| FINANCIAL INSTRUMENTS | 27.
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 December 31, 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 December 31, 2017, the maximum exposure to credit risk is equal to the carrying value of the financial assets which totaled
$630.0 million (December 31, 2016 — $876.3 million). Cash
and cash equivalents are invested with high quality investment grade financial institutions 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 related 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 standard payment terms. The Company’s historical experience with customer defaults has been minimal.
As at December 31, 2017, North American and International customers made up 39% and 61% 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 December 31, 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 U.S. dollar denominated indebtedness. As at December 31, 2017 and 2016, the entire
indebtedness was denominated in U.S. dollars. The Canadian dollar equivalent of the U.S. dollar denominated indebtedness was
$3,645.2 million and $3,930.0 million, respectively (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. All forward foreign exchange contracts matured by October 31, 2017. As
at December 31, 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 (decreased) increased net income (loss) by $162.0 million (December 31, 2016 — $163.5
million) and increased (decreased) other comprehensive income (loss) by $0.2 million (December 31, 2016 — $nil
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 indebtedness 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. In
October 2017, the Company entered into four interest rate swaps to hedge the interest rate risk associated with the variable interest
rate on $1,800.0 million of the U.S. denominated Term Loan B at fixed interest rates, excluding applicable margins, ranging from
1.72% to 2.04%. These contracts mature between September 2019 and September 2022. As at December 31, 2016, the Company had no
outstanding interest rate swaps. If
the interest rates on the unhedged variable rate indebtedness change by 0.25%, excluding the potential impact of interest rate
floors, the result would be an increase or decrease to net income (loss) of $6.5 million for the year ended December 31, 2017
(December 31, 2016 — $5.9 million). 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 December 31, 2017 were as follows:
Carrying amount Contractual cash flows (undiscounted) 2018 2019 2020 2021 2022 Thereafter
Trade
and other payables $ 37,919 $ 37,919 $ 37,919 $ — $ — $ — $ — $ —
Customer and other
deposits 2,272 2,272 2,026 17 9 220 — —
Satellite performance
incentive payments 64,074 83,168 13,240 12,677 10,551 9,180 8,259 29,261
Other financial
liabilities 5,527 5,599 4,798 458 343 — — —
Indebtedness
(1) 3,652,980 4,861,554 230,933 229,012 227,945 225,986 223,650 3,724,028
$ 3,762,772 $ 4,990,512 $ 288,916 $ 242,164 $ 238,848 $ 235,386 $ 231,909 $ 3,753,289
(1) Indebtedness excludes deferred
financing costs, interest rate floor and prepayment option. The
interest payable and interest payments included in the carrying value and contractual cash flows, respectively, in the above table,
were as follows:
Interest payable Interest payments
Satellite
performance incentive payments $ 1,113 $ 19,394
Other financial
liabilities $ 31 $ 103
Indebtedness $ 7,785 $ 1,216,359 Financial
assets and liabilities recorded on the balance sheets and the fair value hierarchy levels used to calculate those values were
as follows:
As at December 31, 2017 Loans and FVTPL Other Total Fair value Fair value
Cash and cash equivalents $ 479,045 $ — $ — $ 479,045 $ 479,045 Level 1
Trade and other receivables 64,986 — — 64,986 64,986 (3)
Other current financial assets (1) 2,275 162 — 2,437 2,437 Level 1, Level 2
Other long-term financial assets (1) 18,808 64,723 — 83,531 83,531 Level 1, Level 2
Trade and other payables — — (37,919 ) (37,919 ) (37,919 ) (3)
Other current financial liabilities — (1 ) (26,354 ) (26,355 ) (27,791 ) Level 2
Other long-term financial liabilities — (5,527 ) (53,304 ) (58,831 ) (59,648 ) Level 2
Indebtedness (2) — — (3,645,195 ) (3,645,195 ) (3,723,474 ) Level 2
$ 565,114 $ 59,357 $ (3,762,772 ) $ (3,138,301 ) $ (3,218,833 )
As at December 31, 2016 Loans and FVTPL Other Total Fair value Fair value
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) Other current and 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. The
fair value hierarchy is as follows: Level
1 is based on quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company can access at
the measurement date. Level
2 is 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 is 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 values are 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 December 31, 2017, cash and cash equivalents included $90.7 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 December 31,
2017, the discount rate used was 5.7% (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 December 31, 2017 2016
Senior Secured Credit Facilities
Term Loan B – U.S. Facility 100.13 % 101.00 %
8.875% Senior Notes 111.83 % 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. Interest
rate swap future cash flows were determined based on current yield curves and exchange rates and then discounted based on discount
curves. Prepayment
option cash flows were calculated with a third party option 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. The
discount rates used to discount cash flows as at December 31, 2017 ranged from 1.56% to 2.31% (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 British Pound
Sterling for the same transactions at the valuation date. The forward foreign exchange rates as at December 31, 2016 ranged from
1.6501 to 1.6509. All forward foreign exchange contracts matured by October 2017. 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 December 31, 2017 Other current financial assets Other long-term financial assets Other current financial liabilities Other long-term financial liabilities Total
Interest rate floors $ — $ — $ (1 ) $ (5,527 ) $ (5,528 )
Interest rate swaps 162 18,945 — — 19,107
Prepayment option — 45,778 — — 45,778
$ 162 $ 64,723 $ (1 ) $ (5,527 ) $ 59,357
As at December 31, 2016 Other Other Other Total
Interest rate floors $ — $ (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, December 31, 2015 and January 1, 2016 $ 8,822
Derivatives recognized at inception
Interest rate floors (25,581 )
Prepayment option 8,671
Realized losses on derivatives
Forward foreign exchange contract (130 )
Unrealized gains (losses) on derivatives
Interest rate floors 18,781
Prepayment option (13,108 )
Interest rate swaps 2,237
Forward foreign exchange contracts 97
Impact of foreign exchange 429
Fair value, December 31, 2016 and January 1, 2017 218
Realized losses on derivatives
Forward foreign exchange contract (207 )
Unrealized gains on derivatives
Interest rate floors 7,861
Prepayment option 33,018
Interest rate swaps 19,394
Forward foreign exchange contracts 240
Impact of foreign exchange (1,167 )
Fair value, December 31, 2017 $ 59,357 |
