Telesat Canada 6-K Current report (foreign)

Exhibit 99.1

TELESAT CANADA

Quarterly Report

For the Three and Six Month Periods Ended June 30, 2017

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements		1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 3. Quantitative and Qualitative Disclosures About Market Risk		36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		37
Item 1A. Risk Factors		37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		37
Item 3. Defaults Upon Senior Securities		37
Item 4. Reserved		37
Item 5. Other Information		37
Item 6. Exhibits		37

i

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TELESAT CANADA
 
(Formerly Telesat Holdings Inc.)
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
For the periods ended June 30

			Three months						Six months
(in thousands of Canadian dollars) (unaudited)	Notes		2017			2016			2017			2016
Revenue		5	$	225,982		$	231,686		$	460,651		$	466,619
Operating expenses		6		(43,980	)		(42,302	)		(99,178	)		(89,149	)
				182,002			189,384			361,473			377,470
Depreciation				(56,129	)		(56,193	)		(112,251	)		(112,478	)
Amortization				(6,585	)		(7,150	)		(13,172	)		(13,760	)
Other operating gains (losses), net				3			(43	)		(21	)		(2,547	)
Operating income				119,291			125,998			236,029			248,685
Interest expense		7		(50,448	)		(46,846	)		(100,198	)		(97,065	)
Interest and other (expense) income				(1,332	)		1,199			(1,140	)		2,374
Gain (loss) on changes in fair value of financial instruments				1,783			(18,428	)		14,305			(24,297	)
Gain on foreign exchange				96,106			18,977			119,593			208,499
Income before tax				165,400			80,900			268,589			338,196
Tax expense		8		(17,766	)		(19,171	)		(32,972	)		(39,101	)
Net income			$	147,634		$	61,729		$	235,617		$	299,095

 
 
See accompanying notes to the condensed consolidated interim financial statements

1

TELESAT CANADA
 
(Formerly Telesat Holdings Inc.)
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
For the periods ended June 30

	Three months					Six months
(in thousands of Canadian dollars) (unaudited)	2017			2016		2017			2016
Net income	$	147,634		$	61,729	$	235,617		$	299,095
Other comprehensive (loss) income
Items that may be reclassified into income or loss
Foreign currency translation adjustments		(21,128	)		182		(28,184	)		(18,697	)
Other comprehensive (loss) income		(21,128	)		182		(28,184	)		(18,697	)
Total comprehensive income	$	126,506		$	61,911	$	207,433		$	280,398

 
 
See accompanying notes to the condensed consolidated interim financial statements

2

TELESAT CANADA
 
(Formerly Telesat Holdings Inc.)
 
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(in thousands of Canadian dollars) (unaudited)	Notes		Common shares			Preferred shares			Total share capital			Accumulated earnings			Equity-settled employee benefits reserve			Foreign currency translation reserve			Total reserves			Total shareholders’ equity
Balance as at January 1, 2016			$	340,602		$	316,272		$	656,874		$	188,479		$	32,265		$	40,510		$	72,775		$	918,128
Net income				—			—			—			299,095			—			—			—			299,095
Repurchase of stock options		19		—			—			—			(15,913	)		(8,745	)		—			(8,745	)		(24,658	)
Issuance of share capital on stock option exercise				—			1,861			1,861			(1,269	)		(592	)		—			(592	)��		—
Other comprehensive loss, net of tax of $nil				—			—			—			—			—			(18,697	)		(18,697	)		(18,697	)
Share-based compensation				—			—			—			—			3,324			—			3,324			3,324
Balance as at June 30, 2016			$	340,602		$	318,133		$	658,735		$	470,392		$	26,252		$	21,813		$	48,065		$	1,177,192
Balance as at July 1, 2016			$	340,602		$	318,133		$	658,735		$	470,392		$	26,252		$	21,813		$	48,065		$	1,177,192
Net loss				—			—			—			(6,195	)		—			—			—			(6,195	)
Dividends declared on preferred shares				—			—			—			(10	)		—			—			—			(10	)
Other comprehensive income, net of tax expense of $1,424				—			—			—			3,676			—			16,932			16,932			20,608
Share-based compensation				—			—			—			—			2,446			—			2,446			2,446
Balance as at December 31, 2016			$	340,602		$	318,133		$	658,735		$	467,863		$	28,698		$	38,745		$	67,443		$	1,194,041
Balance as at January 1, 2017			$	340,602		$	318,133		$	658,735		$	467,863		$	28,698		$	38,745		$	67,443		$	1,194,041
Net income				—			—			—			235,617			—			—			—			235,617
Return of capital		12		(314,022	)		(192,113	)		(506,135	)		—			—			—			—			(506,135	)
Issuance of share capital on stock option exercise		12		—			82			82			—			(5	)		—			(5	)		77
Other comprehensive loss, net of tax of $nil				—			—			—			—			—			(28,184	)		(28,184	)		(28,184	)
Share-based compensation				—			—			—			—			1,689			—			1,689			1,689
Balance as at June 30, 2017			$	26,580		$	126,102		$	152,682		$	703,480		$	30,382		$	10,561		$	40,943		$	897,105

 
 
See accompanying notes to the condensed consolidated interim financial statements

3

TELESAT CANADA
 
(Formerly Telesat Holdings Inc.)
 
CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands of Canadian dollars) (unaudited)	Notes		June 30, 2017		December 31, 2016
Assets
Cash and cash equivalents			$	354,719	$	782,406
Trade and other receivables				45,588		55,639
Other current financial assets				2,350		2,548
Prepaid expenses and other current assets				40,568		61,107
Total current assets				443,225		901,700
Satellites, property and other equipment		5, 9		1,845,507		1,915,411
Deferred tax assets				4,506		2,844
Other long-term financial assets		5		50,042		35,687
Other long-term assets		5		3,452		3,815
Intangible assets		5, 10		823,081		832,512
Goodwill				2,446,603		2,446,603
Total assets			$	5,616,416	$	6,138,572
Liabilities
Trade and other payables			$	29,476	$	44,107
Other current financial liabilities				26,698		58,992
Other current liabilities				98,661		80,448
Current indebtedness		11		15,427		21,931
Total current liabilities				170,262		205,478
Long-term indebtedness		11		3,649,680		3,829,707
Deferred tax liabilities				459,463		471,233
Other long-term financial liabilities				77,711		81,252
Other long-term liabilities				362,195		356,861
Total liabilities				4,719,311		4,944,531
Shareholders’ Equity
Share capital		12		152,682		658,735
Accumulated earnings				703,480		467,863
Reserves				40,943		67,443
Total shareholders’ equity				897,105		1,194,041
Total liabilities and shareholders’ equity			$	5,616,416	$	6,138,572

 
 
See accompanying notes to the condensed consolidated interim financial statements

4

TELESAT CANADA
 
(Formerly Telesat Holdings Inc.)
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the six months ended June 30

(in thousands of Canadian dollars) (unaudited)	Notes		2017			2016
Cash flows from operating activities
Net income			$	235,617		$	299,095
Adjustments to reconcile net income to cash flows from operating activities
Depreciation				112,251			112,478
Amortization				13,172			13,760
Tax expense		8		32,972			39,101
Interest expense				100,198			97,065
Interest income				(2,513	)		(3,109	)
Gain on foreign exchange				(119,593	)		(208,499	)
(Gain) loss on changes in fair value of financial instruments				(14,305	)		24,297
Share-based compensation				1,689			3,324
Loss on disposal of assets				21			2,547
Other				(21,269	)		(19,158	)
Income taxes paid, net of income taxes received		17		(33,047	)		(65,090	)
Interest paid, net of capitalized interest and interest received		17		(107,377	)		(77,388	)
Repurchase of stock options		19		—			(24,658	)
Operating assets and liabilities		17		54,111			71,720
Net cash from operating activities				251,927			265,485
Cash flows used in investing activities
Satellite programs, including capitalized interest				(66,973	)		(99,523	)
Purchase of property and other equipment				(5,726	)		(3,785	)
Purchase of intangible assets				(12,653	)		(36,745	)
Net cash used in investing activities				(85,352	)		(140,053	)
Cash flows used in financing activities
Repayment of indebtedness		17		(16,241	)		(49,824	)
Payment of debt issue costs		17		(42,867	)		—
Return of capital to shareholders		12		(506,135	)		—
Capital lease payments		17		(15	)		(15	)
Satellite performance incentive payments		17		(4,349	)		(3,652	)
Proceeds from exercise of stock options		12		77			—
Settlement of derivatives				206			—
Net cash used in financing activities				(569,324	)		(53,491	)
Effect of changes in exchange rates on cash and cash equivalents				(24,938	)		(26,398	)
(Decrease) increase in cash and cash equivalents				(427,687	)		45,543
Cash and cash equivalents, beginning of period				782,406			690,726
Cash and cash equivalents, end of period		17	$	354,719		$	736,269

 
 
See accompanying notes to the condensed consolidated interim financial statements

5

Telesat Canada
(Formerly Telesat Holdings Inc.)
 
Notes to the Condensed Consolidated Interim Financial Statements
June 30, 2017
(all amounts in thousands of Canadian dollars, except where otherwise noted)
(unaudited)

1. BACKGROUND OF THE COMPANY

On January 1, 2017, Telesat Holdings Inc. completed a corporate reorganization, of companies under common control, pursuant to which Telesat Holdings Inc. amalgamated with Telesat Interco Inc. and immediately thereafter the newly amalgamated company amalgamated with Telesat Canada. The continuing entity, existing under the laws of Canada, is named Telesat Canada. The reorganization has been accounted for as a continuation of Telesat Holdings Inc.

Telesat Canada (the “Company” or “Telesat”) is a Canadian corporation. Telesat is a leading global satellite operator providing reliable and secure satellite-delivered communication solutions worldwide to broadcast, telecom, corporate and government customers. The fleet today consists of 15 satellites and the Canadian payload on ViaSat-1 with two other geostationary satellites under construction. In addition, the Company has two prototype Ka-band satellites under construction to support the development of its planned global low earth orbit (“LEO”) constellation. Telesat also manages the operations of additional satellites for third parties. Telesat is headquartered in Ottawa at 1601 Telesat Court, Ontario, Canada, K1B 5P4, with offices and facilities around the world.

As at June 30, 2017, Loral Space and Communications Inc. (“Loral”) and Canada’s Public Sector Pension Investment Board (“PSP Investments”) indirectly held economic interests in Telesat of approximately 63% and 36%, respectively, with the remaining economic interest held by various individuals. Loral indirectly held a voting interest of 33% on all matters including the election of directors. PSP Investments indirectly held a voting interest of 67% on all matters except for the election of directors, and a 29% voting interest for the election of directors. The remaining voting interest of 38% for the election of directors is held by shareholders of the Company’s Director Voting Preferred Shares.

Unless the context states or requires otherwise, references herein to the “financial statements” or similar terms refer to the unaudited condensed consolidated interim financial statements of Telesat Canada.

On July 25, 2017, these financial statements were approved by the Audit Committee of the Board of Directors and authorized for issue.

2. BASIS OF PRESENTATION

Statement of Compliance

The financial statements represent the interim financial statements of the Company and its subsidiaries, on a consolidated basis, prepared in accordance withInternational Accounting Standard 34, Interim Financial Reporting.

These financial statements should be read in conjunction with the December 31, 2016, consolidated financial statements of Telesat Holdings Inc. The financial statements use the same basis of presentation and significant accounting policies as outlined in Notes 2 and 4 of the consolidated financial statements for the year ended December 31, 2016, with the exception of those outlined in the change in accounting policies in Note 3 below. The results of operations for the three and six months ended June 30, 2017 and 2016 are not necessarily indicative of the results that may be expected for a full fiscal year.

Basis of Consolidation

Subsidiaries

These consolidated financial statements include the results of the Company and subsidiaries controlled by the Company. Control is achieved when the Company has power over an entity, has exposure, or rights to variable returns from its involvement with an entity, and has the ability to use the power over an entity to affect the amount of its return.

6

Telesat Canada
(Formerly Telesat Holdings Inc.)
 
Notes to the Condensed Consolidated Interim Financial Statements
June 30, 2017
(all amounts in thousands of Canadian dollars, except where otherwise noted)
(unaudited)

2. BASIS OF PRESENTATION  – (continued)

Joint arrangements

A joint operation is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to their share of the assets and revenue, and obligations for the liabilities and expenses, relating to the arrangement.

The Company’s consolidated financial statements include the Company’s share of the assets, liabilities, revenue and expenses of its interest in joint operations.

3. CHANGE IN ACCOUNTING POLICIES

IAS 7, Statement of Cash Flows

The Company adopted the amendment to IAS 7,Statement of Cash Flows, with a date of initial adoption of January 1, 2017.

This amendment requires disclosure of the cause of the changes in liabilities arising from financing activities. The incremental disclosure has been added within Note 17.

4. SIGNIFICANT ACCOUNTING POLICIES

Future Changes in Accounting Policies

The International Accounting Standards Board (“IASB”) periodically issues new and amended accounting standards. The new and amended standards determined to be applicable to the Company are disclosed below. The remaining new and amended standards have been excluded as they are not applicable.

Revenue

IFRS 15,Revenue from Contracts with Customers (“IFRS 15”) was issued by the IASB in May 2014, and will replace IAS 18,Revenue, IAS 11,Construction Contracts, and related interpretations on revenue. IFRS 15 sets out the requirements for recognizing revenue that apply to all contracts with customers, except for contracts that are within the scope of the standards on leases, insurance contracts and financial instruments. IFRS 15 uses a control based approach to recognize revenue which is a change from the risk and reward approach under the current revenue standard. Companies can elect to use either a full or modified retrospective approach when adopting this standard which is effective for annual periods beginning on or after January 1, 2018. The Company is currently evaluating the impact of IFRS 15 on its consolidated financial statements.

Financial instruments

IFRS 9,Financial Instruments (“IFRS 9”) was issued by the IASB in July 2014, and will replace IAS 39,Financial Instruments: Recognition and Measurement (“IAS 39”). IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. Impairments of financial assets are determined using a single impairment model that requires entities to recognize expected credit losses without requiring a triggering event to occur. Financial liabilities are measured using one of three measurement approaches (fair value through profit or loss (“FVTPL”), fair value through other comprehensive income (“FVTOCI”), or amortized cost). Financial liabilities that are held-for-trading are measured at FVTPL, financial liabilities that are considered available for sale are measured at FVTOCI unless the FVTPL option is elected, while all other financial liabilities are measured at amortized cost unless the fair value option is elected. The treatment of embedded derivatives under the new standard is consistent with IAS 39.

7

Telesat Canada
(Formerly Telesat Holdings Inc.)
 
Notes to the Condensed Consolidated Interim Financial Statements
June 30, 2017
(all amounts in thousands of Canadian dollars, except where otherwise noted)
(unaudited)

4. SIGNIFICANT ACCOUNTING POLICIES  – (continued)

This standard is effective for annual periods beginning on or after January 1, 2018. The Company is currently evaluating the impact of IFRS 9 on its consolidated financial statements.

Leases

IFRS 16,Leases (“IFRS 16”) was issued by the IASB in January 2016, and will replace IAS 17,Leases and related interpretations on leases. IFRS 16 will require a lessee to recognize a right-of-use asset and lease liability for all leases with a term of more than 12 months. The standard will also require that the depreciation of the lease assets be recorded separately from the interest on the lease liabilities on the statement of income. For lessors, IFRS 16 substantially carries forward the requirements of IAS 17. IFRS 16 also aligns the definition of a lease with the control based approach in IFRS 15.

Companies can elect to use either a retrospective approach with a restatement of comparative information or a retrospective approach with the cumulative effect of initial application shown in retained earnings instead of the restatement of the comparative information. The standard is effective for annual periods beginning on or after January 1, 2019. Earlier application of the standard is permitted if it is applied in conjunction with IFRS 15. The Company is currently evaluating the impact of IFRS 16 on its consolidated financial statements.

Share-based payments

In June 2016, amendments were issued by the IASB for IFRS 2,Share-based Payments. These amendments clarify the accounting treatment and disclosure requirements for certain types of share-based payment transactions, including cash settled share-based payment transactions, share-based payment transactions with a net settlement feature for withholding tax obligations, as well as modifications of share-based payment transactions from cash settled to equity settled. These amendments are effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. The Company is currently evaluating the impact of these amendments on its consolidated financial statements.

Income Taxes

IFRIC 23,Uncertainty over Income Taxes Treatmentswas issued by the IASB in June 2017. The interpretation clarifies how to apply the recognition and measurement requirements in IAS 12,Income Taxes when there is uncertainty over income tax treatments. This interpretation is effective for annual reporting periods beginning on or after January 1, 2019. The Company is currently evaluating the impact of this interpretation on its consolidated financial statements.

5. SEGMENT INFORMATION

Telesat operates in a single reportable industry segment, in which it provides satellite-based services to its broadcast, enterprise and consulting customers around the world.

The Company derives revenue from the following services:

• Broadcast  —  Direct-to-home television, video distribution and contribution, and occasional use services.

• Enterprise  —  Telecommunication carrier and integrator, government, consumer broadband, resource, maritime and aeronautical, retail and satellite operator services.

• Consulting and other  —  Consulting services related to space and earth segments, government studies, satellite control services, and research and development.

8

Telesat Canada
(Formerly Telesat Holdings Inc.)
 
Notes to the Condensed Consolidated Interim Financial Statements
June 30, 2017
(all amounts in thousands of Canadian dollars, except where otherwise noted)
(unaudited)

5. SEGMENT INFORMATION  – (continued)

Revenue derived from the above services were as follows:

	Three months ended June 30,				Six months ended June 30,
	2017		2016		2017		2016
Broadcast	$	119,860	$	120,780	$	238,951	$	244,272
Enterprise		99,308		105,275		209,874		211,102
Consulting and other		6,814		5,631		11,826		11,245
Revenue	$	225,982	$	231,686	$	460,651	$	466,619

Geographic Information

Revenue by geographic regions was based on the point of origin of the revenue, which was the destination of the billing invoice, and was allocated as follows:

	Three months ended June 30,				Six months ended June 30,
	2017		2016		2017		2016
Canada	$	102,557	$	106,275	$	209,568	$	216,652
United States		79,027		77,607		155,590		159,524
Latin America & Caribbean		21,488		20,036		40,950		41,101
Europe, Middle East & Africa		14,571		13,063		28,271		27,871
Asia & Australia		8,339		14,705		26,272		21,471
Revenue	$	225,982	$	231,686	$	460,651	$	466,619

The Company’s satellites are in geosynchronous orbit. For disclosure purposes, the satellites and the intangible assets, have been classified based on ownership. Satellites, property and other equipment and intangible assets by geographic regions were allocated as follows:

As at	June 30, 2017		December 31, 2016
Canada	$	1,068,809	$	1,152,337
Europe, Middle East & Africa		646,361		620,219
United States		127,062		139,064
All others		3,275		3,791
Satellites, property and other equipment	$	1,845,507	$	1,915,411

As at	June 30, 2017		December 31, 2016
Canada	$	739,912	$	744,150
United States		40,689		42,471
Latin America & Caribbean		32,752		35,736
All others		9,728		10,155
Intangible assets	$	823,081	$	832,512

9

Telesat Canada
(Formerly Telesat Holdings Inc.)
 
Notes to the Condensed Consolidated Interim Financial Statements
June 30, 2017
(all amounts in thousands of Canadian dollars, except where otherwise noted)
(unaudited)

5. SEGMENT INFORMATION  – (continued)

Other long-term financial assets and other long-term assets by geographic regions were allocated as follows:

As at	June 30, 2017		December 31, 2016
Canada	$	40,022	$	25,176
Europe, Middle East & Africa		8,633		8,764
All others		1,387		1,747
Other long-term financial assets	$	50,042	$	35,687

As at	June 30, 2017		December 31, 2016
Canada	$	3,151	$	3,372
Europe, Middle East & Africa		301		443
Other long-term assets	$	3,452	$	3,815

Goodwill was not allocated to geographic regions.

Major Customers

For the three months and six months ended June 30, 2017 and 2016, there were three significant customers each representing more than 10% of consolidated revenue.

6. OPERATING EXPENSES

	Three months ended June 30,				Six months ended June 30,
	2017		2016		2017		2016
Compensation and employee benefits(a)	$	18,198	$	17,693	$	46,826	$	36,346
Other operating expenses(b)		10,912		10,054		21,183		19,942
Cost of sales(c)		14,870		14,555		31,169		32,861
Operating expenses	$	43,980	$	42,302	$	99,178	$	89,149

(a) Compensation and employee benefits included salaries, bonuses, commissions, post-employment benefits and charges arising from share-based compensation. The balance for the six months ended June 30, 2017, included $12.3 million of expenses associated with a special payment to stock option holders, including associated benefit expenses (three months ended June 30, 2017 — $0.6 million). There were no expenses for the special payment recognized in the three and six months ended June 30, 2016.

(b) Other operating expenses included general and administrative expenses, marketing expenses, in-orbit insurance expenses, professional fees and facility costs.

(c) Cost of sales included the cost of third-party satellite capacity, the cost of equipment sales and other costs directly attributable to fulfilling the Company’s obligations under customer contracts.

10

Telesat Canada
(Formerly Telesat Holdings Inc.)
 
Notes to the Condensed Consolidated Interim Financial Statements
June 30, 2017
(all amounts in thousands of Canadian dollars, except where otherwise noted)
(unaudited)

7. INTEREST EXPENSE

	Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016
Interest on indebtedness	$	53,404		$	45,297		$	104,945		$	93,322
Interest on derivative instruments		—			898			—			1,844
Interest on satellite performance incentive payments		1,277			1,356			2,558			2,834
Interest on employee benefit plans		97			399			689			798
Capitalized interest		(4,330	)		(1,104	)		(7,994	)		(1,733	)
Interest expense	$	50,448		$	46,846		$	100,198		$	97,065

8. INCOME TAXES

	Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016
Current tax expense	$	26,179		$	23,640		$	48,253		$	47,918
Deferred tax recovery		(8,413	)		(4,469	)		(15,281	)		(8,817	)
Tax expense	$	17,766		$	19,171		$	32,972		$	39,101

A reconciliation of the statutory income tax rate, which is a composite of Canadian federal and provincial rates, to the effective income tax rate was as follows:

	Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016
Income before tax	$	165,400		$	80,900		$	268,589		$	338,196
Multiplied by the statutory income tax rates		26.58	%		26.61	%		26.59	%		26.61	%
		43,963			21,527			71,418			89,994
Income tax recorded at rates different from the Canadian tax rate		(2,042	)		(3,666	)		(4,256	)		(6,743	)
Permanent differences		(12,936	)		1,057			(18,531	)		(17,808	)
Effect of temporary differences not recognized as deferred tax assets		(11,240	)		(1,895	)		(15,243	)		(30,756	)
Other		21			2,148			(416	)		4,414
Tax expense	$	17,766		$	19,171		$	32,972		$	39,101
Effective income tax rate		10.74	%		23.70	%		12.28	%		11.56	%

9. SATELLITES, PROPERTY AND OTHER EQUIPMENT

For the six months ended June 30, 2017, the Company had satellite, property and other equipment additions of $66.6 million (June 30, 2016 — $88.9 million) with substantially all of the asset additions related to the Telstar 18 VANTAGE and Telstar 19 VANTAGE satellites which are currently under construction.

11

Telesat Canada
(Formerly Telesat Holdings Inc.)
 
Notes to the Condensed Consolidated Interim Financial Statements
June 30, 2017
(all amounts in thousands of Canadian dollars, except where otherwise noted)
(unaudited)

10. INTANGIBLE ASSETS

For the six months ended June 30, 2017, the Company had additions to intangible assets of $7.2 million (June 30, 2016 — $36.0 million) with substantially all of the additions relating to the LEO constellation currently under development (June 30, 2016 — concession rights for the use of frequency spectrum in Brazil and the LEO constellation under development).

11. INDEBTEDNESS

As at	June 30, 2017			December 31, 2016
Senior Secured Credit Facilities
Revolving Credit Facility	$	—		$	—
Term Loan B – U.S. Facility (June 30, 2017 – USD $2,411,805, December 31, 2016 – USD $2,423,925)		3,126,664			3,257,998
8.875% Senior Notes (USD $500,000)		648,200			672,050
		3,774,864			3,930,048
Deferred financing costs, interest rate floor, and prepayment option		(109,757	)		(78,410	)
		3,665,107			3,851,638
Less: current indebtedness		(15,427	)		(21,931	)
Long-term indebtedness	$	3,649,680		$	3,829,707

On February 1, 2017, Telesat amended its Senior Secured Credit Facilities. The amendment to the Senior Secured Credit Facilities reduced the applicable margin on the Term Loan B — U.S. Facility from 3.75% to 3.00%. Additional debt issue costs of $38.4 million were incurred in connection with this amendment.

12. SHARE CAPITAL

The number of shares and stated value of the outstanding shares were as follows:

	As at June 30, 2017				As at December 31, 2016
	Number of shares		Stated value		Number of shares		Stated value
Common Shares		74,252,460	$	26,580		74,252,460	$	340,602
Voting Participating Preferred Shares		7,034,444		48,246		7,034,444		77,995
Non-Voting Participating Preferred Shares		38,391,823		77,846		38,384,823		240,128
Director Voting Preferred Shares		1,000		10		1,000		10
Share capital			$	152,682			$	658,735

In January 2017, the Board of Directors approved a cash distribution to shareholders, as a reduction of stated capital, in the amount of approximately $387.2 million U.S. dollars. These distributions were made during the first quarter of 2017.

In January 2017, 7,000 stock options granted under the Company’s stock incentive plan were exercised for 7,000 Non-Voting Participating Preferred Shares in exchange for $0.1 million.

12

Telesat Canada
(Formerly Telesat Holdings Inc.)
 
Notes to the Condensed Consolidated Interim Financial Statements
June 30, 2017
(all amounts in thousands of Canadian dollars, except where otherwise noted)
(unaudited)

13. CAPITAL DISCLOSURES

The Senior Secured Credit Facilities are secured by substantially all of the Company’s assets, excluding the assets of unrestricted subsidiaries. If the Revolving Facility is drawn, the Senior Secured Credit Facilities require Telesat Canada to comply with a first lien net leverage ratio test. As at June 30, 2017, the first lien net leverage ratio was 3.91:1.00, which was less than the maximum test ratio of 5.75:1.00.

The Company’s operating results are tracked against budget on a monthly basis, and this analysis is reviewed by senior management.

14. FINANCIAL INSTRUMENTS

Measurement of Risks

The Company, through its financial assets and liabilities, is exposed to various risks. The following analysis provides a measurement of risks as at June 30, 2017.

Credit risk

Credit risk is the risk that a counterparty to a financial asset will default, resulting in the Company incurring a financial loss. As at June 30, 2017, the maximum exposure to credit risk is equal to the carrying value of the financial assets which totalled $452.7 million (December 31, 2016 — $876.3 million).

Cash and cash equivalents are invested in high quality investment grade financial instruments and are governed by the Company’s corporate investment policy, which aims to reduce credit risk by restricting investments to high-grade, mainly U.S. dollar and Canadian dollar denominated investments.

The Company has credit evaluation, approval and monitoring processes intended to mitigate potential credit risks relating to trade accounts receivable. The Company’s standard payment terms are 30 days with interest typically charged on balances remaining unpaid at the end of the standard payment terms. The Company’s historical experience with customer defaults has been minimal. As at June 30, 2017, North American and International customers made up 48% and 52% of the outstanding trade receivable balance, respectively (December 31, 2016 — 38% and 62%, respectively). Anticipated bad debt losses have been provided for in the allowance for doubtful accounts. The allowance for doubtful accounts as at June 30, 2017 was $2.7 million (December 31, 2016 —  $3.5 million).

The Company mitigates the credit risk associated with derivative instruments by entering into them with only high quality financial institutions.

Foreign exchange risk

The Company’s operating results are subject to fluctuations as a result of exchange rate variations to the extent that transactions are made in currencies other than Canadian dollars. The Company’s main currency exposures lie in its U.S. dollar denominated cash and cash equivalents, trade and other receivables, trade and other payables and indebtedness with the most significant impact being on the entirely U.S. dollar denominated indebtedness. As at June 30, 2017, the Canadian dollar equivalent of the U.S. dollar denominated indebtedness was $3,774.9 million (December 31, 2016 — $3,930.0 million) before netting of deferred financing costs, interest rate floor and prepayment option.

In July 2016, Telesat entered into four forward foreign exchange contracts which require the Company to pay $7.0 million Canadian dollars to receive 4.2 million British Pounds Sterling. As at June 30, 2017, there was one forward foreign exchange contract with a maturity of July 2017 outstanding with an insignificant fair value.

As at June 30, 2017, the impact of a 5 percent increase (decrease) in the value of the Canadian dollar against the U.S. dollar on financial assets and liabilities would have increased (decreased) net income by

13

Telesat Canada
(Formerly Telesat Holdings Inc.)
 
Notes to the Condensed Consolidated Interim Financial Statements
June 30, 2017
(all amounts in thousands of Canadian dollars, except where otherwise noted)
(unaudited)

14. FINANCIAL INSTRUMENTS  – (continued)

$175.9 million and increased (decreased) other comprehensive income by $0.7 million. This analysis assumes that all other variables, in particular interest rates, remain constant.

Interest rate risk

The Company is exposed to interest rate risk on its cash and cash equivalents and its indebtedness. The interest rate risk on the indebtedness is from a portion of the debt having a variable interest rate. Changes in the interest rates could impact the amount of interest that the Company is required to pay or receive.

If the interest rates on the unhedged variable rate indebtedness change by 0.25%, excluding the potential impact of an interest rate floor, the result would be an increase or decrease to net income of $2.0 million and $4.0 million for the three and six months ended June 30, 2017, respectively.

Liquidity risk

The Company maintains credit facilities to ensure it has sufficient funds available to meet current and foreseeable financial requirements.

The contractual maturities of financial liabilities as at June 30, 2017 were as follows:

	Carrying amount		Contractual cash flows (undiscounted)		Remaining 2017		2018		2019		2020		2021		Thereafter
Trade and other payables	$	29,476	$	29,476	$	29,476	$	—	$	—	$	—	$	—	$	—
Customer and other deposits		2,330		2,330		1,861		225		17		—		227		—
Satellite performance incentive payments		71,989		94,224		8,443		13,085		13,122		10,929		9,516		39,129
Other financial liabilities(1)		5,555		5,676		4,314		547		466		349		—		—
Indebtedness(2)		3,782,055		5,054,124		113,471		224,800		223,730		222,724		220,865		4,048,534
	$	3,891,405	$	5,185,830	$	157,565	$	238,657	$	237,335	$	234,002	$	230,608	$	4,087,663

(1) Other financial liabilities excluded the derivative liability for the interest rate floor.

(2) Indebtedness excluded deferred financing costs, interest rate floor and prepayment option.

Included in the table above, the interest payable and interest payments in the carrying value and contractual cash flows, respectively, were as follows:

	Interest payable		Interest payments
Satellite performance incentive payments	$	2,659	$	23,808
Other financial liabilities	$	408	$	529
Indebtedness	$	7,191	$	1,279,260

14

Telesat Canada
(Formerly Telesat Holdings Inc.)
 
Notes to the Condensed Consolidated Interim Financial Statements
June 30, 2017
(all amounts in thousands of Canadian dollars, except where otherwise noted)
(unaudited)

14. FINANCIAL INSTRUMENTS  – (continued)

Financial assets and liabilities recorded on the balance sheet and the fair value hierarchy levels used to calculate those values were as follows:

As at June 30, 2017	Loans and receivables		FVTPL			Other financial liabilities			Total			Fair value			Fair value hierarchy
Cash and cash equivalents	$	354,719	$	—		$	—		$	354,719		$	354,719			Level 1
Trade and other receivables		45,588		—			—			45,588			45,588			(3)
Other current financial assets		2,350		—			—			2,350			2,350			Level 1
Other long-term financial assets(1)		18,544		31,498			—			50,042			50,042			Level 1, Level 2
Trade and other payables		—		—			(29,476	)		(29,476	)		(29,476	)		(3)
Other current financial liabilities		—		(6	)		(26,692	)		(26,698	)		(28,752	)		Level 2
Other long-term financial liabilities		—		(17,341	)		(60,370	)		(77,711	)		(79,498	)		Level 2
Indebtedness(2)		—		—			(3,774,864	)		(3,774,864	)		(3,871,523	)		Level 2
	$	421,201	$	14,151		$	(3,891,402	)	$	(3,456,050	)	$	(3,556,550	)

As at December 31, 2016	Loans and receivables		FVTPL			Other financial liabilities			Total			Fair value			Fair value hierarchy
Cash and cash equivalents	$	782,406	$	—		$	—		$	782,406		$	782,406			Level 1
Trade and other receivables		55,639		—			—			55,639			55,639			(3)
Other current financial assets		2,548		—			—			2,548			2,548			Level 1
Other long-term financial assets(1)		20,756		14,931			—			35,687			35,687			Level 1, Level 2
Trade and other payables		—		—			(44,107	)		(44,107	)		(44,107	)		(3)
Other current financial liabilities		—		(761	)		(58,231	)		(58,992	)		(61,368	)		Level 2
Other long-term financial liabilities		—		(13,952	)		(67,300	)		(81,252	)		(82,781	)		Level 2
Indebtedness(2)		—		—			(3,930,048	)		(3,930,048	)		(3,992,467	)		Level 2
	$	861,349	$	218		$	(4,099,686	)	$	(3,238,119	)	$	(3,304,443	)

(1) The other long-term financial assets classified as fair value through profit or loss were calculated using level 2 of the fair value hierarchy. All other balances were calculated using level 1 of the fair value hierarchy.

(2) Indebtedness excludes deferred financing costs, interest rate floor and prepayment option.

(3) Trade and other receivables and trade and other payables approximate fair value due to the short-term maturity of these instruments.

Assets pledged as security

The Senior Secured Credit Facilities are secured by substantially all of Telesat’s assets excluding the assets of unrestricted subsidiaries.

Fair Value

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market under current market conditions at the measurement date. Where possible, fair values are based on the quoted market values in an active market. In the absence of an active market, the Company determines fair values based on prevailing market rates (bid and ask prices, as appropriate) for instruments with similar characteristics and risk profiles or internal or external valuation models, such as option pricing models and discounted cash flow analysis, using observable market-based inputs.

15

Telesat Canada
(Formerly Telesat Holdings Inc.)
 
Notes to the Condensed Consolidated Interim Financial Statements
June 30, 2017
(all amounts in thousands of Canadian dollars, except where otherwise noted)
(unaudited)

14. FINANCIAL INSTRUMENTS  – (continued)

The fair value hierarchy is as follows:

Level 1 based on quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company can access at the measurement date.

Level 2 based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially all of the full term of the assets or liabilities.

Level 3 based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Estimates of fair values are affected significantly by the assumptions for the amount and timing of estimated future cash flows and discount rates, which all reflect varying degrees of risk. Potential income taxes and other expenses that would be incurred on disposition of these financial instruments are not reflected in the fair values. As a result, the fair values are not necessarily the net amounts that would be realized if these instruments were actually settled.

The carrying amounts of cash and cash equivalents, trade and other receivables, and trade and other payables approximate fair value due to the short-term maturity of these instruments. As at June 30, 2017, cash and cash equivalents included $86.3 million (December 31, 2016 — $324.7 million) of short-term investments.

The fair value of the satellite performance incentive payments, included in other current and other long-term financial liabilities, was determined using a discounted cash flow methodology. The calculation is performed on a recurring basis. As at June 30, 2017, the discount rate used was 5.3% (December 31, 2016 — 5.5%).

The fair value of the indebtedness was based on transactions and quotations from third parties considering market interest rates and excluding deferred financing costs, interest rate floor and prepayment option. The calculation of the fair value of the indebtedness is performed on a recurring basis. The rates used were as follows:

As at	June 30, 2017			December 31, 2016
Term Loan B – U.S. Facility		100.50	%		101.00	%
8.875% Senior Notes		112.50	%		104.44	%

Fair value of derivative financial instruments

Derivatives, with the exception of the forward foreign exchange contracts, were valued using a discounted cash flow methodology. The calculations of the fair value of the derivatives are performed on a recurring basis.

Prepayment option cash flows were calculated with a third party valuation model which is based on the current price of the debt instrument and discounted based on a discount curve.

Interest rate floor cash flows were calculated using the Black Scholes option valuation model in Bloomberg and discounted based on discount curves.

16

Telesat Canada
(Formerly Telesat Holdings Inc.)
 
Notes to the Condensed Consolidated Interim Financial Statements
June 30, 2017
(all amounts in thousands of Canadian dollars, except where otherwise noted)
(unaudited)

14. FINANCIAL INSTRUMENTS  – (continued)

The discount rates used to discount cash flows as at June 30, 2017 ranged from 1.22% to 2.07% (December 31, 2016 — 0.77% to 2.15%).

The fair value of the forward foreign exchange contracts was calculated using the forward foreign exchange rates against the British Pound Sterling for the same transactions as at the valuation date. The forward foreign exchange rate as at June 30, 2017 was 1.6868 (December 31, 2016 — rates ranged from 1.6501 to 1.6509).

The fair value of the derivative assets and liabilities was calculated based on the level 2 of the fair value hierarchy. The current and long-term portions of the fair value of the Company’s derivative assets and liabilities, as at each balance sheet date, were as follows:

As at June 30, 2017	Other long-term financial assets		Other current financial liabilities			Other long-term financial liabilities			Total
Interest rate floor	$	—	$	(6	)	$	(17,341	)	$	(17,347	)
Prepayment option		31,498		—			—			31,498
	$	31,498	$	(6	)	$	(17,341	)	$	14,151

As at December 31, 2016	Other long-term financial assets		Other current financial liabilities			Other long-term financial liabilities			Total
Interest rate floor	$	—	$	(728	)	$	(13,952	)	$	(14,680	)
Forward foreign exchange contracts		—		(33	)		—			(33	)
Prepayment option		14,931		—			—			14,931
	$	14,931	$	(761	)	$	(13,952	)	$	218

The reconciliation of the fair value of derivative assets and liabilities was as follows:

Fair value as at December 31, 2016 and January 1, 2017	$	218
Realized losses on derivatives
Forward foreign exchange contracts		(206	)
Unrealized gains (losses) on derivatives
Interest rate floor		(3,297	)
Prepayment option		17,569
Forward foreign exchange contracts		239
Impact of foreign exchange		(372	)
Fair value as at June 30, 2017	$	14,151

15. SHARE-BASED COMPENSATION PLANS

In connection with the $387.2 million U.S. dollars cash distribution to the Company’s shareholders (Note 12), in January 2017, a special payment was authorized to stock option holders of $12.8 million U.S. dollars, of which $7.7 million U.S. dollars was paid during the six months ended June 30, 2017 (three months ended June 30, 2017 — $0.1 million U.S. dollars) with the remaining payments to be made in subsequent periods subject to certain conditions being met.

17

Telesat Canada
(Formerly Telesat Holdings Inc.)
 
Notes to the Condensed Consolidated Interim Financial Statements
June 30, 2017
(all amounts in thousands of Canadian dollars, except where otherwise noted)
(unaudited)

15. SHARE-BASED COMPENSATION PLANS  – (continued)

Effective May 2017, Telesat authorized an additional grant of up to 350,000 stock options under the April 2013 stock incentive plan. As at June 30, 2017, the April 2013 stock incentive plan provided for the grant of up to 4,449,133 options, to purchase Non-Voting Participating Preferred Shares, convertible into common shares.

16. EMPLOYEE BENEFIT PLANS

The expenses included on the condensed consolidated statements of income were as follows:

Three months ended June 30,	2017					2016
	Pension			Other		Pension		Other
Operating expenses	$	1,206		$	48	$	1,558	$	56
Interest (income) expense	$	(106	)	$	203	$	219	$	180

Six months ended June 30,	2017				2016
	Pension		Other		Pension		Other
Operating expenses	$	3,117	$	122	$	3,117	$	111
Interest expense	$	325	$	364	$	438	$	360

No amounts were recorded on the condensed consolidated statements of comprehensive income for the three or six months ended June 30, 2017 or 2016.

The balance sheet obligations, distributed between pension and other post-employment benefits, included in other long-term liabilities were as follows:

As at	June 30, 2017		December 31, 2016
Pension benefits	$	13,372	$	14,330
Other post-employment benefits		22,329		22,388
	$	35,701	$	36,718

17. SUPPLEMENTAL CASH FLOW INFORMATION

Cash and cash equivalents were comprised of the following:

As at June 30,	2017		2016
Cash	$	268,390	$	500,976
Short-term investments(1)		86,329		235,293
Cash and cash equivalents	$	354,719	$	736,269

(1) Consisted of short-term investments with an original maturity of three months or less or which are available on demand with no penalty for early redemption.

Income taxes paid, net of income taxes received was comprised of the following:

Six months ended June 30,	2017			2016
Income taxes paid	$	(33,817	)	$	(65,090	)
Income taxes received		770			—
	$	(33,047	)	$	(65,090	)

18

Telesat Canada
(Formerly Telesat Holdings Inc.)
 
Notes to the Condensed Consolidated Interim Financial Statements
June 30, 2017
(all amounts in thousands of Canadian dollars, except where otherwise noted)
(unaudited)

17. SUPPLEMENTAL CASH FLOW INFORMATION  – (continued)

Interest paid, net of capitalized interest and interest received was comprised of the following:

Six months ended June 30,	2017			2016
Interest paid	$	(118,052	)	$	(82,280	)
Interest received		2,681			3,159
Capitalized interest		7,994			1,733
	$	(107,377	)	$	(77,388	)

The net change in operating assets and liabilities was comprised of the following:

Six months ended June 30,	2017			2016
Trade and other receivables	$	9,337		$	(16,059	)
Financial assets		1,802			(1,400	)
Other assets		9,357			776
Trade and other payables		(3,751	)		(568	)
Financial liabilities		(13,363	)		1,500
Other liabilities		50,729			87,471
	$	54,111		$	71,720

The reconciliation of the liabilities arising from financing activities was as follows:

	Indebtedness			Satellite performance incentive payments			Capital leases
Balance as at January 1, 2017(1)	$	3,856,097		$	75,985		$	422
Debt issue costs		(42,867	)		—			—
Cash outflows		(16,241	)		(4,349	)		(15	)
Amortization of deferred financing costs, interest rate floor and prepayment option		7,048			—			—
Other		—			270			3
Impact of foreign exchange		(138,930	)		(2,575	)		(15	)
Balance as at June 30, 2017	$	3,665,107		$	69,331		$	395

(1) Balance of the indebtedness as at January 1, 2017, included $4,459 of accrued debt issue costs associated with the November 2016 refinancing which were paid in 2017.

	Indebtedness			Satellite performance incentive payments			Capital leases
Balance as at January 1, 2016	$	4,063,221		$	87,026		$	—
Non-cash additions		—			—			474
Cash outflows		(49,824	)		(3,652	)		(15	)
Amortization of deferred financing costs, interest rate floors, prepayment option and premiums		6,603			—			—
Other		—			301			(1	)
Impact of foreign exchange		(237,350	)		(5,667	)		(36	)
Balance as at June 30, 2016	$	3,782,650		$	78,008		$	422

19

Telesat Canada
(Formerly Telesat Holdings Inc.)
 
Notes to the Condensed Consolidated Interim Financial Statements
June 30, 2017
(all amounts in thousands of Canadian dollars, except where otherwise noted)
(unaudited)

17. SUPPLEMENTAL CASH FLOW INFORMATION  – (continued)

Non cash investing activities were comprised of:

Six months ended June 30,	2017		2016
Satellites, property and other equipment	$	7,559	$	13,606
Intangible assets	$	61	$	57

18. COMMITMENTS AND CONTINGENT LIABILITIES

The following is a summary of the Company’s off-balance sheet contractual obligations as at June 30, 2017:

	Remaining 2017		2018		2019		2020		2021		Thereafter		Total
Operating property leases	$	3,056	$	6,687	$	3,025	$	1,255	$	903	$	1,363	$	16,289
Capital commitments		73,325		40,255		—		—		—		—		113,580
Other operating commitments		9,731		12,513		10,496		9,013		8,389		13,998		64,140
	$	86,112	$	59,455	$	13,521	$	10,268	$	9,292	$	15,361	$	194,009

Operating property leases consisted of off-balance sheet contractual obligations for land or building usage, while capital commitments included commitments for capital projects. Other operating commitments consisted of third party satellite capacity arrangements as well as other commitments that are not categorized as operating property leases or capital commitments. The Company’s off-balance sheet obligations included the future minimum payments for the non-cancellable period of each respective obligation, which have various terms and expire between 2017 and 2043.

The Company has entered into contracts for the construction and launch of satellites, and other capital expenditures. The total outstanding commitments as at June 30, 2017, were included in capital commitments.

The Company has agreements with various customers for prepaid revenue on several service agreements which take effect when the satellite is placed in service. The Company is responsible for operating and controlling these satellites. As at June 30, 2017, customer prepayments of $415.0 million (December 31, 2016 — $391.8 million), a portion of which is refundable under certain circumstances, were reflected in other current and other long-term liabilities.

In the normal course of business, the Company has executed agreements that provide for indemnification and guarantees to counterparties in various transactions. These indemnification undertakings and guarantees may require the Company to compensate the counterparties for costs and losses incurred as a result of certain events including, without limitation, loss or damage to property, change in the interpretation of laws and regulations (including tax legislation), claims that may arise while providing services, or as a result of litigation that may be suffered by the counterparties. The nature of substantially all of the indemnification undertakings prevents the Company from making a reasonable estimate of the maximum potential amount the Company could be required to pay counterparties as the agreements do not specify a maximum amount and the amounts are dependent upon the outcome of future contingent events, the nature and likelihood of which cannot be determined at this time. Historically, the Company has not made any significant payments under such indemnifications.

Telesat and Loral have entered into an indemnification agreement whereby Loral will indemnify Telesat for tax liabilities for taxation years prior to 2007 related to Loral Skynet operations. Likewise, Telesat will indemnify Loral for the settlement of tax receivables for taxation years prior to 2007.

20

Telesat Canada
(Formerly Telesat Holdings Inc.)
 
Notes to the Condensed Consolidated Interim Financial Statements
June 30, 2017
(all amounts in thousands of Canadian dollars, except where otherwise noted)
(unaudited)

18. COMMITMENTS AND CONTINGENT LIABILITIES  – (continued)

Legal Proceedings

The Company frequently participates in proceedings before national telecommunications regulatory authorities. In addition, the Company may also become involved from time to time in other legal proceedings arising in the normal course of its business.

Other than the legal proceedings disclosed in Note 31 of the Company’s December 31, 2016 consolidated statements, the Company is not aware of any proceedings outstanding or threatened as of the date hereof by or against it or relating to its business which may have, or have had in the recent past, significant effects on the Company’s financial position or profitability.

19. RELATED PARTY TRANSACTIONS

The Company’s immediate shareholders are Red Isle Private Investment Inc. (“Red Isle”), a company incorporated in Canada, Loral Holdings Corporation (“Loral Holdings”), a company incorporated in the United States, and various individuals. Red Isle is wholly-owned by PSP Investments, a Canadian Crown corporation. Loral Holdings is a wholly-owned subsidiary of Loral, a United States publicly listed company.

Transactions with subsidiaries

The Company and its subsidiaries regularly engage in inter-group transactions. These transactions include the purchase and sale of satellite services and communication equipment, providing and receiving network and call centre services, access to orbital slots and management services. The transactions have been entered into over the normal course of operations. Balances and transactions between the Company and its subsidiaries have been eliminated on consolidation and therefore have not been disclosed.

Special cash distribution

Effective January 25, 2017, the Board of Directors approved a special cash distribution to shareholders, as a reduction of stated capital, in the amount of approximately $387.2 million U.S. dollars. Of this balance, $138.5 million U.S. dollars was paid to Red Isle, $242.7 million U.S. dollars was paid to Loral Holdings, with the remainder paid to other shareholders. These distributions were made during the first quarter of 2017.

Special payment to stock option holders

In connection with the cash distribution to our shareholders, in January 2017, a special payment was authorized to stock option holders of $12.8 million U.S. dollars, of which $11.3 million U.S. dollars related to key management personnel. Payments of $6.6 million U.S. dollars of this balance was paid to key management personnel in the six months ended June 30, 2017 (three months ended June 30, 2017 — $0.1 million) with the remaining payments to be made in subsequent periods subject to certain conditions being met.

Compensation of executives and Board level directors

Compensation of the Company’s executives and Board level directors consists of short-term benefits (including salaries), post-employment benefits and share-based compensation. The transactions have been entered into with the Company in the normal course of operations.

Key management personnel — stock options

During 2013 through 2015, the Board authorized the grant of stock options to certain key management personnel pursuant to the stock incentive plan. An expense of $0.7 million and $1.6 million was recorded in the three and six months ended June 30, 2017, respectively, in connection with these stock options (June 30, 2016 — $1.5 million and $3.0 million, respectively).

21

Telesat Canada
(Formerly Telesat Holdings Inc.)
 
Notes to the Condensed Consolidated Interim Financial Statements
June 30, 2017
(all amounts in thousands of Canadian dollars, except where otherwise noted)
(unaudited)

19. RELATED PARTY TRANSACTIONS  – (continued)

In March 2016, a total of 1,253,477 stock options were repurchased from key management personnel and other employees or former employees for total cash consideration of $24.7 million, of which $18.7 million was paid to key management personnel.

Transactions with related parties

The Company and certain of its subsidiaries regularly engage in transactions with related parties. The Company’s related parties include Loral and Red Isle. There were no transactions or balances outstanding with Red Isle during any of the periods presented.

During the periods presented below, the Company and its subsidiaries entered into the following transactions with Loral:

	Sale of goods and services				Purchase of goods and services
Three months ended June 30,	2017		2016		2017		2016
Revenue	$	33	$	33	$	—	$	—
Operating expenses	$	—	$	—	$	1,686	$	1,611

	Sale of goods and services				Purchase of goods and services
Six months ended June 30,	2017		2016		2017		2016
Revenue	$	33	$	67	$	—	$	—
Operating expenses	$	—	$	—	$	3,343	$	3,334

The following balances were outstanding with Loral at the end of the periods presented below:

	Amounts owed by related parties				Amounts owed to related parties
As at	June 30, 2017		December 31, 2016		June 30, 2017		December 31, 2016
Current receivables/payables	$	72	$	—	$	—	$	174

The amounts outstanding are unsecured and will be settled in cash.

Other related party transactions

The Company funds certain defined benefit pension plans. Contributions made to the plans for the three and six months ended June 30, 2017, were $2.1 million and $4.2 million, respectively (June 30, 2016 — $2.3 million and $4.6 million, respectively).

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with Telesat Canada’s unaudited condensed consolidated interim financial statements beginning at Page 1 of this Quarterly Report.

On January 1, 2017, Telesat Holdings Inc. completed a corporate reorganization, of companies under common control, pursuant to which Telesat Holdings Inc. amalgamated with Telesat Interco Inc. and immediately thereafter the newly amalgamated company amalgamated with Telesat Canada. The continuing entity, existing under the laws of Canada, is named Telesat Canada. The reorganization has been accounted for as a continuation of Telesat Holdings Inc.

As used in this management’s discussion and analysis of financial condition and results of operations (“MD&A”), unless the context states or requires otherwise, references to “Telesat,” “Company,” “we,” “our” and “us” refer to Telesat Canada (formerly Telesat Holdings Inc.) and its subsidiaries. Unless the context states or requires otherwise, reference herein to “the consolidated financial statements” or “the financial statements” or similar terms refer to Telesat Canada’s unaudited condensed consolidated interim financial statements included herein.

The dollar amounts presented in this Quarterly Report are in Canadian dollars unless otherwise specified. On June 30, 2017, the Bloomberg exchange rate was USD $1 = CAD $1.2964. The average exchange rate for the three months ended June 30, 2017, was USD $1 = CAD $1.3490.

The financial information presented herein has been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting.

The information contained in this MD&A takes into account information available up to July 25, 2017, unless otherwise noted.

Forward-Looking Statements Safe Harbor

This Quarterly Report contains statements that are not based on historical fact and 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,” “well positioned,” “project,” “targeted,” “intend,” “pursue” or “outlook” or other variations of these words. These statements or other similar expressions are intended to identify forward-looking statements and information. Actual results may differ materially from the expectations expressed or implied in the forward-looking statements as a result of known and unknown risks and uncertainties. Detailed information about some of the known risks and uncertainties is included in the “Risk Factors” section of Telesat Canada’s Annual Report on Form 20-F for the fiscal year ended December 31, 2016 filed with the SEC on March 1, 2017 as well as Telesat’s other filings with the SEC which can be obtained on the SEC’s website at http://www.sec.gov. Readers are specifically referred to these documents. Known risks and uncertainties include but are not limited to: (1) financial risks, including economic downturns, restrictions imposed by covenants contained in the agreements governing our debt, our leverage, volatility in exchange rates, and our dependence on a few large customers for a significant proportion of our revenue; (2) risks associated with operating satellites and providing satellite services, including satellite construction or launch delays, launch failures, in-orbit failures or impaired satellite performance, the ability to obtain or renew satellite insurance at all or on reasonable terms, and competition from other providers of telecommunication services; (3) risks associated with domestic and foreign government regulation; and (4) other risks, including potential conflicts of interest with our significant shareholders, litigation, and market risks. The foregoing list of important factors is not exhaustive. The information contained in this Quarterly Report reflects our beliefs, assumptions, intentions, plans and expectations as of the date of this report. We undertake no obligation to update any forward-looking statements.

OVERVIEW OF THE BUSINESS

We are a leading global fixed satellite services operator, with offices and facilities around the world. We provide our satellite and communication services from a fleet of satellites that occupy Canadian and other

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orbital locations. We are organized into one operating segment, the satellite services business; however, we provide our services through three business categories: Broadcast, Enterprise and Consulting and other.

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. We have been able to generate a large contracted revenue backlog by entering into long-term contracts with some of our customers for all or substantially all of a satellite’s life. Historically, this has resulted in revenue from the satellite services business being fairly predictable.

As at June 30, 2017, we provided satellite services to customers from our fleet of 15 in-orbit satellites as well as our Canadian payload on the ViaSat-1 satellite. In addition, we have two other geostationary satellites under construction, and also have two prototype Ka-band satellites under construction to support the development of our planned global low earth orbit (“LEO”) constellation. We also manage the operations of additional satellites for third parties.

Telesat and its affiliates operate satellites pursuant to authorizations granted by governments, including those of Canada, the United States, Brazil, the Kingdom of Tonga and the United Kingdom, to access and use certain geostationary orbital locations and associated spectrum resources. The use of these orbital locations, as well as our other operations, is subject to a variety of Canadian and international regulations.

Revenue

We earn most of our revenue by providing video and data services using satellite transponder capacity. We also earn revenue by providing ground-based transmit and receive services, selling equipment, managing satellite networks, and providing consulting services in the field of satellite communications.

We recognize revenue when earned, as services are rendered or as products are delivered to customers. For us to recognize revenue, there must be evidence that an arrangement exists, the amount of revenue must be fixed or determinable and our ability to collect must be reasonably assured. In particular, broadcast and some enterprise revenue are generally billed in advance to customers and recognized in the month for which the service is rendered. Consulting revenue for cost plus contracts is recognized after the work has been completed and accepted by the customer. The percentage of completion method is used to recognize consulting revenue for fixed price contracts.

Expenses

Our operating expenses consist of labor, the cost of which has historically been relatively stable, and variable operating expenses which include in-orbit insurance and direct-billed expenses, such as third-party contractor services.

Interest expense continues to be significant and arises principally from our Senior Secured Credit Facilities and our Senior Notes. Foreign exchange gains or losses incurred on the translation of our U.S. dollar denominated indebtedness and the gains or losses on financial instruments resulting from variations in the fair value of the prepayment option on our Senior Notes and embedded derivative related to the interest rate floor included on our U.S. Term Loan B Facilities remain significant components of our total expenses.

Other significant operating expenses include the straight-line depreciation of the cost of each of our satellites over their useful lives and amortization expense related to various finite-life intangible assets.

FUTURE OUTLOOK

Our desirable spectrum rights, commitment to providing the highest level of customer service, deep technical expertise and culture of innovation have enabled us to successfully develop our business to date. Leveraging these strengths and building on our existing contractual revenue backlog, our focus is on profitably growing our business by increasing the utilization of our in-orbit satellites and, in a disciplined manner, deploying expansion satellite capacity where we anticipate there will be strong market demand. We currently have two geostationary satellites, Telstar 18 VANTAGE and Telstar 19 VANTAGE, under construction. In addition, we have two prototype Ka-band satellites under construction as part of our plan to develop an advanced, global LEO satellite constellation offering low latency, high throughput broadband services.

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We believe we are well-positioned to serve our customers and the markets in which we participate. We actively pursue opportunities to develop new satellites, particularly in conjunction with current or prospective customers who will commit to long-term service agreements prior to the time the satellite construction contract is signed. Although we regularly pursue opportunities to develop new satellites, we do not procure additional or replacement satellites until we believe there is a demonstrated need and a sound business plan for such satellite capacity.

As we move through 2017, we remain focused on increasing the utilization of our existing satellites, the construction of our new satellites, and identifying and pursuing opportunities to invest in expansion satellite capacity, all while maintaining our operating discipline.

RESULTS OF OPERATIONS

Review of financial performance

Our net income for the three months ended June 30, 2017, was $148 million compared to a net income of $62 million for the same period in the prior year. The increase of $86 million was principally due to a higher non-cash gain on foreign exchange and a favorable change in the fair value of financial instruments, which was partially offset by lower revenue and higher interest expense.

Below are the foreign exchange rates used for our condensed consolidated interim financial statements and this MD&A:

	Q1 2017		Q2 2017		Q2 YTD 2017		June 30, 2017
USD to CAD spot rate		—		—		—		1.2964
USD to CAD average rates		1.3257		1.3490		1.3374		—

	Q1 2016		Q2 2016		Q2 YTD 2016		December 31, 2016
USD to CAD spot rate		—		—		—		1.3441
USD to CAD average rates		1.3785		1.2884		1.3335		—

Revenue

	Three Months Ended June 30,				% Increase (Decrease)			Six Months Ended June 30,				% Increase (Decrease)
(in millions of Canadian dollars except percentages)	2017		2016					2017		2016
Broadcast	$	120	$	120		— %		$	239	$	245		(2	)%
Enterprise		99		106		(7	)%		210		211		— %
Consulting and other		7		6		17 %			12		11		9 %
Revenue	$	226	$	232		(3	)%	$	461	$	467		(1	)%

Revenue for the three months ended June 30, 2017, decreased by $6 million to $226 million, when compared to $232 million earned over the same period in the prior year. Revenue for the six months ended June 30, 2017, was $461 million, which represents a decrease of $6 million compared to $467 million of revenue earned during the same period in the prior year.

Revenue from Broadcast services remained constant for the three months ended June 30, 2017, and decreased by $6 million for the six months ended June 30, 2017, when compared to the same periods in the prior year. For the three months ended June 30, 2017, a favorable foreign exchange impact on the conversion of our U.S. dollar denominated revenue, when compared to the same period in 2016, was primarily offset by a one time sale of equipment and related services in 2016 and, secondarily, by a slight decrease in certain international services. The decrease for the six months ended June 30, 2017, was primarily due to a one time sale of equipment and related services in 2016, a slight decrease in certain international services, and a reduction in revenue from Canadian spectrum license fees, which also resulted in a corresponding reduction in operational expenses.

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Revenue from Enterprise services decreased by $7 million and $1 million for the three and six months ended June 30, 2017, respectively, when compared to the same periods in the prior year. The decrease for the three months ended June 30, 2017, was primarily due to short-term services provided to another satellite operator in the second quarter of 2016, which did not occur in 2017 and, to a lesser extent, a reduction in services for certain customers, partially offset by favorable foreign exchange impact on the conversion of our U.S. dollar denominated revenue, when compared to the same period in 2016. The decrease for the six months ended June 30, 2017, was mainly due to end of service or reduction of services for certain customers, partially offset by a short term service provided to another satellite operator in the first quarter of 2017, higher equipment sales, as well as favorable foreign exchange impact on the conversion of our U.S. dollar denominated revenue, when compared to the same period in 2016.

Consulting and other revenue increased by $1 million for the three and six months ended June 30, 2017, when compared to the same periods in the prior year. The increase for the three and six months ended June 30, 2017, was due to higher consulting activities compared to the same periods in the prior year.

Expenses

	Three Months Ended June 30,				% Increase (Decrease)			Six Months Ended June 30,				% Increase (Decrease)
(in millions of Canadian dollars except percentages)	2017		2016					2017		2016
Depreciation	$	56	$	56		— %		$	112	$	112		— %
Amortization		6		7		(14	)%		13		14		(7	)%
Other operating gains (losses), net		—		—		—	%		—		3		(100	)%
Operating expenses		44		42		5	%		99		89		11	%
Expenses	$	106	$	105		1 %		$	224	$	218		3	%

Depreciation

Depreciation of satellites, property and other equipment remained constant for the three and six months ended June 30, 2017, when compared to the same periods in the prior year.

Amortization

Amortization of intangible assets decreased by $1 million for the three and six months ended June 30, 2017, when compared to the same periods in the prior year, due primarily to lower amortization of intangible assets related to revenue backlog.

Other operating gains (losses), net

For the six months ended June 30, 2016, the other operating gains (losses), net related to the disposals of certain equipment.

Operating Expenses

	Three Months Ended June 30,				% Increase (Decrease)			Six Months Ended June 30,				% Increase (Decrease)
(in millions of Canadian dollars except percentages)	2017		2016					2017		2016
Compensation and employee benefits	$	18	$	17		6 %		$	47	$	36		31	%
Other operating expenses		11		11		— %			21		20		5	%
Cost of sales		15		14		7	%		31		33		(6	)%
Operating expenses	$	44	$	42		5	%	$	99	$	89		11	%

Operating expenses increased by $2 million and $10 million for the three and six months ended June 30, 2017, respectively, when compared to the same periods in the prior year. Operating expenses consisted of compensation and employee benefits, other operating expenses, such as marketing, general and administration expenses, and cost of sales.

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Compensation and employee benefits increased by $1 million and $11 million for the three months and six months ended June 30, 2017, respectively, in comparison with the same periods in the prior year. The increase was primarily due to compensation expense associated with the special payments to stock option holders in connection with the cash distribution made to our shareholders in the first quarter of 2017. This was partially offset by lower share-based compensation.

Other operating expenses remained constant for the three months ended June 30, 2017 and increased by $1 million for the six months ended June 30, 2017, when compared to the same periods in the prior year. For the three months ended June 30, 2017, higher professional fees were offset by lower bad debts expense. For the six months ended June 30, 2017, higher professional fees were partially offset by lower bad debts expense.

Cost of sales increased by $1 million for the three months ended June 30, 2017, when compared to the same period in the prior year. The increase for the three months ended June 30, 2017, was primarily due to an unfavorable foreign exchange impact on the conversion of our U.S. dollar denominated expenses, when compared to the same period in the prior year. The decrease of $2 million for the six months ended June 30, 2017, was primarily due to a reduction in Canadian spectrum license fees and lower third-party satellite capacity expenses, partially offset by higher cost of equipment sales.

Interest Expense

	Three Months Ended June 30,						% Increase (Decrease)			Six Months Ended June 30,						% Increase (Decrease)
(in millions of Canadian dollars except percentages)	2017			2016						2017			2016
Debt service costs	$	53		$	46			15	%	$	105		$	95			11	%
Interest on satellite performance incentive payments		2			2			—	%		3			3			—	%
Interest on employee benefit plans		—			—			—	%		1			1			—	%
Capitalized interest		(4	)		(1	)		300	%		(8	)		(2	)		300	%
Interest expense	$	51		$	47			9	%	$	101		$	97			4	%

Interest expense included interest related to our debt, net of capitalized interest, as well as, interest related to our derivative instruments, satellite performance incentive payments and employee benefit plans.

Debt service costs, which included interest expense on indebtedness and derivative instruments, increased by $7 million for the three months ended June 30, 2017 and by $10 million for the six months ended June 30, 2017, when compared to the same periods in the prior year. The change in debt service costs for the three and six months ended June 30, 2017 was primarily due to higher interest on our new Senior Secured Credit Facilities and Senior Notes. This was combined with an unfavorable foreign exchange impact on the conversion of U.S. dollar denominated debt costs into Canadian dollar equivalent, when compared to the same periods in the prior year.

Interest on satellite performance incentive payments and on employee benefit plans remained constant for the three and six months ended June 30, 2017, when compared to the same periods in the prior year.

Capitalized interest increased by $3 million and $6 million for the three and six months ended June 30, 2017, respectively, when compared to the same periods in the prior year, primarily due to an increase in accumulated capital expenditures relating to our satellites under construction.

Interest and Other (Expense) Income

	Three Months Ended June 30,					Six Months Ended June 30,
(in millions of Canadian dollars)	2017			2016		2017			2016
Interest and other (expense) income	$	(1	)	$	1	$	(1	)	$	2

Interest and other (expense) income were mainly related to interest income on cash and short-term investments and other one-time expenses.

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Foreign Exchange and Derivatives

	Three Months Ended June 30,					Six Months Ended June 30,
(in millions of Canadian dollars)	2017		2016			2017		2016
Gain (loss) on changes in fair value of financial instruments	$	2	$	(18	)	$	14	$	(24	)
Gain on foreign exchange	$	96	$	19		$	120	$	209

The $2 million gain on changes in fair value of financial instruments in the three months ended June 30, 2017, represented a positive change of $20 million compared to the same period in the prior year. The $14 million gain on changes in fair value of financial instruments in the six months ended June 30, 2017, represented a favorable change of $38 million compared to the same period in the prior year. The gain on changes in fair value of financial instruments primarily reflects changes in the fair values of our interest rate floor on our Senior Secured Credit Facilities, and the prepayment option on our Senior Notes, as a result of changes in key economic variables, such as foreign exchange rates, credit spreads and swap rates.

The foreign exchange gain for the three months ended June 30, 2017, was $96 million compared to a foreign exchange gain of $19 million for the same period in 2016 resulting in a positive change of $77 million. The gain for the three months ended June 30, 2017, was mainly due to a weaker U.S. dollar to Canadian dollar spot rate at June 30, 2017 ($1.2964), compared to the spot rate at March 31, 2017 ($1.3318), and the resulting favorable impact on the translation of our U.S. dollar denominated debt. The mainly non-cash foreign exchange gain for the three months ended June 30, 2016, was primarily due to a weaker U.S. dollar to Canadian dollar spot rate at June 30, 2016 (1.2924), compared to a spot rate at March 31, 2016 ($1.3004), and the resulting favorable impact on the translation of our U.S. dollar denominated debt.

The foreign exchange gain for the six months ended June 30, 2017, was $120 million, compared to a foreign exchange gain of $209 million for the same period in 2016, resulting in a negative change of $89 million. The mainly non-cash gain for the six months ended June 30, 2017, was primarily due to a weaker U.S. dollar to Canadian dollar spot rate at June 30, 2017 ($1.2964), compared to the spot rate at December 31, 2016 ($1.3441), and the resulting favorable impact on the translation of our U.S. dollar denominated debt. The mainly non-cash foreign exchange gain for the six months ended June 30, 2016, was primarily due to a weaker U.S. dollar to Canadian dollar spot rate at June 30, 2016 ($1.2924), compared to the spot rate at December 31, 2015 ($1.3839), and the resulting favorable impact on the translation of our U.S. dollar denominated debt.

Income Taxes

	Three Months Ended June 30,						Six Months Ended June 30,
(in millions of Canadian dollars)	2017			2016			2017			2016
Current tax expense	$	26		$	24		$	48		$	48
Deferred tax recovery		(8	)		(5	)		(15	)		(9	)
Tax expense	$	18		$	19		$	33		$	39

The tax expense decreased by $1 million and $6 million for the three and six months ended June 30, 2017, respectively, when compared to the same periods in the prior year. The decrease for the three and six months ended June 30, 2017, was primarily due lower operating income and higher interest expense, when compared to the same periods in the prior year.

Backlog

Contracted revenue backlog (“backlog”) represents our expected future revenue from existing service contracts (without discounting for present value) including any deferred revenue that we will recognize in the future in respect of cash already received. The majority of our contracted revenue backlog is generated from contractual agreements for satellite capacity. We do not include revenue beyond the stated expiration date of a contract regardless of the potential for a renewal. As at June 30, 2017, our contracted backlog was approximately $3.9 billion.

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Generally, following the successful launch of a satellite, if the satellite is operating nominally, our customers may only terminate their service agreements for satellite capacity by paying us all, or substantially all, of the payments that would have otherwise become due over the term of the service agreement. However, if certain of our existing satellites were to experience a significant launch delay, launch or in-orbit failure, or otherwise fail to operate as anticipated, our customers may be entitled to terminate their agreement and we may be obligated to return all or a portion of the customer prepayments made under service agreements for that satellite and reduce the associated contractual revenue from revenue backlog. Any repayments under such conditions would be funded by insurance proceeds we may receive, cash on hand, short-term investments, and funds available under our Revolving Credit Facility.

We expect our backlog, as at June 30, 2017, to be recognized as follows:

(in millions of Canadian dollars)	Remaining 2017		2018		2019		2020		2021		Thereafter
Backlog	$	391	$	644	$	561	$	506	$	424	$	1,410

The recognition of the backlog is based upon our current revenue recognition policies and does not take into account changes, if any, that may be required upon the adoption of IFRS 15.

Backlog is not a presentation made in accordance with IFRS. The presentation of backlog is not comparable to other similarly titled measures of other companies because not all companies use identical calculations of backlog. We believe the disclosure of the recognition of backlog provides information that is useful to an investor’s understanding of our expected known revenue recognition.

LIQUIDITY AND CAPITAL RESOURCES

Cash and Available Credit

As at June 30, 2017, we had $355 million of cash and short-term investments, as well as approximately $200 million U.S. dollars (or Canadian dollar equivalent) of borrowing availability under our Revolving Credit Facility.

Cash Flows from Operating Activities

Cash generated from operating activities for the six months ended June 30, 2017, was $252 million, a $14 million decrease compared to the same period in the prior year. The decrease was primarily due lower customer prepayments and higher interest paid, partially offset by lower taxes paid and the repurchase of stock options which occurred in the three months ended March 31, 2016.

Cash Flows used in Investing Activities

Cash used in investing activities for the six months ended June 30, 2017 was $85 million. This consisted of $67 million of expenditures on satellite programs, $13 million of payments for intangible assets, as well as $5 million of payments for property and other equipment.

Cash used in investing activities for the six months ended June 30, 2016 was $140 million. This consisted of $99 million of expenditures on satellite programs, $37 million of payments for intangible assets, as well as $4 million for property and other equipment.

Cash Flows used in Financing Activities

Cash used in financing activities for the six months ended June 30, 2017 was $569 million. This was mostly related to a cash distribution to shareholders, as a reduction of stated capital, the debt issue costs in connection with the repricing of the Senior Secured Credit Facilities and mandatory principal repayments made on our Senior Secured Credit Facilities.

Cash used in financing activities for the six months ended June 30, 2016 was $53 million. This was mainly related to mandatory principal repayment on our former Senior Secured Credit Facilites.

Liquidity

A large portion of our 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. We believe cash

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and short-term investments as at June 30, 2017, cash flows from operating activities, and drawings on the Revolving Credit Facility under our Senior Secured Credit Facilities will be adequate to meet our expected cash requirements for at least the next twelve months for activities in the normal course of business, including our capital requirements and the required interest and principal payments on our debt.

The construction of any satellite replacement or expansion program will require significant capital expenditures. We may choose to invest in new satellites to further grow our business. Cash required for current and future satellite construction programs will be funded from some or all of the following: cash and short-term investments, cash flows from operating activities, cash flows from customer prepayments or through borrowings on the Revolving Credit Facility under our Senior Secured Credit Facilities. In addition, we may sell certain satellite assets and, in accordance with the terms and conditions of our Senior Secured Credit Facilities, reinvest the proceeds in replacement satellites or pay down indebtedness under those Senior Secured Credit Facilities. Subject to market conditions and subject to compliance with the terms and conditions of our Senior Secured Credit Facilities and the financial leverage covenant tests therein, we may also have the ability to obtain additional secured or unsecured financing to fund current or future satellite construction. However, our ability to access these sources of funding is not guaranteed, and therefore, we may not be able to fully fund additional replacement or new satellite construction programs.

Debt

Senior Secured Credit Facilities

The obligations under the 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 our subsidiaries (“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 net leverage ratio and contains customary events of default and affirmative covenants, including an excess cash sweep, that may require us to repay a portion of the outstanding principal under our Senior Secured Credit Facilities prior to the stated maturity.

Our Senior Secured Credit Facilities are comprised of the following facilities:

i — Revolving Credit Facility

Our Revolving Credit Facility (“Revolving Facility”) is a $200 million loan facility available in either U.S. dollar or Canadian dollar equivalent, maturing on November 17, 2021. Loans under our Revolving Facility bear interest at a floating rate of LIBOR plus an applicable margin ranging from 1.50% to 2.00% for prime rate and Alternative Base Rate loans and ranging from 2.50% to 3.00% for Bankers’ Acceptance (“BA”) and Eurodollar loans. The rates on the Revolving Facility vary depending upon the results of the first lien leverage ratio. Our Revolving Facility currently has an unused commitment fee of 40 basis points. As at June 30, 2017, other than approximately $0.1 million in drawings related to letters of credit, there were no borrowings under this facility.

ii — Term Loan B — U.S. Facility

Our Term Loan B — U.S. Facility (“U.S. TLB Facility”) is a USD $2,430 million loan maturing on November 17, 2023.

As at June 30, 2017, USD $2,412 million of this facility was outstanding, which represents the full amount available following mandatory repayments. The initial terms had the outstanding borrowings under our U.S. TLB Facility bear interest at a floating rate of LIBOR, but not less than 0.75%, plus an initial applicable margin of 3.75%. On February 1, 2017, we amended the Senior Secured Credit Facilities to reduce the applicable margin to 3.00% on the then outstanding USD $2,424 million. As at February 1, 2017, the mandatory principal repayments on our U.S. TLB Facility are one quarter of 1.00% of the value of the loan at the time of the amendment, which must be paid on the last day of each quarter.

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Senior Notes

Our Senior Notes, in the amount of USD $500 million, bear interest at an annual rate of 8.875% and are due November 17, 2024. They include covenants or terms that restrict our 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 our satellite insurance, effect mergers with another entity, and redeem our Senior Notes, without penalty, before November 15, 2022, in each case subject to exceptions provided in the Senior Notes indenture.

As at June 30, 2017, we were in compliance with the financial covenants of our Senior Secured Credit Facilities and the indenture governing our Senior Notes.

Debt Service Cost

An estimate of the interest expense is based upon assumptions of foreign exchange rates, Libor, BA rates and the applicable margins of our Senior Secured Credit Facilities and Senior Notes. Our interest expense for the year ending December 31, 2017, is expected to be approximately $195 million.

Derivatives

We use, from time to time, interest rate and currency derivatives to manage our exposure to changes in interest rates and foreign exchange rates.

As at June 30, 2017, there was one forward foreign exchange contract with a maturity of July 2017 outstanding with an insignificant fair value.

We also have embedded derivatives that are accounted for separately at fair value. These embedded derivatives are related to a prepayment option included on our Senior Notes, as well as an interest rate floor included on our U.S. TLB Facility. As at June 30, 2017, the fair value of the embedded derivative related to the prepayment option on our Senior Notes was an asset of $31 million and the fair value of the embedded derivatives related to the interest rate floor was a liability of $17 million.

The changes in the fair value of these embedded derivatives are recorded on our consolidated statement of income as a gain or loss on changes in fair value of financial instruments and are non-cash.

All derivative instruments are measured at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market under current market conditions at the measurement date. Where possible, fair values are based on the quoted market values in an active market. In the absence of an active market, we determine fair values based on prevailing market rates (bid and ask prices, as appropriate) for instruments with similar characteristics and risk profiles or internal or external valuation models, such as option pricing models and discounted cash flow analysis, using observable market-based inputs.

These estimates are affected significantly by the assumptions for the amount and timing of estimated future cash flows and discount rates, which all reflect varying degrees of risk. Potential income taxes and other expenses that would be incurred on disposition of our derivative instruments are not reflected in the fair values. The fair values also include an adjustment related to the counterparty credit risk. As a result, the fair values are not necessarily the net amounts that would be realized if these instruments were actually settled.

CAPITAL EXPENDITURES

We have entered into contracts for the construction and launch of satellites and other capital expenditures. The outstanding commitments associated with these contracts were approximately $114 million as at June 30, 2017. These expenditures may be funded from some or all of the following: cash and short-term investments, cash flow from operating activities, cash flow from customer prepayments or funds available under our Revolving Credit Facility.

MARKET RISK

Credit Risk Related to Financial Instruments

Financial instruments that potentially subject us to a concentration of credit risk consist of cash and short-term investments, accounts receivable, derivative assets and other assets. Cash and short-term

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investments are invested with high quality financial institutions and are governed by our corporate investment policy, which aims to reduce credit risk by restricting investments to high-grade, mainly U.S. dollar and Canadian dollar denominated investments. Credit checks are performed to minimize exposure to any one customer. We are exposed to credit risk if counterparties to our derivative instruments are unable to meet their obligations. It is expected that these counterparties will be able to meet their obligations as they are institutions with strong credit ratings, but we still periodically monitor their credit risk and credit exposure.

Foreign Exchange Risk

Our operating results are subject to fluctuations as a result of exchange rate variations to the extent that transactions are made in currencies other than Canadian dollars. The most significant impact of variations in the exchange rate is on our U.S. dollar denominated debt and cash and short-term investments. In addition, a portion of our revenue and expenses, as well as the majority of our capital expenditures are denominated in U.S. dollars. As a result, the volatility of the U.S. dollar exposes us to foreign exchange risks.

For the six month period ended June 30, 2017, we recorded a mainly non-cash foreign exchange gain of approximately $120 million due to a weaker U.S. to Canadian dollar spot rate ($1.2964) compared to December 31, 2016 ($1.3441). For the six month period ended June 30, 2016, we recorded a mainly non-cash foreign exchange gain of approximately $209 million due to a weaker U.S. to Canadian dollar spot rate ($1.2924) compared to December 31, 2015 ($1.3839).

The approximate amount of our revenue and certain expenses denominated in U.S. dollars, as a percentage of their overall balance, is summarized in the table below:

	Three months ended June 30, 2017			Six months ended June 30, 2017
Revenue		50	%		51	%
Operating expenses		44	%		43	%
Interest on our indebtedness		100	%		100	%

We use, from time to time, the following instruments to manage our exposure to foreign exchange risk:

• forward currency contracts to hedge foreign exchange risk on anticipated cash flows, mainly related to the construction of satellites and interest payments; and

• currency derivative instruments to hedge the foreign exchange risk on our U.S. dollar denominated debt.

Our policy is that we do not use derivative instruments for speculative purposes. As at June 30, 2017, we had one forward currency contract in place and no currency derivative instruments.

A five percent increase (decrease) in the value of the U.S. dollar against the Canadian dollar would have increased (decreased) our indebtedness and cash and short-term investments as at June 30, 2017 by $189 million and $14 million, respectively.

A five percent increase (decrease) in the value of the U.S. dollar against the Canadian dollar would have increased (decreased) our revenue and certain expenses for the three and six months ended June 30, 2017, as summarized in the table below:

(in millions of Canadian dollars)	Three months ended June 30, 2017		Six months ended June 30, 2017
Revenue	$	6	$	12
Operating expenses	$	1	$	2
Interest on our indebtedness	$	3	$	5

The sensitivity analyses above assume that all other variables remain constant.

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Through our U.S. dollar denominated debt, we are exposed to foreign exchange fluctuations. The following table contains our existing U.S. dollar denominated debt balances at the beginning of each respective period, which are net of our scheduled debt repayments, and based on the foreign exchange rate as at June 30, 2017.

(CAD millions)	Q3 2017		2018		2019		2020		2021		Thereafter
U.S. TLB Facility	$	3,126.7	$	3,111.0	$	3,079.5	$	3,048.1	$	3,016.7	$	2,985.3
Senior Notes		648.2		648.2		648.2		648.2		648.2		648.2
U.S. dollar denominated debt balances	$	3,774.9	$	3,759.2	$	3,727.7	$	3,696.3	$	3,664.9	$	3,633.5

Interest Rate Risk

We are exposed to interest rate risk on our cash and short-term investments and on our indebtedness, a portion of which includes a variable interest rate. Changes in the interest rates could impact the amount of interest that we receive or are required to pay.

We use, from time to time, interest rate swaps to hedge the interest rate risk related to our debt.

Our policy is that we do not use derivative instruments for speculative purposes. As at June 30, 2017, we had no interest rate swaps.

If the interest rates on our unhedged variable rate debt increased (decreased) by 0.25%, excluding the potential impact of the interest rate floor, the result would be an decrease (increase) of $2.0 million and $4.0 million to our net income for the three and six months ended June 30, 2017, respectively.

As at June 30, 2017, through our U.S. TLB Facility we are exposed to interest rate fluctuations. The following table contains the balance of the U.S. TLB facility at the beginning of each respective period, net of our scheduled repayments, and based on the foreign exchange rates as at June 30, 2017.

(CAD millions)	Q3 2017		2018		2019		2020		2021		Thereafter
U.S. TLB Facility(1)	$	3,126.7	$	3,111.0	$	3,079.5	$	3,048.1	$	3,016.7	$	2,985.3

(1) U.S. TLB Facility is USD denominated and bears interest at Libor with a 0.75% floor plus a spread.

NON-IFRS MEASURES

Consolidated EBITDA for Covenant Purposes

Under the terms of the Credit Agreement for our Senior Secured Credit Facilities, we are required to comply with a senior secured leverage ratio maintenance covenant as well as with other financial ratio covenants that impact, among other items, our ability to incur debt and make dividend payments.

If our Revolving Credit Facility is drawn, our Credit Agreement requires us to comply with a first lien net leverage ratio of 5.75:1.00, tested quarterly, and failure to comply will result in an event of default. We refer to this first lien net leverage ratio as the Consolidated Total Secured Debt to Consolidated EBITDA for Covenant Purposes ratio.

Our Credit Agreement limits, among other items, our ability to incur debt and make dividend payments if the total leverage ratio is above 4.50:1.00, with certain exceptions. We refer to this total leverage ratio as the Consolidated Total Debt for Covenant Purposes to Consolidated EBITDA for the purposes of our Senior Secured Credit Facilities.

Our Consolidated Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) for Covenant Purposes is defined as net income (loss) for Telesat and Restricted Subsidiaries plus interest expense, net of cash interest income earned on cash and cash equivalents, depreciation expense, amortization expense, extraordinary losses and unusual and non-recurring charges, non-cash charges, any expenses or charges incurred in connection with any issuance of debt, any impairment charges or asset write off, foreign withholding taxes paid or accrued, non-cash charges related to share-based compensation expense and consulting fees payable to Loral. Additional sums which may be added include projected cost savings from an

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acquisition and lost revenue which may have been earned by satellites that have been subject to an insured loss. Deductions which are made in calculating Consolidated EBITDA for Covenant Purposes include extraordinary, non-recurring gains and losses and non-cash gains and losses.

Further adjustments are made to account for income from Unrestricted Subsidiaries, and currency gains and losses (including non-cash gains or losses on derivative contracts). Unrestricted Subsidiaries are (a) any Subsidiary of Telesat that is formed or acquired after the closing date of the Credit Agreement, provided that such Subsidiary is designated as an Unrestricted Subsidiary, and (b) any Restricted Subsidiary subsequently re-designated as an Unrestricted Subsidiary.

Consolidated EBITDA for Covenant Purposes is not a presentation made in accordance with IFRS, is not a measure of financial condition or profitability, and should not be considered as an alternative to (1) net income (loss) determined in accordance with IFRS or (2) cash flows from operating activities determined in accordance with IFRS. Additionally, Consolidated EBITDA for Covenant Purposes is not intended to be a measure of free cash flow for management’s discretionary use as it does not include certain cash requirements for such items as interest payments, tax payments and debt service requirements. We believe that the inclusion of Consolidated EBITDA for Covenant Purposes herein is appropriate to provide additional information concerning the calculation of the financial ratio maintenance covenant and other covenants on our Senior Secured Credit Facilities. Consolidated EBITDA for Covenant Purposes is a material component of these covenants. Non-compliance with the financial ratio maintenance covenant contained in our Senior Secured Credit Facilities could result in the requirement to immediately repay all amounts outstanding. This presentation of Consolidated EBITDA for Covenant Purposes is not comparable to other similarly titled measures of other companies because not all companies use identical calculations of EBITDA. We believe the disclosure of the calculation of Consolidated EBITDA for Covenant Purposes provides information that is useful to an investor’s understanding of our liquidity and financial flexibility.

The following is a reconciliation of net income, which is an IFRS measure of our operating results, to Consolidated EBITDA for Covenant Purposes, as defined in the Credit Agreement and the calculation of the ratio of Consolidated Total Secured Debt to Consolidated EBITDA for Covenant Purposes as defined in the Credit Agreement. The terms and related calculations are defined in the Credit Agreement, a copy of which is publicly available atwww.sec.gov.

(in CAD millions)	Twelve Months Ended June 30, 2017
Net income	$	229.4
Impact of unrestricted subsidiary		—
Consolidated earnings for Covenant Purposes		229.4
Plus:
Income taxes (Note 1)		77.8
Interest expense (Note 1)		194.2
Depreciation and amortization expense (Note 1)		251.6
Non-cash share-based compensation		4.1
Other, primarily realized foreign exchange losses on refinancing		58.6
Increased by:
Non-cash gains on changes in fair value of financial instruments and swap obligations and cash gains on the value of swap obligations		(46.5	)
Non-cash losses resulting from changes in foreign exchange rates		(3.7	)
Consolidated EBITDA for Covenant Purposes	$	765.5

Note 1: Tax, interest, depreciation and amortization expense for covenant purposes excludes certain specific expenses as defined in the Credit Agreement. As a result, these items in the covenant calculation do not reconcile to the financial statement line items.

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Consolidated Total Secured Debt for Covenant Purposes

Consolidated Total Debt for Covenant Purposes and Consolidated Total Secured Debt for Covenant Purposes are non-IFRS measures. We believe that the inclusion of Consolidated Total Debt for Covenant Purposes and Consolidated Total Secured Debt for Covenant Purposes herein are appropriate to provide additional information concerning the calculation of the financial ratio maintenance and other covenants under our Senior Secured Credit Facilities and provides information that is useful to an investor’s understanding of our compliance with these financial covenants.

The following is a reconciliation of our Consolidated Total Debt for Covenant Purposes and Consolidated Total Secured Debt for Covenant Purposes to Indebtedness:

(in $ millions)	As at June 30, 2017
U.S. dollar denominated debt
Term Loan B U.S Facility (USD)	$	2,411.8
8.875% Senior Notes (USD)		500.0
		2,911.8
Foreign exchange adjustment		863.1
Subtotal (CAD)		3,774.9
Deferred financing costs, interest rate floor and prepayment option (CAD)		(109.8	)
Indebtedness	$	3,665.1

(in CAD $ millions)
Indebtedness	$	3,665.1
Adjustments for covenant purposes:
Deferred financing costs, interest rate floor and prepayment option (CAD)		109.8
Less: cash and cash equivalents (max. $100 million USD)		(129.7	)
Consolidated Total Debt for Covenant Purposes		3,645.2
Less: unsecured debt (8.875% Senior Notes)		(648.2	)
Consolidated Total Secured Debt for Covenant Purposes	$	2,997.0

As at June 30, 2017, the Consolidated Total Debt to Consolidated EBITDA for Covenant Purposes ratio, for the purposes of our Senior Secured Credit Facilities, was 4.76:1.00. The Consolidated Total Secured Debt to Consolidated EBITDA for Covenant Purposes ratio, for the purposes of our Senior Secured Credit Facilities, was 3.91:1.00.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in accordance with IFRS requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the amounts of revenue and expenses reported for the year. Actual results could differ from these estimates under different assumptions and conditions. For more details on these estimates, refer to Note 5 of our audited consolidated financial statements for the year ended December 31, 2016.

ACCOUNTING STANDARDS

Recent IFRS Accounting Pronouncements

The IASB periodically issues new and amended accounting standards. The new and amended standards determined to be applicable to us are disclosed below. The remaining new and amended standards have been excluded as they are not applicable.

Revenue

IFRS 15,Revenue from Contracts with Customers (“IFRS 15”) was issued by the IASB in May 2014, and will replace IAS 18,Revenue, IAS 11,Construction Contracts, and related interpretations on revenue. IFRS 15 sets out the requirements for recognizing revenue that apply to all contracts with customers, except

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for contracts that are within the scope of the standards on leases, insurance contracts and financial instruments. IFRS 15 uses a control based approach to recognize revenue which is a change from the risk and reward approach under the current revenue standard. We can elect to use either a full or modified retrospective approach when adopting this standard and it is effective for annual periods beginning on or after January 1, 2018. We are currently evaluating the impact of IFRS 15 on our consolidated financial statements.

Financial instruments

IFRS 9,Financial Instruments (“IFRS 9”) was issued by the IASB in July 2014, and will replace IAS 39,Financial Instruments: Recognition and Measurement (“IAS 39”). IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. Impairments of financial assets are determined using a single impairment model that requires entities to recognize expected credit losses without requiring a triggering event to occur. Financial liabilities are measured using one of three measurement approaches (fair value through profit or loss (“FVTPL”), fair value through other comprehensive income (“FVTOCI”), or amortized cost). Financial liabilities that are held-for-trading are measured at FVTPL, financial liabilities that are considered available for sale are measured at FVTOCI unless the FVTPL option is elected, while all other financial liabilities are measured at amortized cost unless the fair value option is elected. The treatment of embedded derivatives under the new standard is consistent with IAS 39.

The standard is effective for annual periods beginning on or after January 1, 2018. We are currently evaluating the impact of IFRS 9 on our consolidated financial statements.

Leases

IFRS 16,Leases (“IFRS 16”) was issued by the IASB in January 2016, and will replace IAS 17,Leases and related interpretations on leases. IFRS 16 will require a lessee to recognize a right-of-use asset and lease liability for all leases with a term of more than 12 months. The standard will also require that the depreciation of the lease assets be recorded separately from the interest on the lease liabilities on the statement of income. For lessors, IFRS 16 substantially carries forward the requirements of IAS 17. IFRS 16 also aligns the definition of a lease with the control based approach in IFRS 15.

Companies can elect to use either a retrospective approach with a restatement of comparative information or a retrospective approach with the cumulative effect of initial application shown in retained earnings instead of the restatement of the comparative information. The standard is effective for annual periods beginning on or after January 1, 2019. Earlier application of the standard is permitted if it is applied in conjunction with IFRS 15. We are currently evaluating the impact of IFRS 16 on our consolidated financial statements.

Share-based payments

In June 2016, amendments were issued by the IASB for IFRS 2,Share-based Payments. These amendments clarify the accounting treatment and disclosure requirements for certain types of share-based payment transactions, including cash settled share-based payment transactions, share-based payment transactions with a net settlement feature for withholding tax obligations, as well as modifications of share-based payment transactions from cash settled to equity settled. These amendments are effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. We are currently evaluating the impact of these amendments on our consolidated financial statements.

Income Taxes

IFRIC 23,Uncertainty over Income Taxes Treatmentswas issued by the IASB in June 2017. The interpretation clarifies how to apply the recognition and measurement requirements in IAS 12,Income Taxes when there is uncertainty over income tax treatments. This interpretation is effective for annual reporting periods beginning on or after January 1, 2019. We are currently evaluating the impact of this interpretation on our consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the section “Market Risk”.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We discuss certain legal proceedings in Telesat Canada’s Annual Report on Form 20-F for the fiscal year ended December 31, 2016, filed with the SEC, in the section titled “Legal Proceedings”. We refer the reader to that discussion for information concerning those proceedings. There have been no material developments in those proceedings since the filing of that report.

Item 1A. Risk Factors

Our business and operations are subject to a significant number of known and unknown risks and uncertainties. The most significant of the known risks are summarized in, and the reader’s attention is directed to, the section titled “Risk Factors” of Telesat Canada’s Annual Report on Form 20-F for the fiscal year ended December 31, 2016, filed with the SEC. There have been no material changes to those risk factors since the filing of that report.

Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Reserved

Item 5. Other Information

Effective July 25, 2017, Mr. David Bernardi has joined the Board of Directors of Telesat Canada and the Board of Managers of Telesat LLC, replacing Mr. Daniel Garant who has stepped down from both Boards. Effective July 24, 2017, Mr. Guthrie Stewart replaced Mr. Daniel Garant on the Compensation and Corporate Governance Committee.

Item 6. Exhibits

None.

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