883 | $33,695 | $48,896 | - The total undiscounted contractual cash flows for lease liabilities as of March 31, 2023, were $48.9 million, including $14.4 million in interest payments[43] 11. INDEBTEDNESS - Telesat Canada's Senior Secured Credit Facilities include a $200.0 million US dollar revolving credit facility maturing in December 2024 and a Term Loan B – U.S. Facility of US$1,908.5 million maturing in December 2026[44] - Outstanding notes include US$550 million of 6.5% Senior Unsecured Notes due October 2027, US$400 million of 4.875% Senior Secured Notes due June 2027, and US$500 million of 5.625% Senior Secured Notes due December 2026[45][48][49] - In 2022, Telesat repurchased Senior Unsecured Notes with a principal amount of $202.1 million (US$160.0 million) for $97.2 million (US$77.0 million), resulting in a $106.9 million (US$84.5 million) gain on extinguishment of debt[47] Long-term Indebtedness (in thousands of Canadian dollars) | (in thousands of Canadian dollars) | March 31, 2023 | December 31, 2022 | | :--------------------------------- | :------------- | :---------------- | | Term Loan B – U.S. Facility | $2,098,785 | $2,104,685 | | Senior Unsecured Notes | $527,124 | $528,606 | | 2026 Senior Secured Notes | $675,800 | $677,700 | | Senior Secured Notes | $540,640 | $542,160 | | Long-term indebtedness | $3,839,510 | $3,850,081 | 12. SHARE CAPITAL Share Capital (in thousands of Canadian dollars) | | March 31, 2023 | December 31, 2022 | | :--------------------------- | :------------- | :---------------- | | Telesat Public Shares | | | | Number of shares | 13,279,039 | 12,692,450 | | Stated value ($) | 42,298 | 40,214 | | Class C Shares | | | | Number of shares | 112,841 | 112,841 | | Stated value ($) | 6,340 | 6,340 | | Total Share Capital | | | | Number of shares | 13,391,880 | 12,805,291 | | Stated value ($) | 48,638 | 46,554 | - During Q1 2023, 103,071 Restricted Share Units (RSUs) were settled for 54,166 Telesat Public Shares, and 532,423 Telesat Public Shares were issued in exchange for an equal number of Class B Limited Partnership units (LP Units)[53] LP Units (in thousands of Canadian dollars) | | March 31, 2023 | December 31, 2022 | | :--------------------------- | :------------- | :---------------- | | Class A and Class B LP Units | | | | Number of units | 18,321,842 | 18,854,265 | | Stated value ($) | 50,141 | 51,598 | | Class C LP Units | | | | Number of units | 18,098,362 | 18,098,362 | | Stated value ($) | 38,893 | 38,893 | | Total LP Units | | | | Number of units | 36,420,204 | 36,952,627 | | Stated value ($) | 89,034 | 90,491 | 13. NON-CONTROLLING INTEREST - As of March 31, 2023, Telesat Corporation held approximately 27% economic interest in the Partnership, with the remaining 73% held by limited partnership unit holders, compared to 26% and 74% respectively at December 31, 2022[55] 14. SHARE-BASED COMPENSATION PLANS - Telesat Corporation adopted an Omnibus Long-Term Incentive Plan in November 2021, allowing for various equity-based awards including stock options, RSUs, PSUs, and DSUs, which can be settled for Public Shares or cash[57] Stock Options Outstanding | | Historic Plan (Number of options) | Omnibus Plan (Number of options) | | :-------------------------- | :-------------------------------- | :------------------------------- | | Outstanding, January 1, 2023 | 793,667 | 285,149 | | Forfeited | (5,568) | (10,080) | | Outstanding March 31, 2023 | 788,099 | 275,069 | Restricted Share Units (RSUs) Outstanding | Historic Plan (RSUs) | RSUs with time criteria | RSUs with time and performance criteria | | :-------------------------- | :---------------------- | :-------------------------------------- | | Outstanding, January 1, 2023 | 973,338 | 124,080 | | Forfeited | (33,088) | — | | Outstanding, March 31, 2023 | 940,250 | 124,080 | Omnibus Plan Awards Outstanding | Omnibus Plan | RSUs with time criteria | PSUs with time and performance criteria | DSUs | | :-------------------------- | :---------------------- | :-------------------------------------- | :--- | | Outstanding, January 1, 2023 | 351,071 | 140,583 | 46,576 | | Granted | — | — | 19,666 | | Settled | (103,071) | — | — | | Forfeited | (8,132) | (7,455) | — | | Outstanding, March 31, 2023 | 239,868 | 133,128 | 66,242 | 15. EARNINGS PER SHARE Net Income (Loss) Attributable to Telesat Common Shares (in thousands of Canadian dollars) | Three months ended March 31 | 2023 ($) | 2022 ($) | | :-------------------------- | :------- | :------- | | Net income (loss) attributable to Telesat Common Shares | 8,065 | 13,983 | | Diluted net income (loss) attributable to Telesat Common Shares | 8,783 | 15,325 | Weighted Average Number of Telesat Common Shares Outstanding | Three months ended March 31 | 2023 | 2022 | | :-------------------------- | :--- | :--- | | Basic total weighted average number of Telesat Common Shares outstanding | 13,022,905 | 12,023,077 | | Diluted total weighted average number of Telesat Common Shares outstanding | 14,638,067 | 13,562,260 | 16. GOVERNMENT GRANT - Telesat has an agreement for a non-refundable government contribution of up to $85 million for the Telesat Lightspeed constellation until July 31, 2023[63][64] - For Q1 2023, $1.7 million was recorded, with $0.7 million reducing satellites, property, and other equipment, and $1.0 million reducing operating expenses[65] 17. CAPITAL DISCLOSURES - The Senior Secured Credit Facilities, Senior Secured Notes, and 2026 Senior Secured Notes are secured by substantially all of the Company's assets, excluding unrestricted subsidiaries[66] - As of March 31, 2023, the first lien net leverage ratio was 5.36:1.00, below the maximum test ratio of 5.75:1.00[66] 18. FINANCIAL INSTRUMENTS - As of March 31, 2023, the maximum exposure to credit risk was $1,771.3 million, primarily from cash and cash equivalents, and trade and other receivables[69] - The company mitigates credit risk by investing with high-quality financial institutions and through credit evaluation processes for receivables[70] - The company is exposed to foreign exchange risk, mainly from its U.S. dollar denominated indebtedness, cash, and short-term investments[73] - A 5% increase (decrease) in the U.S. dollar against the Canadian dollar would have decreased (increased) net income (loss) by $169.6 million and increased (decreased) other comprehensive income (loss) by $57.7 million as of March 31, 2023[74] - Interest rate risk arises from variable interest rate indebtedness[75] - A 0.25% change in interest rates on variable rate indebtedness would result in a $1.3 million increase or decrease to net income (loss) for Q1 2023[76] Contractual Cash Flows for Financial Liabilities (in thousands of Canadian dollars) | (in thousands of Canadian dollars) | Carrying amount | Contractual cash flows (undiscounted) | | :--------------------------------- | :-------------- | :------------------------------------ | | Trade and other payables | $43,462 | $43,462 | | Satellite performance incentive payments | $23,664 | $28,908 | | Indebtedness | $3,905,677 | $4,907,441 | | Total | $3,976,498 | $4,983,506 | Fair Value of Financial Instruments (in thousands of Canadian dollars) | As at March 31, 2023 | Amortized cost ($) | Fair Value ($) | Fair value hierarchy | | :------------------------------- | :----------------- | :------------- | :------------------- | | Cash and cash equivalents | 1,709,577 | 1,709,577 | Level 1 | | Other current financial assets | 474 | 474 | Level 1 | | Other long-term financial assets | 9,418 | 9,418 | Level 1 | | Other current financial liabilities | (72,107) | (72,719) | Level 2 | | Other long-term financial liabilities | (18,580) | (17,939) | Level 2 | | Indebtedness | (3,842,349) | (1,910,438) | Level 2 | - The fair value of indebtedness is based on market transactions and quotations, excluding deferred financing costs[91] - As of March 31, 2023, the fair value of the Term Loan B – U.S. Facility was 53.00% of face value, Senior Unsecured Notes 30.88%, Senior Secured Notes 51.71%, and 2026 Senior Secured Notes 52.64%[91] 19. EMPLOYEE BENEFIT PLANS Employee Benefit Plan Expenses (in thousands of Canadian dollars) | Three months ended March 31, 2023 | Pension Plans (Canadian $) | Pension Plans (US $) | Total Pension Plans ($) | Other Post-employment Benefit Plans (Canadian $) | Other Post-employment Benefit Plans (US $) | Total Other Post-employment Benefit Plans ($) | | :-------------------------------- | :----------------------- | :------------------- | :---------------------- | :----------------------------------------------- | :----------------------------------------- | :-------------------------------------------- | | Operating expenses | 1,131 | 171 | 1,302 | 117 | — | 117 | | Interest (income) expense | (573) | 142 | (431) | 232 | 6 | 238 | Employee Benefit Plan Liabilities and Assets (in thousands of Canadian dollars) | As at March 31, 2023 | Pension Plans (Canadian $) | Pension Plans (US $) | Total Pension Plans ($) | Other Post-employment Benefit Plans (Canadian $) | Other Post-employment Benefit Plans (US $) | Total Other Post-employment Benefit Plans ($) | | :------------------- | :----------------------- | :------------------- | :---------------------- | :----------------------------------------------- | :----------------------------------------- | :-------------------------------------------- | | Included in other long-term liabilities | — | 11,399 | 11,399 | 18,077 | 3,751 | 21,828 | | Included in other long-term assets | 46,855 | — | 46,855 | — | — | — | 20. SUPPLEMENTAL CASH FLOW INFORMATION Cash and Cash Equivalents (in thousands of Canadian dollars) | As at March 31, | 2023 ($) | 2022 ($) | | :-------------- | :------- | :------- | | Cash | 1,630,473 | 1,508,720 | | Short-term investments | 79,104 | 3,870 | | Cash and cash equivalents | 1,709,577 | 1,512,590 | Income Taxes and Interest Paid (in thousands of Canadian dollars) | Three months ended March 31, | 2023 ($) | 2022 ($) | | :--------------------------- | :------- | :------- | | Income taxes paid, net of income taxes received | (17,510) | (29,471) | | Interest paid, net of interest received | (24,153) | (22,109) | Reconciliation of Liabilities from Financing Activities (in thousands of Canadian dollars) | Reconciliation of liabilities from financing activities | Indebtedness ($) | Satellite performance incentive payments ($) | Lease liabilities ($) | | :-------------------------------------- | :--------------- | :------------------------------------------- | :-------------------- | | Balance as at January 1, 2023 | 3,850,081 | 25,124 | 34,106 | | Cash outflows | — | (1,529) | (523) | | Impact of foreign exchange | (10,802) | (71) | (10) | | Balance as at March 31, 2023 | 3,839,510 | 23,524 | 33,563 | Non-Cash Activities (in thousands of Canadian dollars) | Three months ended March 31, | 2023 ($) | 2022 ($) | | :--------------------------- | :------- | :------- | | Net change in operating assets and liabilities | (21,061) | (35,194) | | Non-cash investing activities (Satellites, property and other equipment) | 977 | (2,617) | 21. COMMITMENTS AND CONTINGENT LIABILITIES Off-Balance Sheet Contractual Obligations (in thousands of Canadian dollars) | Off-balance sheet contractual obligations as at March 31, 2023 ($) | Remaining 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | Total | | :------------------------------------------------- | :------------- | :--- | :--- | :--- | :--- | :--------- | :---- | | Property leases | 748 | 1,114 | 1,033 | 1,032 | 986 | 11,192 | 16,105 | | Capital commitments | 49,334 | 42,981 | 54,199 | — | — | — | 146,514 | | Other operating commitments | 32,561 | 25,657 | 15,856 | 6,543 | 4,144 | 12,096 | 96,857 | | Total | 82,643 | 69,752 | 71,088 | 7,575 | 5,130 | 23,288 | 259,476 | - Total outstanding capital commitments for the Telesat Lightspeed constellation and other capital expenditures were $146.5 million as of March 31, 2023[99][100] - Customer prepayments for service agreements, a portion of which is refundable, totaled $313.5 million as of March 31, 2023[101] - Telesat is involved in legal proceedings, including a dispute with Brazilian tax authorities for $95.2 million (including interest and penalties) related to revenue characterization[108] - The company believes a favorable outcome is more likely than not and has not established a reserve[108] 22. RELATED PARTY TRANSACTIONS - Inter-group transactions with subsidiaries, including satellite services, equipment sales, and management services, are eliminated on consolidation[110] - Compensation for executives and Board directors includes short-term benefits, post-employment benefits, and share-based compensation[111] - Contributions to defined benefit pension plans for Q1 2023 were $0.3 million, down from $1.3 million in Q1 2022[113] 23. SUBSEQUENT EVENTS - In April 2023 and up to May 10, 2023, Telesat repurchased Senior Secured Notes, 2026 Senior Secured Notes, and Senior Unsecured Notes with a principal amount of US$48.2 million, US$37.2 million, and US$17.7 million, respectively, at an aggregate cost of US$56.0 million[114] - On May 9, 2023, Telesat Canada amended its Credit Agreement to replace LIBOR-based benchmark rates with SOFR-based benchmark rates, adjusting interest margins for Revolving Facility and Term Loan B Facility loans[115] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis of Telesat Corporation's Q1 2023 financial condition and operational results, detailing business, outlook, and key financial metrics OVERVIEW OF THE BUSINESS - Telesat is a global satellite services operator, providing mission-critical communications through its fleet of 15 geostationary satellites and the Canadian payload on ViaSat-1[132][133] - The business is capital-intensive, with long-term contracts providing predictable revenue[134] - The company is developing 'Telesat Lightspeed,' a LEO satellite constellation designed for global broadband connectivity, with initial testing demonstrating low latency broadband capabilities[135] - Revenue is primarily derived from video and data services using satellite transponder capacity, ground-based services, equipment sales, network management, and consulting[137] - Operating expenses include labor, in-orbit insurance, and third-party contractor services[140] FUTURE OUTLOOK - Telesat aims to profitably grow its business by increasing utilization of in-orbit satellites and deploying expansion capacity, leveraging its spectrum rights, customer service, and technical expertise[143] - A key focus is the development of the Telesat Lightspeed LEO constellation to revolutionize global broadband connectivity[144] - The company prioritizes developing new satellites in conjunction with customers committed to long-term service agreements and maintains operating discipline while pursuing expansion opportunities[145][146] RESULTS OF OPERATIONS - Net income decreased by $32.0 million to $28.6 million for Q1 2023 compared to $60.6 million in Q1 2022, primarily due to the prior year's gain on extinguishment of debt, higher interest expense, and lower foreign exchange gain, partially offset by increased interest income[147] Revenue Revenue by Service Type (in millions of Canadian dollars) | ($ millions) | March 31, 2023 | March 31, 2022 | % Increase (Decrease) | | :----------- | :------------- | :------------- | :-------------------- | | Broadcast | $85.6 | $97.0 | (11.8)% | | Enterprise | $95.1 | $85.4 | 11.3% | | Consulting and other | $2.8 | $3.4 | (18.5)% | | Total Revenue | $183.4 | $185.8 | (1.3)% | - Broadcast revenue decreased by $11.4 million due to reduced revenue from a North American DTH customer, partially offset by favorable U.S. dollar conversion[150] - Enterprise revenue increased by $9.7 million, driven by higher equipment sales to Canadian Government and increased services in the aero and maritime markets[151] - Consulting and other revenue decreased by $0.6 million due to reduced activity[152] Expenses Expenses Breakdown (in millions of Canadian dollars) | ($ millions) | March 31, 2023 | March 31, 2022 | % Increase (Decrease) | | :----------- | :------------- | :------------- | :-------------------- | | Depreciation | $46.4 | $49.3 | (5.9)% | | Amortization | $3.4 | $3.7 | (9.1)% | | Operating expenses | $53.5 | $64.4 | (16.9)% | | Total expenses | $103.2 | $117.4 | (12.1)% | - Depreciation decreased by $2.9 million due to the Anik F3 satellite reaching the end of its useful life, partially offset by depreciation on the newly acquired Anik F4[154] - Amortization decreased by $0.3 million due to reduced amortization on revenue backlog[155] - Total operating expenses decreased by $10.9 million, primarily from a $13.1 million decrease in compensation and employee benefits due to lower non-cash share-based compensation, and a $0.9 million decrease in other operating expenses due to lower insurance costs[157][158] - Cost of sales increased by $3.1 million due to higher equipment sales to the Canadian Government[159] Interest Expense Interest Expense (in millions of Canadian dollars) | ($ millions) | March 31, 2023 | March 31, 2022 | % Increase (Decrease) | | :----------- | :------------- | :------------- | :-------------------- | | Debt service costs | $64.2 | $43.0 | 49.1% | | Total Interest expense | $68.9 | $48.5 | 42.0% | - Debt service costs increased by $21.1 million, mainly due to higher interest rates on the U.S. TLB Facility and unfavorable foreign exchange impact, partially offset by debt repurchases in 2022 and the maturity of an interest rate swap[161] Gain on Extinguishment of Debt Gain on Extinguishment of Debt (in millions of Canadian dollars) | ($ millions) | March 31, 2023 | March 31, 2022 | | :----------- | :------------- | :------------- | | Gain on extinguishment of debt | $— | $21.0 | - No gain on extinguishment of debt was recorded in Q1 2023, compared to a $21.0 million gain in Q1 2022 from the repurchase of Senior Unsecured Notes[166] Interest and Other Income Interest and Other Income (in millions of Canadian dollars) | ($ millions) | March 31, 2023 | March 31, 2022 | | :----------- | :------------- | :------------- | | Interest and other income | $15.5 | $0.7 | - Interest and other income increased by $14.8 million, driven by higher interest rates earned on increased cash and cash equivalent balances[167] Foreign Exchange and Derivatives Foreign Exchange and Derivatives (in millions of Canadian dollars) | ($ millions) | March 31, 2023 | March 31, 2022 | | :----------- | :------------- | :------------- | | Gain (loss) on changes in fair value of financial instruments | $— | $2.4 | | Gain (loss) on foreign exchange | $10.1 | $36.1 | - Foreign exchange gain decreased by $26.0 million, from $36.1 million in Q1 2022 to $10.1 million in Q1 2023[169] - This decrease was primarily due to a weaker U.S. dollar to Canadian dollar spot rate impacting U.S. dollar denominated indebtedness[170][171] Income Taxes Income Taxes (in millions of Canadian dollars) | ($ millions) | March 31, 2023 | March 31, 2022 | | :----------- | :------------- | :------------- | | Current tax expense | $13.7 | $21.6 | | Deferred tax recovery | $(5.4) | $(2.2) | | Tax expense (recovery) | $8.3 | $19.4 | - Tax expense decreased by $11.1 million, mainly due to higher interest expense, lower foreign exchange gains, and the absence of prior year's gain on extinguishment of debt[172] Backlog - As of March 31, 2023, contracted revenue backlog was approximately $1.7 billion, excluding any backlog from the Telesat Lightspeed program[173] - The majority of the backlog is from long-term service contracts for satellite capacity[173] - Customers may terminate agreements for in-orbit satellite failure, potentially requiring repayment of prepayments, which would be funded by insurance, cash, or credit facilities[174] Contracted Revenue Backlog (in millions of Canadian dollars) | ($ millions) | Remaining 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | | :----------- | :------------- | :--- | :--- | :--- | :--- | :--------- | | Backlog | $438.6 | $388.2 | $261.5 | $196.5 | $128.8 | $282.4 | LIQUIDITY AND CAPITAL RESOURCES Cash and Available Credit - As of March 31, 2023, Telesat had $1,709.6 million in cash and short-term investments, including $1,015.8 million held in unrestricted subsidiaries, and approximately US$200.0 million available under its Revolving Credit Facility[176] Cash Flows generated from Operating Activities - Cash generated from operating activities increased by $19.2 million to $62.6 million for Q1 2023, driven by higher cash flows from operating assets and liabilities and lower income taxes paid, partially offset by lower operating income[177] Cash Flows (used in) generated from Investing Activities - Cash used in investing activities was $25.0 million in Q1 2023, mainly for the Telesat Lightspeed constellation and the Anik F4 satellite[178] - This contrasts with Q1 2022, which saw $46.6 million generated from C-band clearing proceeds, partially offset by Lightspeed investments[179] Cash Flows (used in) generated from Financing Activities - Cash used in financing activities was $2.1 million in Q1 2023, primarily for satellite performance incentive payments[180] - This is a decrease from $12.1 million used in Q1 2022, which included debt repurchases and incentive payments, partially offset by government grants[181] Government Grant - Telesat has an agreement with the Government of Canada for up to $85.0 million to support the Telesat Lightspeed constellation, committing to over $200.0 million in R&D activities and Canadian workforce expansion[182] - Total research and development costs for Telesat Lightspeed increased by $5.6 million to $20.9 million in Q1 2023, driven by increased development activities[183][184] Liquidity - Telesat expects current cash, operating cash flows, and Revolving Credit Facility drawings to meet cash requirements for at least the next twelve months, excluding capital for Lightspeed constellation construction[185] - The company may continue to repurchase or refinance existing debt and may incur additional debt or issue equity to fund such transactions[186] - Future satellite programs, especially Lightspeed, will require significant capital, potentially funded by various sources including cash, operating cash flows, customer prepayments, and government grants[187] Debt - The Senior Secured Credit Facilities and guarantees are secured by substantially all of Telesat's assets (excluding unrestricted subsidiaries) and contain covenants restricting actions like incurring debt, paying dividends, and engaging in mergers[190] - The Revolving Credit Facility is a $200.0 million loan maturing in December 2024, with floating interest rates and an unused commitment fee[191] - As of March 31, 2023, there were no significant borrowings[191] - The Term Loan B – U.S. Facility is a US$1,908.5 million facility maturing in December 2026, with US$1,552.8 million outstanding as of March 31, 2023, bearing floating interest rates (LIBOR or ABR plus margins)[192][193] - On May 9, 2023, the Credit Agreement was amended to replace LIBOR with SOFR-based benchmark rates for both the Revolving Facility and Term Loan B Facility, including credit spread adjustments for SOFR loans[195] - Senior Secured Notes (US$400.0 million, 4.875%, due June 2027), 2026 Senior Secured Notes (US$500.0 million, 5.625%, due December 2026), and Senior Unsecured Notes (US$390.0 million outstanding, 6.5%, due October 2027) all have indentures with covenants restricting various corporate actions[196][197][198][199] - As of March 31, 2023, Telesat was in compliance with all financial covenants for its Senior Secured Credit Facilities and notes[200] Debt Service Cost - Estimated interest expense for the year ending December 31, 2023, is approximately $260.2 million, excluding amortization of deferred financing costs, prepayment options, and loss on repayment[201] Derivatives - Telesat uses interest rate and currency derivatives to manage exposure to interest rate and foreign exchange rate changes, but not for speculative purposes[202] - Embedded derivatives related to prepayment options on Senior Unsecured, Senior Secured, and 2026 Senior Secured Notes are accounted for at fair value, with changes recorded as non-cash gains or losses[203][204] MARKET RISK Credit Risk Related to Financial Instruments - Telesat is exposed to credit risk from cash and short-term investments, accounts receivable, and derivative assets[207] - This risk is mitigated by investing with high-quality financial institutions and performing credit checks on customers, with counterparty credit risk for derivatives also monitored[207] Foreign Exchange Risk - Operating results are subject to foreign exchange fluctuations, primarily due to U.S. dollar denominated indebtedness, cash, short-term investments, and a portion of revenue, expenses, and capital expenditures[208] - A mainly non-cash foreign exchange gain of $10.1 million was recorded in Q1 2023 due to a weaker U.S. to Canadian dollar spot rate, compared to a $36.1 million gain in Q1 2022[209] U.S. Dollar Denominated Financial Items | Three months ended March 31, | 2023 | 2022 | | :--------------------------- | :--- | :--- | | Revenue (U.S. dollar denominated) | 49.1% | 53.5% | | Operating expenses (U.S. dollar denominated) | 41.4% | 27.8% | | Interest on our indebtedness (U.S. dollar denominated) | 100.0% | 100.0% | - A 5% increase (decrease) in the U.S. dollar's value against the Canadian dollar would increase (decrease) indebtedness by $192.1 million, cash and cash equivalents by $79.8 million, net income (loss) by $24.3 million, and other comprehensive income (loss) by $55.5 million for Q1 2023[211][212] Interest Rate Risk - Telesat is exposed to interest rate risk on its cash, short-term investments, and variable-rate indebtedness[216] - A 0.25% increase (decrease) in variable interest rates would decrease (increase) net income (loss) by $1.3 million for Q1 2023[218] - The company uses interest rate swaps to hedge this risk but had no outstanding swaps as of March 31, 2023, as all previous swaps matured[216][217] NON-IFRS MEASURES Adjusted EBITDA - Adjusted EBITDA is a non-IFRS measure used to evaluate operating performance by excluding depreciation, amortization, interest, taxes, and certain other non-recurring expenses, enhancing comparability with competitors[220][221] Adjusted EBITDA and Margin (in millions of Canadian dollars) | ($ millions) | March 31, 2023 | March 31, 2022 | | :----------- | :------------- | :------------- | | Net income (loss) | $28.6 | $60.6 | | Interest expense | $68.9 | $48.5 | | Depreciation | $46.4 | $49.3 | | Amortization | $3.4 | $3.7 | | Non-cash expense related to share-based compensation | $9.0 | $24.2 | | Adjusted EBITDA | $138.9 | $145.6 | | Revenue | $183.4 | $185.8 | | Adjusted EBITDA Margin | 75.7% | 78.4% | - Adjusted EBITDA decreased by $6.7 million for Q1 2023, primarily due to lower revenues and higher operating expenses[224] Consolidated EBITDA for Covenant Purposes - Consolidated EBITDA for Covenant Purposes is a non-IFRS measure used to assess compliance with financial ratio covenants in the Senior Secured Credit Facilities[225] - This includes a first lien net leverage ratio of 5.75:1.00 if the Revolving Credit Facility is drawn by more than 35%[226] - This measure adjusts net income (loss) for Telesat and Restricted Subsidiaries by adding back interest expense, depreciation, amortization, non-cash charges, and other specific items, and deducting non-cash gains and certain other items[228] Consolidated EBITDA for Covenant Purposes (in millions of Canadian dollars) | (in $ millions) | Twelve months ended March 31, 2023 | | :-------------- | :--------------------------------- | | Net income (loss) | $(112.1) | | Consolidated income for Covenant Purposes | $(91.0) | | Plus: Income taxes | $33.3 | | Plus: Interest expense | $209.5 | | Plus: Depreciation and amortization expense | $198.9 | | Plus: Non-cash share-based compensation and pension expense | $56.7 | | Decreased by: Gains on extinguishment of debt | $(85.9) | | Decreased by: Non-cash gains resulting from changes in foreign exchange rates | $262.8 | | Consolidated EBITDA for Covenant Purposes | $599.5 | Consolidated Total Secured Debt and Consolidated Debt for Covenant Purposes - These non-IFRS measures provide additional information for understanding compliance with financial covenants under the Senior Secured Credit Facilities[233] Consolidated Debt for Covenant Purposes (in millions of Canadian dollars) | (in $ millions) | As at March 31, 2023 | | :-------------- | :------------------- | | Indebtedness | $3,839.5 | | Add: lease liabilities | $33.6 | | Consolidated Total Debt | $3,875.9 | | Less: Cash and cash equivalents (max. US$100 million) | $(135.2) | | Consolidated Total Debt for Covenant Purposes | $3,740.8 | | Less: Unsecured debt (Senior Unsecured Notes) | $(527.1) | | Consolidated Total Secured Debt for Covenant Purposes | $3,213.6 | - As of March 31, 2023, the Consolidated Total Debt for Covenant Purposes to Consolidated EBITDA ratio was 6.24:1.00, and the Consolidated Total Secured Debt to Consolidated EBITDA for Covenant Purposes ratio was 5.36:1.00[234] - The company was in compliance with its debt covenants[236] Unaudited Interim Condensed Consolidating Financial Information This section presents unaudited interim condensed consolidating financial information, reflecting investments using the equity method for Telesat in Issuers, Issuers in Guarantor and Non-Guarantor subsidiaries, and Guarantors in Non-Guarantor subsidiaries Unaudited Interim Condensed Consolidating Statements of Income (Loss) | (in thousands of Canadian dollars) | Telesat Corporation | Telesat Partnership | Telesat LLC | Telesat Canada | Guarantor subsidiaries | Non guarantor subsidiaries | Adjustments | Consolidated | | :--------------------------------- | :------------------ | :------------------ | :---------- | :------------- | :--------------------- | :------------------------- | :---------- | :----------- | | Revenue | — | — | — | 162,700 | 101,227 | 2,548 | (83,053) | 183,422 | | Operating income (loss) | 476 | (272) | — | 49,335 | 43,530 | (7,855) | (4,978) | 80,236 | | Net income (loss) | 36,730 | 36,252 | — | 36,658 | 40,290 | 815 | (122,112) | 28,633 | Unaudited Interim Condensed Consolidating Statements of Comprehensive Income (Loss) | (in thousands of Canadian dollars) | Telesat Corporation | Telesat Partnership | Telesat LLC | Telesat Canada | Guarantor subsidiaries | Non guarantor subsidiaries | Adjustments | Consolidated | | :--------------------------------- | :------------------ | :------------------ | :---------- | :------------- | :--------------------- | :------------------------- | :---------- | :----------- | | Net income (loss) | 36,730 | 36,252 | — | 36,658 | 40,290 | 815 | (122,112) | 28,633 | | Total comprehensive income (loss) | 56,001 | 55,492 | — | 55,868 | 63,536 | 23,122 | (230,843) | 23,176 | Unaudited Interim Condensed Consolidating Statements of Income (Loss) (2022) | (in thousands of Canadian dollars) | Telesat Corporation | Telesat Partnership | Telesat LLC | Telesat Canada | Guarantor subsidiaries | Non guarantor subsidiaries | Adjustments | Consolidated | | :--------------------------------- | :------------------ | :------------------ | :---------- | :------------- | :--------------------- | :------------------------- | :---------- | :----------- | | Revenue | — | — | — | 166,271 | 102,194 | 3,200 | (85,896) | 185,769 | | Operating income (loss) | (1,010) | (274) | — | 39,596 | 40,546 | (5,243) | (5,248) | 68,367 | | Net income (loss) | 65,900 | 66,858 | — | 67,311 | 36,943 | (5,204) | (171,178) | 60,630 | Unaudited Interim Condensed Consolidating Statements of Comprehensive Income (Loss) (2022) | (in thousands of Canadian dollars) | Telesat Corporation | Telesat Partnership | Telesat LLC | Telesat Canada | Guarantor subsidiaries | Non guarantor subsidiaries | Adjustments | Consolidated | | :--------------------------------- | :------------------ | :------------------ | :---------- | :------------- | :--------------------- | :------------------------- | :---------- | :----------- | | Net income (loss) | 65,900 | 66,858 | — | 67,311 | 36,943 | (5,204) | (171,178) | 60,630 | | Total comprehensive income (loss) | 24,724 | 25,575 | — | 25,856 | 24,691 | (40,601) | (17,158) | 43,087 | CURRENT SHARE INFORMATION Share Capital (in thousands of Canadian dollars) | | Number of shares | Stated value ($) | | :--------------------------- | :--------------- | :--------------- | | Telesat Public shares | 13,279,039 | 42,298 | | Class C shares | 112,841 | 6,340 | | Total | 13,391,880 | 48,638 | Telesat Public Shares Breakdown | Telesat Public shares | Number of shares | | :-------------------- | :--------------- | | Class A Common shares | 1,012,172 | | Class B Variable Voting shares | 12,266,867 | | Total Telesat Public shares | 13,279,039 | Outstanding Share-Based Awards as at March 31, 2023 | Outstanding Share-Based Awards as at March 31, 2023 | Historic Plan | Omnibus Plan | | :------------------------------------------------ | :------------ | :----------- | | Stock Options | 788,099 | 275,069 | | RSUs with time criteria | 940,250 | 239,868 | | RSUs with time and performance criteria | 124,080 | — | | PSUs with time and performance criteria | — | 133,128 | | DSUs | — | 66,240 | | Total | 1,852,429 | 714,305 | - During Q1 2023, 103,071 RSUs were settled for 54,166 Telesat Public Shares, and 532,423 Telesat Public Shares were issued in exchange for an equal number of Class B Limited Partnership units (LP Units)[250] CRITICAL ACCOUNTING JUDGMENTS AND ESTIMATES - The preparation of financial statements requires management to make estimates and assumptions that affect reported amounts[251] - These critical accounting judgments and estimates are consistent with those outlined in the consolidated financial statements for the year ended December 31, 2022[252] ACCOUNTING STANDARDS - The IASB amended IAS 1, Presentation of Financial Statements, in October 2022 to improve disclosures about long-term debt covenants[253] - These amendments, effective January 1, 2024 (with early adoption permitted), clarify that only covenants to be complied with on or before the reporting date affect debt classification[254][255] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section refers to the detailed discussion on market risk, including credit risk, foreign exchange risk, and interest rate risk, provided within Item 2 - 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[256] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section states that there have been no material developments in legal proceedings since the filing of Telesat Corporation's Annual Report on Form 20-F for the fiscal year ended December 31, 2022 - No material developments in legal proceedings have occurred since the filing of the Annual Report on Form 20-F for the fiscal year ended December 31, 2022[258] Item 1A. Risk Factors This section indicates that there have been no material changes to the risk factors previously disclosed in Telesat Corporation's Annual Report on Form 20-F for the fiscal year ended December 31, 2022 - No material changes to the risk factors have occurred since the filing of the Annual Report on Form 20-F for the fiscal year ended December 31, 2022[259] - Additional unknown or currently immaterial risks and uncertainties may adversely affect the business, financial condition, or operating results[260] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports that there were no unregistered sales of equity securities or use of proceeds during the period - There were no unregistered sales of equity securities and no use of proceeds to report[261] Item 3. Defaults Upon Senior Securities This section confirms that there were no defaults upon senior securities during the reporting period - There were no defaults upon senior securities[262] Item 4. Reserved This item is reserved, with no specific information provided Item 5. Other Information This section discloses that Erwin Hudson, Vice President of Telesat Lightspeed System Development, intends to retire on June 30, 2023 - Erwin Hudson, Vice President of Telesat Lightspeed System Development, is scheduled to retire on June 30, 2023[263] Item 6. Exhibits This section indicates that there are no exhibits to be filed with this report - No exhibits are included with this report[264]