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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 000-50262

INTELSAT S.A.

(Exact Name of Registrant as Specified in Its Charter)

 

Luxembourg   98-0346003

(State or Other Jurisdiction of

Incorporation or Organization)

  (I.R.S. Employer Identification No.)

4, rue Albert Borschette

Luxembourg

  L-1246
(Address of Principal Executive Offices)   (Zip Code)

+352 27-84-1600

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨    Accelerated  filer  ¨    Non-accelerated filer  x    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of November 1, 2010, 5,000,000 common shares, par value $1.00 per share, were outstanding.

 

 

 


Table of Contents

 

TABLE OF CONTENTS

 

          Page  

PART I.    FINANCIAL INFORMATION

  

Item 1.

   Financial Statements:   
  

Condensed Consolidated Balance Sheets as of December 31, 2009 and September 30, 2010 (Unaudited)

     5   
  

Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2010

     6   
  

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2010

     7   
  

Notes to the Condensed Consolidated Financial Statements (Unaudited)

     8   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     49   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     67   

Item 4.

  

Controls and Procedures

     67   

PART II.    OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

     69   

Item 1A.

  

Risk Factors

     69   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     69   

Item 3.

  

Defaults upon Senior Securities

     69   

Item 4.

  

(Removed and Reserved)

     69   

Item 5.

  

Other Information

     69   

Item 6.

  

Exhibits

     69   

SIGNATURES

     70   

 

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INTRODUCTION

In this Quarterly Report, unless otherwise indicated or the context otherwise requires, (1) the terms “we,” “us,” “our”, “the Company” and “Intelsat” refer to Intelsat S.A. and its subsidiaries on a consolidated basis, (2) the terms “Serafina Holdings” and “Intelsat Global” refer to Intelsat Global S.A. (formerly known as Serafina Holdings Limited), (3) the term “Serafina” refers to Intelsat Global Subsidiary S.A. (formerly known as Serafina Acquisition Limited), (4) the term “Intelsat Holdings” refers to Intelsat S.A.’s parent, Intelsat Holdings S.A., (5) the term “Intelsat Luxembourg” refers to Intelsat (Luxembourg) S.A., Intelsat S.A.’s direct wholly-owned subsidiary, (6) the term “Intelsat Jackson” refers to Intelsat Jackson Holdings S.A., Intelsat Luxembourg’s direct wholly-owned subsidiary, (7) the term “Intermediate Holdco” refers to Intelsat Intermediate Holding Company S.A., Intelsat Jackson’s direct wholly-owned subsidiary, (8) the term “Intelsat Sub Holdco” refers to Intelsat Subsidiary Holding Company S.A., Intermediate Holdco’s direct wholly-owned subsidiary, (9) the term “Intelsat Corp” refers to PanAmSat Corporation prior to the PanAmSat Acquisition Transactions and to Intelsat Corporation thereafter, (10) the term “PanAmSat” refers to PanAmSat Holding Corporation and its subsidiaries on a consolidated basis prior to the PanAmSat Acquisition Transactions (as defined below), (11) the term “PanAmSat Acquisition Transactions” refers to our acquisition of PanAmSat on July 3, 2006 and related transactions, and (12) the term “New Sponsors Acquisition Transactions” refers to the acquisition of Intelsat Holdings by Serafina on February 4, 2008 and related transactions.

In this Quarterly Report, unless the context otherwise requires, all references to transponder capacity or demand refer to transponder capacity or demand in the C-band and Ku-band only.

FINANCIAL AND OTHER INFORMATION

Unless otherwise indicated, all references to “dollars” and “$” in this Quarterly Report are to, and all monetary amounts in this Quarterly Report are presented in, U.S. dollars. Unless otherwise indicated, the financial information contained in this Quarterly Report has been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”).

Certain monetary amounts, percentages and other figures included in this Quarterly Report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.

In this Quarterly Report, we refer to and rely on publicly available information regarding our industry and our competitors. Although we believe the information is reliable, we cannot guarantee the accuracy and completeness of the information and have not independently verified it.

 

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FORWARD-LOOKING STATEMENTS

Some of the statements in this Quarterly Report constitute forward-looking statements that do not directly or exclusively relate to historical facts. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements as long as they are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from the expectations expressed or implied in the forward-looking statements.

When used in this Quarterly Report, the words “may,” “will,” “might,” “should,” “expect,” “plan,” “anticipate,” “project,” “believe,” “estimate,” “predict,” “intend,” “potential,” “outlook” and “continue,” and the negative of these terms and other similar expressions, are intended to identify forward-looking statements and information.

The forward-looking statements made in this Quarterly Report reflect our intentions, plans, expectations, assumptions and beliefs about future events. These forward-looking statements speak only as of the date of this Quarterly Report and are not guarantees of future performance or results and are subject to risks, uncertainties and other factors, many of which are outside of our control. These factors could cause actual results or developments to differ materially from the expectations expressed or implied in the forward-looking statements and include known and unknown risks. Known risks include, among others, the risks discussed in Item 1A—Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2009, the political, economic and legal conditions in the markets we are targeting for communications services or in which we operate and other risks and uncertainties inherent in the telecommunications business in general and the satellite communications business in particular.

The following list represents some, but not necessarily all, of the factors that could cause actual results to differ from historical results or those anticipated or predicted by these forward-looking statements:

 

   

risks associated with operating our in-orbit satellites;

 

   

satellite launch failures, satellite launch and construction delays and in-orbit failures or reduced performance;

 

   

potential changes in the number of companies offering commercial satellite launch services and the number of commercial satellite launch opportunities available in any given time period that could impact our ability to timely schedule future launches and the prices we have to pay for such launches;

 

   

our ability to obtain new satellite insurance policies with financially viable insurance carriers on commercially reasonable terms or at all, as well as the ability of our insurance carriers to fulfill their obligations;

 

   

possible future losses on satellites that are not adequately covered by insurance;

 

   

domestic and international government regulation;

 

   

changes in our revenue backlog or expected revenue backlog for future services;

 

   

pricing pressure and overcapacity in the markets in which we compete;

 

   

inadequate access to capital markets;

 

   

the competitive environment in which we operate;

 

   

customer defaults on their obligations owed to us;

 

   

our international operations and other uncertainties associated with doing business internationally; and

 

   

litigation.

 

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Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee our future results, level of activity, performance or achievements. Because actual results could differ materially from our intentions, plans, expectations, assumptions and beliefs about the future, you are urged not to rely on forward-looking statements in this Quarterly Report and to view all forward-looking statements made in this Quarterly Report with caution. We do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

INTELSAT S.A.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

 

     As of
December 31,
2009
    As of
September 30,
2010
 
           (unaudited)  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 477,571      $ 651,224   

Receivables, net of allowance of $20,517 in 2009 and $18,934 in 2010

     294,539        277,439   

Deferred income taxes

     50,643        30,854   

Prepaid expenses and other current assets

     33,561        56,411   
                

Total current assets

     856,314        1,015,928   

Satellites and other property and equipment, net

     5,781,955        5,908,022   

Goodwill

     6,780,827        6,780,827   

Non-amortizable intangible assets

     2,458,100        2,458,100   

Amortizable intangible assets, net

     978,599        880,888   

Other assets

     487,140        512,404   
                

Total assets

   $ 17,342,935      $ 17,556,169   
                
LIABILITIES AND SHAREHOLDER’S DEFICIT     

Current liabilities:

    

Accounts payable and accrued liabilities

   $ 157,519      $ 213,168   

Employee related liabilities

     48,882        30,856   

Accrued interest payable

     369,376        273,988   

Current portion of long-term debt

     97,689        92,498   

Deferred satellite performance incentives

     18,683        15,500   

Deferred revenue

     53,671        64,633   

Other current liabilities

     68,823        67,328   
                

Total current liabilities

     814,643        757,971   

Long-term debt, net of current portion

     15,223,010        15,860,493   

Deferred satellite performance incentives, net of current portion

     128,774        118,440   

Deferred revenue, net of current portion

     254,636        333,658   

Deferred income taxes

     548,719        486,419   

Accrued retirement benefits

     239,873        236,878   

Other long-term liabilities

     335,159        339,985   

Redeemable noncontrolling interest

     8,884        17,487   

Commitments and contingencies (Note 12)

    

Shareholder’s deficit:

    

Ordinary shares, $1.00 par value, 100,000,000 shares authorized and 5,000,000 shares issued and outstanding at December 31, 2009 and September 30, 2010

     5,000        5,000   

Paid-in capital

     1,520,616        1,523,396   

Accumulated deficit

     (1,667,998     (2,060,026

Accumulated other comprehensive loss

     (68,381     (65,431
                

Total Intelsat S.A. shareholder’s deficit

     (210,763     (597,061

Noncontrolling interest

     —          1,899   
                

Total liabilities and shareholder’s deficit

   $ 17,342,935      $ 17,556,169   
                

See accompanying notes to unaudited condensed consolidated financial statements.

 

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INTELSAT S.A.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

 

     Three Months
Ended
September 30,
2009
    Three Months
Ended
September 30,
2010
    Nine Months
Ended
September 30,
2009
    Nine Months
Ended
September 30,
2010
 

Revenue

   $ 617,888      $ 644,256      $ 1,892,219      $ 1,900,683   

Operating expenses:

        

Direct costs of revenue (exclusive of depreciation and amortization)

     86,772        104,732        297,576        302,620   

Selling, general and administrative

     56,339        46,009        172,975        144,589   

Depreciation and amortization

     199,991        198,993        611,079        596,989   

Impairment of asset value

     —          —          499,100        110,625   

(Gains) losses on derivative financial instruments

     38,820        19,950        (5,303     90,592   
                                

Total operating expenses

     381,922        369,684        1,575,427        1,245,415   
                                

Income from operations

     235,966        274,572        316,792        655,268   

Interest expense, net

     337,504        345,531        1,027,837        1,035,018   

Loss on early extinguishment of debt

     (103     (75,805     (14,979     (75,805

Other income, net

     3,381        3,600        9,579        7,943   
                                

Loss before income taxes

     (98,260     (143,164     (716,445     (447,612

Benefit from income taxes

     (3,476     (35,811     (31,327     (54,919
                                

Net loss

     (94,784     (107,353     (685,118     (392,693

Net loss attributable to noncontrolling interest

     508        953        456        3,029   
                                

Net loss attributable to Intelsat S.A.

   $ (94,276   $ (106,400   $ (684,662   $ (389,664
                                

See accompanying notes to unaudited condensed consolidated financial statements.

 

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INTELSAT S.A.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Nine Months
Ended
September 30,
2009
    Nine Months
Ended
September 30,
2010
 

Cash flows from operating activities:

    

Net loss

   $ (685,118   $ (392,693

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Depreciation and amortization

     611,079        596,989   

Impairment of asset value

     499,100        110,625   

Provision for doubtful accounts

     5,696        4,120   

Foreign currency transaction gain

     (4,804     (1,419

Loss on disposal of assets

     2,561        343   

Share-based and other compensation expense

     24,037        (4,645

Deferred income taxes

     (55,295     (49,656

Amortization of discount, premium, issuance costs and other non-cash items

     93,226        72,584   

Interest paid-in-kind

     226,956        203,715   

Loss on early extinguishment of debt

     14,496        73,247   

Share in gain of unconsolidated affiliates

     (388     (377

Gain on sale of investment

     —          (1,261

Unrealized (gains) losses on derivative financial instruments

     (64,478     43,257   

Other non-cash items

     162        2,602   

Changes in operating assets and liabilities:

    

Receivables

     (19,789     11,477   

Prepaid expenses and other assets

     17,952        (61,397

Accounts payable and accrued liabilities

     (124,784     (36,788

Deferred revenue

     26,226        89,984   

Accrued retirement benefits

     3,372        (2,995

Other long-term liabilities

     (20,905     (36,692
                

Net cash provided by operating activities

     549,302        621,020   
                

Cash flows from investing activities:

    

Payments for satellites and other property and equipment (including capitalized interest)

     (456,035     (683,349

Proceeds from sale of other property and equipment

     686        —     

Proceeds from sale of investment

     —          28,594   

Capital contributions to unconsolidated affiliates

     (12,210     (12,209

Other investing activities

     5,437        9,585   
                

Net cash used in investing activities

     (462,122     (657,379
                

Cash flows from financing activities:

    

Repayments of long-term debt

     (424,184     (745,589

Repayment of loan proceeds received from Intelsat Holdings

     (34,000     —     

Proceeds from issuance of long-term debt

     429,195        1,023,465   

Debt issuance costs

     (7,331     (32,063

Payment of premium on early retirement of debt

     —          (44,118

Capital contribution from parent

     —          18,000   

Noncontrolling interest in New Dawn

     —          1,035   

Principal payments on deferred satellite performance incentives

     (19,569     (11,946

Principal payments on capital lease obligations

     (1,763     (191
                

Net cash provided by (used in) financing activities

     (57,652     208,593   
                

Effect of exchange rate changes on cash and cash equivalents

     4,804        1,419   
                

Net change in cash and cash equivalents

     34,332        173,653   

Cash and cash equivalents, beginning of period

     470,211        477,571   
                

Cash and cash equivalents, end of period

   $ 504,543      $ 651,224   
                

Supplemental cash flow information:

    

Interest paid, net of amounts capitalized

   $ 803,269      $ 767,790   

Income taxes paid

     43,279        31,997   

Supplemental disclosure of non-cash investing activities:

    

Accrued capital expenditures

   $ 60,108      $ 122,661   

See accompanying notes to unaudited condensed consolidated financial statements.

 

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INTELSAT S.A.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2010

Note 1    General

Basis of Presentation

The accompanying condensed consolidated financial statements of Intelsat S.A. and its subsidiaries (“Intelsat,” “we,” “us” or “our”) have not been audited, but are prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. References to U.S. GAAP issued by the Financial Accounting Standards Board (“FASB”) in these footnotes are to the FASB Accounting Standards Codification (“ASC” or the “Codification”). The unaudited condensed consolidated financial statements include all adjustments (consisting only of normal and recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of these financial statements. The results of operations for the periods presented are not necessarily indicative of operating results for the full year. The condensed consolidated balance sheet as of December 31, 2009 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 on file with the Securities and Exchange Commission.

On December 15, 2009, Intelsat, Ltd. and certain of its parent holding companies and subsidiaries migrated their jurisdiction of organization from Bermuda to Luxembourg (the “Migration”). As a result of the Migration, our headquarters are located in Luxembourg. Each company that migrated has continued its corporate and legal personality in Luxembourg. Subsequent to the Migration, Intelsat Global, Ltd. is known as Intelsat Global S.A. (“Intelsat Global”), Intelsat Global Subsidiary, Ltd. is known as Intelsat Global Subsidiary S.A., Intelsat Holdings, Ltd. is known as Intelsat Holdings S.A. (“Intelsat Holdings”), Intelsat, Ltd. is known as Intelsat S.A., Intelsat (Bermuda), Ltd. is known as Intelsat (Luxembourg) S.A. (“Intelsat Luxembourg”), Intelsat Jackson Holdings, Ltd. is known as Intelsat Jackson Holdings S.A. (“Intelsat Jackson”), Intelsat Intermediate Holding Company, Ltd. is known as Intelsat Intermediate Holding Company S.A. (“Intermediate Holdco”) and Intelsat Subsidiary Holding Company, Ltd. is known as Intelsat Subsidiary Holding Company S.A. (“Intelsat Sub Holdco”).

Use of Estimates

The preparation of these condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in these condensed consolidated financial statements and accompanying notes. Examples of estimates include the allowance for doubtful accounts, pension and postretirement benefits, the fair value of our derivative instruments, the fair value of the redeemable noncontrolling interest, the fair value of share-based and other compensation awards, income taxes, useful lives of satellites, intangible assets and other property and equipment, the recoverability of goodwill and the fair value of non-amortizable intangible assets. Changes in such estimates may affect amounts reported in future periods.

Recently Adopted Accounting Pronouncements

During the third quarter of 2009, the FASB issued Accounting Standards Update 2009-13 (EITF 08-1), Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”). ASC Subtopic 605-25, Revenue Recognition-Multiple-Element-Arrangements (“ASC Subtopic 605-25”), sets forth requirements that must be met for an entity to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered.

 

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INTELSAT S.A.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)—(Continued)

September 30, 2010

 

 

Historically, we have entered into contracts with customers to deliver multiple services such as tracking, telemetry and control (“TT&C”), satellite capacity and equipment. These elements usually have separate delivery dates. Under the previous guidance, in certain situations we deferred the revenue of all deliverables until the undelivered item had been provided because we were unable to demonstrate vendor-specific objective evidence (“VSOE”) or third-party evidence (“TPE”) for the undelivered items, primarily capacity. The arrangements with multiple deliverables are not common and are non-standard; therefore, they do not constitute a significant portion of the contracts entered into during a given year.

ASU 2009-13 amends ASC Subtopic 605-25 to eliminate the requirement that all undelivered elements must have VSOE or TPE before an entity can recognize the portion that is attributable to items already delivered. In the absence of VSOE or TPE of the stand-alone selling price for one or more delivered or undelivered elements in the arrangement, entities will be required to make a best estimate of the selling prices of those elements. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 with early adoption permitted.

We elected to early adopt ASU 2009-13 on a prospective basis, effective for the first quarter of 2010. The adoption of ASU 2009-13 did not have a material impact on our condensed consolidated statements of operations for the three and nine months ended September 30, 2010 and is not expected to significantly impact future periods.

Note 2    Fair Value Measurements

FASB ASC Topic 820, Fair Value Measurements and Disclosures (“FASB ASC 820”), defines fair value, establishes a market-based framework or hierarchy for measuring fair value and provides for certain required disclosures about fair value measurements. The guidance is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value, but does not require any new fair value measurements.

The fair value hierarchy prioritizes the inputs used in valuation techniques into three levels as follows:

 

   

Level 1—unadjusted quoted prices for identical assets or liabilities in active markets;

 

   

Level 2—quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted market prices that are observable or that can be corroborated by observable market data by correlation; and

 

   

Level 3—unobservable inputs based upon the reporting entity’s internally developed assumptions which market participants would use in pricing the asset or liability.

 

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INTELSAT S.A.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)—(Continued)

September 30, 2010

 

 

The following tables present assets and liabilities measured and recorded at fair value in our condensed consolidated balance sheets on a recurring basis and their level within the fair value hierarchy (in thousands), excluding long-term debt (see Note 8—Long-Term Debt):

 

            Fair Value Measurements at December 31, 2009  

Description

   As of
December 31,
2009
     Quoted Prices in
Active Markets
for Identical Assets

(Level 1)
     Significant Other
Observable Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Assets

           

Marketable securities (1)

   $ 34,303       $ 34,303       $ —         $ —     

Undesignated interest rate swaps

     15,662         —           15,662         —     
                                   

Total assets

   $ 49,965       $ 34,303       $ 15,662       $ —     
                                   

Liabilities

           

Undesignated interest rate swaps

   $ 115,512       $ —         $ 115,512       $ —     

Embedded derivative

     14,600         —           —           14,600   

Redeemable noncontrolling interest (2)

     8,884         —           —           8,884   
                                   

Total liabilities

   $ 138,996       $ —         $ 115,512       $ 23,484   
                                   
            Fair Value Measurements at September 30, 2010  

Description

   As of
September 30,
2010
     Quoted Prices in
Active Markets

for Identical Assets
(Level 1)
     Significant Other
Observable Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Assets

           

Marketable securities (1)

   $ 5,702       $ 5,702       $ —         $ —     
                                   

Total assets

   $ 5,702       $ 5,702       $ —         $ —     
                                   

Liabilities

           

Undesignated interest rate swaps

   $ 172,456       $ —         $ 172,456       $ —     

Redeemable noncontrolling interest (2)

     17,487         —           —           17,487   
                                   

Total liabilities

   $ 189,943       $ —         $ 172,456       $ 17,487   
                                   

 

(1) The cost basis of our available-for-sale marketable securities was $34.0 million at December 31, 2009 and $6.3 million at September 30, 2010. We sold marketable securities with a cost basis of $27.7 million during the nine months ended September 30, 2010 and recorded a gain on the sale of $1.3 million which was included within other income, net in our condensed consolidated statement of operations.

 

(2) Redeemable noncontrolling interest is classified as mezzanine equity in the accompanying condensed consolidated balance sheets.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)—(Continued)

September 30, 2010

 

 

The following tables present the activity for those items measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as defined in FASB ASC 820 (in thousands):

 

     Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
 
     Redeemable
Noncontrolling
Interest
    Embedded
Derivative
    Total  

Balance at December 31, 2008

   $ 4,500      $ —        $ 4,500   

Purchases, issuances and settlements

     —          36,040        36,040   

Mark to market valuation adjustment

     4,754        (21,440     (16,686

Net loss attributable to noncontrolling interest

     (370     —          (370
                        

Balance at December 31, 2009

   $ 8,884      $ 14,600      $ 23,484   
                        
     Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
 
     Redeemable
Noncontrolling
Interest
    Embedded
Derivative
    Total  

Balance at December 31, 2009

   $ 8,884      $ 14,600      $ 23,484   

Contributions

     610        —          610   

Mark to market valuation adjustment

     7,916        (4,120     3,796   

Net loss attributable to noncontrolling interest

     (806     —          (806
                        

Balance at March 31, 2010

     16,604        10,480        27,084   
                        

Contributions

     421        —          421   

Mark to market valuation adjustment

     1,268        1,301        2,569   

Net loss attributable to noncontrolling interest

     (1,226     —          (1,226
                        

Balance at June 30, 2010

     17,067        11,781        28,848   
                        

Contributions

     4        —          4   

Mark to market valuation adjustment

     1,391        (11,781     (10,390

Net loss attributable to noncontrolling interest

     (975     —          (975
                        

Balance at September 30, 2010

   $ 17,487      $ —        $ 17,487   
                        

In accordance with the FASB ASC 480, Distinguishing Liabilities from Equity, regarding the classification and measurement of redeemable securities, we mark to market the fair value of the noncontrolling interest in our joint venture investment in New Dawn Satellite Company, Ltd. (“New Dawn”), at each reporting period. We performed a fair value analysis of the noncontrolling interest related to our 74.9% indirect ownership interest in New Dawn as of September 30, 2010, and this resulted in an increase in the noncontrolling interest of $10.6 million during the nine months ended September 30, 2010.

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, such items are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances, such as if there is evidence of impairment.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)—(Continued)

September 30, 2010

 

 

The following table presents assets measured and recorded on a nonrecurring basis at fair value in our condensed consolidated balance sheets and their level within the fair value hierarchy (in thousands):

 

Description

   Carrying
Value As of
September 30,
2010
     Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
     Total
Losses
 

Long lived asset held and used

   $ 34,200       $ 35,000       $ 104,100   

The fair value measurement of this long-lived asset was considered by us to be within Level 3 of the fair value hierarchy as the most significant inputs were derived utilizing our internally prepared budgets and forecast information, which we believe a market participant would use in pricing such an asset. The estimated fair value was determined based on a probability weighted discounted cash flow analysis and was discounted at an appropriate weighted average cost of capital. During the second quarter of 2010, this long-lived asset was written down to a fair value of $35.0 million from its carrying value of $139.1 million, and continues to be depreciated. In accordance with the FASB ASC Topic 360, Property, Plant and Equipment (“FASB ASC 360”), regarding the impairment or disposal of long-lived assets, we recorded an impairment charge of $104.1 million, which was included in our condensed consolidated statements of operations for the nine months ended September 30, 2010 (see Note 5—Satellites and Other Property and Equipment).

Note 3    Share-Based and Other Compensation Plans

We maintain a variety of equity-based awards issued under the amended and restated Intelsat Global, Ltd. 2008 Share Incentive Plan (the “2008 Incentive Plan”), which was adopted by the board of directors of Intelsat Global on May 6, 2009. The 2008 Incentive Plan provides for a variety of equity-based awards with respect to Class A common shares of Intelsat Global (the “Class A Shares”) and Class B common shares of Intelsat Global (the “Class B Shares”), including non-qualified share options, incentive share options (within the meaning of Section 422 of the United States Internal Revenue Service Tax Code), restricted share awards, restricted share unit awards, share appreciation rights, phantom share awards and performance-based awards.

During the nine months ended September 30, 2010, Intelsat Global entered into share-based compensation arrangements (“SCAs”) permitting the purchase of 6,000 Class A shares on terms substantially similar to previous such grants. During the nine months ended September 30, 2010, Intelsat Global also cancelled 10,289 Class A rollover options and repurchased 5,075 Class A restricted shares and 8,624 vested Class B Shares. We recorded compensation expense of $18.8 million during the nine months ended September 30, 2009, and a credit to compensation expense of $4.6 million during the nine months ended September 30, 2010, related to our equity-based awards.

Note 4    Retirement Plans and Other Retiree Benefits

(a) Pension and Other Postretirement Benefits

We maintain a noncontributory defined benefit retirement plan covering substantially all of our employees hired prior to July 19, 2001. The cost of providing benefits to eligible participants under the defined benefit retirement plan is calculated using the plan’s benefit formulas, which take into account the participants’ remuneration, dates of hire, years of eligible service, and certain actuarial assumptions. In addition, as part of the overall medical plan, we provide postretirement medical benefits to certain current retirees who meet the criteria under the medical plan for postretirement benefit eligibility.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)—(Continued)

September 30, 2010

 

 

The defined benefit retirement plan is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended. We expect that our future contributions to the defined benefit retirement plan will be based on the minimum funding requirements of the Internal Revenue Code and on the plan’s funded status. Recent market conditions have resulted in an unusually high degree of volatility and increased risks related to the short-term liquidity of certain investments held by our defined benefit retirement plan, which could impact the value of the plan assets after the date of these condensed consolidated financial statements. Additionally, any significant decline in the fair value of our defined benefit retirement plan assets or other adverse changes to the significant assumptions used to determine the plan’s funded status would negatively impact its funded status and could result in increased funding in future periods. The impact on the funded status as of October 1, the plan’s annual measurement date, is determined based upon market conditions in effect when we completed our annual valuation. During the nine months ended September 30, 2010, we made a contribution to the defined benefit retirement plan of $7.2 million. In October 2010, we made an additional non-cash contribution of approximately $2.2 million to the defined benefit retirement plan, whereby a credit was applied for this amount related to the defined benefit retirement plan’s funding standard carryover balance. We do not anticipate that we will make any additional contributions to the defined benefit retirement plan during the remainder of 2010. We fund the postretirement medical benefits throughout the year based on benefits paid. We anticipate that our contributions to fund postretirement medical benefits in 2010 will be approximately $4.0 million.

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (the “Healthcare Reform Act”), was signed into law in March 2010. The Healthcare Reform Act codifies health care reforms with staggered effective dates from 2010 to 2018 with many provisions in the Healthcare Reform Act requiring the issuance of additional guidance from various governmental agencies. We assessed the future impact of several of the Healthcare Reform Act’s provisions on our other postretirement benefit liability and determined that as of September 30, 2010, the impact to our condensed consolidated balance sheets and condensed consolidated statements of operations would be immaterial. Given the complexity of the Healthcare Reform Act, the extended time period over which the reforms will be implemented, and the unknown impact of future regulatory guidance, further financial impact to our other postretirement benefit liability and related future expense may occur.

Included in accumulated other comprehensive loss at September 30, 2010 is $103.2 million ($64.5 million, net of tax) that has not yet been recognized in net periodic pension cost, which includes the amortization of unrecognized prior service credits and unrecognized actuarial losses.

Net periodic pension benefit costs included the following components (in thousands):

 

     Three Months
Ended
September 30,
2009
    Three Months
Ended
September 30,
2010
    Nine Months
Ended
September 30,
2009
    Nine Months
Ended
September 30,
2010
 

Service cost

   $ 694      $ 726      $ 2,081      $ 2,179   

Interest cost

     5,176        5,221        15,529        15,661   

Expected return on plan assets

     (5,143     (4,855     (15,429     (14,566

Amortization of unrecognized prior service cost

     (43     (43     (129     (129

Amortization of unrecognized net loss

     —          910        —          2,731   
                                

Net periodic costs

   $ 684      $ 1,959      $ 2,052      $ 5,876   
                                

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)—(Continued)

September 30, 2010

 

 

Net periodic other postretirement benefit costs included the following components (in thousands):

 

     Three Months
Ended
September 30,
2009
     Three Months
Ended
September 30,
2010
     Nine Months
Ended
September 30,
2009
     Nine Months
Ended
September 30,
2010
 

Service cost

   $ 195       $ 138       $ 586       $ 414   

Interest cost

     1,202         1,232         3,607         3,696   
                                   

Total costs

   $ 1,397       $ 1,370       $ 4,193       $ 4,110   
                                   

(b) Other Retirement Plans

We maintain two defined contribution retirement plans, qualified under the provisions of Section 401(k) of the Internal Revenue Code, for our employees in the United States. We recognized compensation expense for these plans of $6.7 million and $4.6 million during the nine months ended September 30, 2009 and 2010, respectively. We also maintain other defined contribution retirement plans in several non-U.S. jurisdictions, but such plans are not material to our financial position or results of operations.

Note 5    Satellites and Other Property and Equipment

(a) Satellites and Other Property and Equipment, Net

Satellites and other property and equipment, net were comprised of the following (in thousands):

 

     As of
December 31,
2009
    As of
September 30,
2010
 

Satellites and launch vehicles

   $ 6,384,964      $ 6,904,690   

Information systems and ground segment

     377,237        416,037   

Buildings and other

     273,518        279,465   
                

Total cost

     7,035,719        7,600,192   

Less: accumulated depreciation

     (1,253,764     (1,692,170
                

Total

   $ 5,781,955      $ 5,908,022   
                

Satellites and other property and equipment are stated at cost, with the exception of satellites that have been impaired, as discussed below. Satellites and other property and equipment acquired as part of an acquisition are based on their fair value at the date of acquisition.

Satellites and other property and equipment, net included construction-in-progress of $1.1 billion and $1.3 billion as of December 31, 2009 and September 30, 2010, respectively. These amounts relate primarily to satellites under construction and related launch services. Interest costs of $52.9 million and $69.8 million were capitalized during the nine months ended September 30, 2009 and 2010, respectively.

We have entered into launch contracts for the launch of both specified and unspecified future satellites. Each of these launch contracts provides that such contract may be terminated at our option, subject to payment of a termination fee that increases in magnitude as the applicable launch date approaches. In addition, in the event of a failure of any launch, we may exercise our right to obtain a replacement launch within a specified period following our request for re-launch.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)—(Continued)

September 30, 2010

 

 

(b) Satellite Launch

On February 12, 2010, we successfully launched our IS-16 satellite into orbit. This satellite operates at 58º west longitude and primarily serves a direct-to-home customer operating in Latin America. This satellite entered into service in March 2010.

(c) Impairment of Asset Value

On February 1, 2010 our IS-4 satellite experienced an anomaly of its backup satellite control processor (“SCP”). The anomaly has caused this satellite to be deemed unrecoverable, resulting in a net non-cash impairment charge in February 2010 of $6.5 million to write off the remaining carrying value of the IS-4 satellite, which was not insured, and related deferred performance incentive obligations. Launched in 1995, IS-4 was expected to reach its end of service life later in 2010. IS-4 had previously experienced the failure of its primary SCP and was operating on its backup SCP.

On April 5, 2010, our Galaxy 15 satellite experienced an anomaly. We transitioned all media traffic on this satellite to our Galaxy 12 satellite, which was our designated in-orbit spare satellite for the North America region. Galaxy 15 is a Star-2 satellite manufactured by Orbital Sciences Corporation (“Orbital”). Along with the manufacturer, we are conducting a technical investigation with respect to this anomaly. As of September 30, 2010, a final conclusion had not been reached as to the most likely cause of the anomaly. All recovery attempts thus far have been unsuccessful, and the likelihood that future attempts will be successful is uncertain. Furthermore, because we have been unable to communicate with the satellite since the anomaly, the exact health of Galaxy 15 is unknown and therefore there can be no assurance that the satellite can return to its pre-anomaly role in our satellite fleet should it be recovered.

In accordance with our policy and the guidance provided for under FASB ASC Topic 360, Property, Plant and Equipment, we review our long-lived assets for impairment whenever events and circumstances indicate that the carrying amount of the asset or asset group may not be recoverable. The recoverability of an asset or asset group held and used is measured by a comparison of the carrying amount of the asset or asset group to the estimated undiscounted future cash flows expected to be generated by the asset or asset group. When a satellite experiences an anomaly or other health related issues, we believe the lowest level of identifiable cash flows exists at the individual satellite level. Accordingly, in the second quarter of 2010, we performed an impairment review of our Galaxy 15 satellite and recorded a non-cash impairment charge of $104.1 million to write down the Galaxy 15 satellite to its estimated fair value following the anomaly. The estimated fair value of Galaxy 15 was determined by us based on a probability-weighted cash flow analysis derived primarily using our internally prepared budgets and forecast information including estimates of the potential revenue generating capacity of the satellite, if recovered, discounted at an appropriate weighted average cost of capital. Our analysis included an estimate of the likelihood of recovery of the satellite, based in part on discussions with Orbital and input from our engineers. In the event that remaining attempts to recover the Galaxy 15 satellite are unsuccessful, we may be required to take additional charges for impairment, including the possible full impairment of the remaining carrying value of the satellite, which was $34.2 million at September 30, 2010. All attempts to recover this satellite are currently expected to be completed within the next several months.

Note 6    Investments

In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”). Subsequent to the issuance of the accounting pronouncement, SFAS No. 167 was incorporated into the Codification under FASB ASC Topic 810,

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)—(Continued)

September 30, 2010

 

Consolidations (“FASB ASC 810”). FASB ASC 810 is intended to revise the previous methodology used to determine the primary beneficiary of a Variable Interest Entity (“VIE”). Historically, the analysis was primarily quantitative and contained certain considerations of qualitative factors. FASB ASC 810 eliminates the quantitative approach for determining the primary beneficiary of a VIE and revises the guidance to employ a more qualitative approach to analyzing a VIE, including consideration of the substance of the VIE as well as assessing the underlying factors driving the economics of the VIE. Additionally, the revised guidance requires an ongoing assessment of whether an entity is the primary beneficiary and includes additional disclosure requirements, which are included below, including further description and explanation as to how an entity determined the primary beneficiary of the VIE. Under FASB ASC 810, the primary beneficiary is the entity that consolidates a VIE. We adopted FASB ASC 810 in the first quarter of 2010.

During 2009 and 2010 we had ownership interests in a number of entities which met the criteria of a VIE, including WildBlue Communications Inc. (“WildBlue”), Horizons-1, Horizons-2, New Dawn and WP Com, as defined below. We had a noncontrolling ownership interest of approximately 28% in WildBlue in 2009 and accordingly did not consolidate WildBlue in accordance with FASB ASC 810. We have a greater than 50% controlling ownership and voting interest in New Dawn and therefore consolidate the New Dawn joint venture. Horizons-1 and Horizons-2, as well as WP Com, are discussed in further detail below, including our analyses of the primary beneficiary determination as required under FASB ASC 810.

(a) WildBlue Communications, Inc.

Prior to December 15, 2009, we had a noncontrolling ownership interest of approximately 28% in WildBlue, a company offering broadband Internet access services in the continental United States via Ka-band satellite capacity. We accounted for our investment using the equity method of accounting. On December 15, 2009, we sold our ownership interest in WildBlue to Viasat Inc. through a non-cash transaction whereby we exchanged our interest in WildBlue for shares of Viasat Inc. common stock. During the first quarter of 2010, we sold all of our shares of Viasat Inc. common stock for $28.6 million, and recorded a $1.3 million gain on the sale within our condensed consolidated statement of operations during the nine months ended September 30, 2010.

(b) Horizons-1 and Horizons-2

As a result of our acquisition of PanAmSat Holding Corporation and its subsidiaries on July 3, 2006 and related transactions (the “PanAmSat Acquisition Transactions”), we have a joint venture with JSAT International, Inc. (“JSAT”), a leading satellite operator in the Asia-Pacific region. The joint venture is named Horizons Satellite Holdings, LLC (“Horizons Holdings”), and consists of two investments: Horizons-1 Satellite LLC (“Horizons-1”) and Horizons-2 Satellite LLC (“Horizons-2”). We provide certain services to the joint venture and utilize capacity from the joint venture.

In accordance with the guidance provided under FASB ASC 810, we are required to reassess the primary beneficiary determination of Horizons Holdings on a recurring basis, as well as consider more qualitative factors when considering the primary beneficiary. Upon inception of the joint venture, we originally concluded that we were not the primary beneficiary of the joint venture and therefore did not consolidate Horizons Holdings. The assessment considered both quantitative and qualitative factors surrounding the joint venture, including which entity was more exposed to risk of loss or gain as well as other factors such as whether one partner of the joint venture had more voting power or other control of the joint venture. Horizons Holdings is set up with a joint 50/50 share of management authority as well as an equal share of the profits and revenues from Horizons-1 and Horizons-2. Therefore the equal share of quantitative and qualitative rights from the joint venture alone was not

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)—(Continued)

September 30, 2010

 

persuasive in defining a primary beneficiary. However, JSAT guarantees the payment of the debt at Horizons Holdings which was incurred to finance the construction of the Horizons-2 satellite. As a result, it was determined that we were not the primary beneficiary and would not consolidate Horizons Holdings. Rather, our investment is accounted for using the equity method of accounting. Subsequent to inception, and considering the guidance in FASB ASC 810, there have been no events or revisions to the joint venture which would change our primary beneficiary determination. As of September 30, 2010, we continue to believe that we are not the primary beneficiary of the VIE and therefore we have not consolidated Horizons Holdings.

Horizons-1 owns and operates the Ku-band portion of the Horizons-1 satellite in the fixed satellite services sector, offering service to customers in the Asia-Pacific region. Through our investment in Horizons Holdings, we have an indirect 50% ownership interest in Horizons-1, an investment which is accounted for under the equity method of accounting. Our share of the results of Horizons-1 is included in other income, net in the accompanying condensed consolidated statements of operations and was income of $0.1 million during each of the nine months ended September 30, 2009 and 2010. The investment balance of $12.6 million and $10.4 million as of December 31, 2009 and September 30, 2010, respectively, was included within other assets in the accompanying condensed consolidated balance sheets.

During each of the nine months ended September 30, 2009 and 2010, we recorded expenses of $2.8 million in relation to the utilization of Ku-band satellite capacity from Horizons-1. Additionally, we provide TT&C and administrative services for the Horizons-1 satellite. We recorded revenue for these services of $0.5 million during each of the nine months ended September 30, 2009 and 2010.

We also have a revenue share agreement with JSAT related to services sold on the Horizons-1 satellite. We are responsible for the billing and collecting for all such services sold, but recognize revenue on a net basis. The payable due to JSAT was $1.8 million as of December 31, 2009 and September 30, 2010.

On August 1, 2005, Intelsat Corporation (“Intelsat Corp”), our indirect wholly-owned subsidiary, formed a second satellite joint investment with JSAT to build and launch a Ku-band satellite, Horizons–2. The Horizons-2 satellite was launched in December 2007 and placed into service in February 2008. Similar to the Horizons-1 joint venture, we share an indirect 50/50 ownership and voting interest in Horizons-2 with JSAT through our investment in Horizons Holdings. However, unlike Horizons-1, JSAT guarantees the payment of debt for the Horizons-2 joint venture.

The total future joint investment obligation in Horizons-2 is estimated to be $100.7 million as of September 30, 2010, of which each of the joint venture partners is required to fund their 50% share. Our share of the results of Horizons-2 is included in other income, net in the accompanying condensed consolidated statements of operations and was income of $0.3 million and $0.2 million during the nine months ended September 30, 2009 and 2010, respectively. As of December 31, 2009 and September 30, 2010, the investment balance of $75.3 million and $71.8 million, respectively, was included within other assets in the accompanying condensed consolidated balance sheets.

In connection with our investment in Horizons-2, we entered into a capital contribution and subscription agreement in August 2005, which requires us to fund our 50% share of the amounts due under Horizons-2’s loan agreement with a third-party lender. Pursuant to this agreement, we made contributions of $12.2 million during each of the nine months ended September 30, 2009 and 2010. We have entered into a security and pledge agreement with a third-party lender and, pursuant to this agreement, granted a security interest in our contribution obligation to the lender. Therefore, we have recorded this obligation as an indirect guarantee. We recorded a

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)—(Continued)

September 30, 2010

 

liability of $12.2 million within accrued liabilities as of December 31, 2009 and September 30, 2010, and a liability of $48.8 million and $36.6 million within other long-term liabilities as of December 31, 2009 and September 30, 2010, respectively, in the accompanying condensed consolidated balance sheets.

We provide TT&C and administrative services for the Horizons-2 satellite. We recorded revenue for these services of $0.6 million during each of the nine months ended September 30, 2009 and 2010. During the nine months ended September 30, 2009 and 2010, we recorded expenses of $5.3 million and $5.1 million, respectively, in relation to the utilization of satellite capacity for the Horizons-2 satellite.

We also have a revenue share agreement with JSAT related to services sold on the Horizons-2 satellite. We are responsible for the billing and collecting for all such services sold, but recognize revenue on a net basis. The amount payable to JSAT was $1.8 million and $1.7 million as of December 31, 2009 and September 30, 2010, respectively.

(c) New Dawn

In June 2008, we entered into a project and shareholders’ agreement (the “New Dawn Project Agreement”) with Convergence SPV, Ltd. (“Convergence Partners”) pursuant to which New Dawn, a Mauritius company in which we have a 74.9% indirect ownership interest and Convergence Partners has a 25.1% noncontrolling ownership interest, intends to procure and launch a new satellite to provide satellite transponder services to customers in Africa. We currently expect the satellite to be launched during the first half of 2011.

New Dawn entered into a secured loan financing arrangement, which is non-recourse to New Dawn’s shareholders, including us and our wholly-owned subsidiaries, beyond the shareholders’ scheduled capital contributions, on December 5, 2008 to obtain $215.0 million of financing to fund a portion of the cost of construction and launch of the new satellite (see Note 8—Long-Term Debt). In addition, we and Convergence Partners have agreed to make certain capital contributions to New Dawn in proportion to our respective ownership interests in New Dawn to fund a portion of these costs. Total equity contributions to New Dawn during the nine months ended September 30, 2010 were $4.1 million, of which $3.1 million were attributable to us with the remaining $1.0 million contributed by Convergence Partners. New Dawn and its subsidiaries are unrestricted subsidiaries for purposes of applicable indentures and credit agreements of ours and our wholly-owned subsidiaries.

We have agreed to provide sales and marketing services, engineering and administrative support services, and have agreed to perform satellite-related consulting and technical services for New Dawn. The services include the provision of program management services with respect to the satellite and launch vehicle construction programs as well as TT&C services for the new satellite. In addition, for a fee of $15.0 million together with assumption of continuing payment obligations, we assigned New Dawn a launch service contract to provide for the launch of the Intelsat New Dawn satellite.

Convergence Partners has at its option the ability to require us to buy its ownership interest at fair value subsequent to the operations of New Dawn’s assets for a period as defined in the New Dawn Project Agreement. As a result of this option, as of each balance sheet date, we have reflected within mezzanine equity the estimated amount that we would pay to Convergence Partners as if the option was exercised. This amount reflects the fair value analysis we performed at September 30, 2010, which resulted in a $10.6 million increase in the fair value during the nine months ended September 30, 2010. The $10.6 million change in fair value is shown as a

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)—(Continued)

September 30, 2010

 

reduction in our paid-in capital at September 30, 2010. We have assessed the significance of the Level 3 inputs to the overall valuation and have concluded that the valuation in its entirety is classified in Level 3 of the fair value hierarchy (see Note 2—Fair Value Measurements).

We consolidated New Dawn within our condensed consolidated financial statements, net of eliminating entries. Additionally, we accounted for the percentage interest in New Dawn owned by Convergence Partners as a noncontrolling interest. We recorded the transaction in accordance with the guidance provided under the Distinguishing Liabilities from Equity topic of the Codification specifically related to the classification and measurement of redeemable securities.

(d) WP Com

We have formed a joint venture with Corporativo W. Com S. de R.L. de C.V. (“Corporativo”) named WP Com, S. de R.L. de C.V. (“WP Com”). We own 49% of the voting equity shares and 88% of the economic interest in WP Com and Corporativo owns the remaining 51% of the voting equity shares. PanAmSat de Mexico, S. de R.L. de C.V. (“PAS de Mexico”) is a subsidiary of WP Com, 99.9% of which is owned by WP Com, with the remainder of the equity interest split between us and Corporativo. We formed WP Com to enable us to operate in Mexico, and PAS de Mexico acts as a reseller of our satellite services to customers in Mexico. Profits and losses of WP Com are allocated to the joint venture partners based upon the voting equity shares.

We have determined that this joint venture meets the criteria of a VIE under FASB ASC 810. In accordance with FASB ASC 810, we evaluated this joint venture to determine the primary beneficiary. We have concluded that we are the primary beneficiary because we influence the underlying business drivers of PAS de Mexico, including by acting as the sole provider for satellite services that PAS de Mexico resells. Furthermore, we have modified our pricing for these services to ensure that PAS de Mexico continues to operate in the Mexican market. Corporativo does not fund any of the operating expenses of PAS de Mexico. Thus, we have consolidated WP Com within our condensed consolidated financial statements and we have accounted for the percentage interest in the voting equity of WP Com owned by Corporativo as a noncontrolling interest, which is included in the equity section of our condensed consolidated balance sheet in accordance with FASB ASC 810.

Note 7    Goodwill and Other Intangible Assets

The carrying amounts of goodwill and acquired intangible assets not subject to amortization consist of the following (in thousands):

 

     As of
December 31,
2009
     As of
September 30,
2010
 

Goodwill

   $ 6,780,827       $ 6,780,827   

Trade name

     70,400         70,400   

Orbital locations

     2,387,700         2,387,700   

We determine the estimated fair value of our rights to operate at orbital locations using the build up method, as described below, to determine the cash flows for the income approach, with the resulting projected cash flows discounted at an appropriate weighted average cost of capital. In instances where the build up method does not generate positive value for the right to operate at an orbital location, but the right is expected to generate revenue, we assigned a value based upon independent source data for recent transactions of similar orbital locations.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)—(Continued)

September 30, 2010

 

 

Under the build up method, the amount an investor would be willing to pay for the right to operate a satellite business at an orbital location within our network is calculated by first estimating the cash flows that typical market participants would assume could be available from the right to operate satellites using the orbital locations in a similar market. It is assumed that rather than acquiring such a business, the buyer would hypothetically start with the right to operate at the orbital locations and build a new operation with similar attributes. Thus the buyer or builder is considered to incur the start-up costs and losses typically associated with such a business, including costs for all other tangible and intangible assets.

We account for goodwill and other non-amortizable intangible assets in accordance with FASB ASC Topic 350, Intangibles—Goodwill and Other (“FASB ASC 350”), and have deemed these assets to have indefinite lives. Therefore, these assets are not amortized but are tested on an annual basis for impairment during the fourth quarter, or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. During the nine months ended September 30, 2009, we recognized a non-cash impairment charge of $499.1 million related to the impairment of our rights to operate at orbital locations resulting from an increase in the discount rate used in our valuation process. There was no similar impairment charge recognized during the nine months ended September 30, 2010.

The carrying amount and accumulated amortization of acquired intangible assets subject to amortization consist of the following (in thousands):

 

     As of December 31, 2009      As of September 30, 2010  
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
 

Backlog and other

   $ 743,760       $ (270,905   $ 472,855       $ 743,760       $ (350,068   $ 393,692   

Customer relationships

     534,030         (28,366     505,664         534,030         (46,854     487,176   

Technology

     2,700         (2,620     80         2,700         (2,680     20   
                                                   

Total

   $ 1,280,490       $ (301,891   $ 978,599       $ 1,280,490       $ (399,602   $ 880,888   
                                                   

Intangible assets are amortized based on the expected pattern of consumption. We recorded amortization expense of $109.4 million and $97.7 million for the nine months ended September 30, 2009 and 2010, respectively.

In the first quarter of 2009, the FASB revised FASB ASC 350 to provide additional guidance for determining the useful life of intangible assets. The revised guidance provides that we are required to disclose on an interim and annual basis our policy related to the renewal or extension of the term of our intangible assets. Our policy is to expense all costs incurred to renew or extend the terms of our intangible assets. The renewal expenses for each of the three and nine months ended September 30, 2009 and 2010 were immaterial to our condensed consolidated results of operations.

 

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INTELSAT S.A.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)—(Continued)

September 30, 2010

 

 

Note 8    Long-Term Debt

The carrying values and fair values of our notes payable and long-term debt were as follows (in thousands):

 

    As of December 31, 2009     As of September 30, 2010  
    Carrying Value     Fair Value     Carrying Value     Fair Value  

Intelsat S.A.:

       

6.5% Senior Notes due November 2013

  $ 353,550      $ 328,802      $ 353,550      $ 350,474   

Unamortized discount on 6.5% Senior Notes

    (92,653     —          (78,697     —     

7.625% Senior Notes due April 2012

    485,841        478,553        485,841        504,060   

Unamortized discount on 7.625% Senior Notes

    (71,932     —          (51,207     —     
                               

Total Intelsat S.A. obligations

    674,806        807,355        709,487        854,534   
                               

Intelsat Luxembourg:

       

11.25% Senior Notes due February 2017

    2,805,000        2,812,013        2,805,000        3,001,350   

11.5% / 12.5% Senior PIK Election Notes due February 2017

    2,149,991        2,106,991        2,427,138        2,627,377   
                               

Total Intelsat Luxembourg obligations

    4,954,991        4,919,004        5,232,138        5,628,727   
                               

Intelsat Jackson:

       

11.25% Senior Notes due June 2016

    1,048,220        1,132,078        1,048,220        1,137,319   

Unamortized premium on 11.25% Senior Notes

    5,619        —          5,154        —     

11.5% Senior Notes due June 2016

    284,595        306,651        284,595        308,786   

9.5% Senior Notes due June 2016

    701,913        751,047        701,913        747,537   

9.25% Senior Notes due June 2016

    55,035        55,794        55,035        58,821   

Senior Unsecured Credit Facilities due February 2014

    195,152        176,515        195,152        182,389   

New Senior Unsecured Credit Facilities due February 2014

    810,876        733,437        810,876        757,845   

8.5% Senior Notes due November 2019

    500,000        513,750        500,000        542,500   

Unamortized discount on 8.5% Senior Notes

    (4,119     —          (3,916     —     

7.25% Senior Notes due October 2020

    —          —          1,000,000        1,005,000   
                               

Total Intelsat Jackson obligations

    3,597,291        3,669,272        4,597,029        4,740,197   
                               

Intermediate Holdco:

       

9.25% Senior Discount Notes due February 2015

    4,516        4,640        4,545        4,704   

9.5% Senior Discount Notes due February 2015

    477,385        490,513        481,020        497,856   
                               

Total Intermediate Holdco obligations

    481,901        495,153        485,565        502,560   
                               

Intelsat Sub Holdco:

       

8.5% Senior Notes due January 2013

    883,346        901,013        883,346        892,179   

8.875% Senior Notes due January 2015

    681,012        703,145        681,012        703,145   

Senior Secured Credit Facilities due July 2013

    334,408        317,420        331,822        319,479   

8.875% Senior Notes due January 2015, Series B

    400,000        413,000        400,000        413,000   

Unamortized discount on 8.875% Senior Notes

    (73,759     —          (65,873     —     

Capital lease obligations

    191        191        —          —     

7% Note payable to Lockheed Martin Corporation

    5,000        5,000        —          —     
                               

Total Intelsat Sub Holdco obligations

    2,230,198        2,339,769        2,230,307        2,327,803   
                               

 

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INTELSAT S.A.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)—(Continued)

September 30, 2010

 

    As of December 31, 2009     As of September 30, 2010  
    Carrying Value     Fair Value     Carrying Value     Fair Value  

New Dawn:

       

Senior Secured Debt Facility

    72,652        72,652        82,648        82,648   

Mezzanine Facility Term Loan

    42,137        42,137        60,926        60,926   
                               

New Dawn obligations

    114,789        114,789        143,574        143,574   
                               

Intelsat Corp:

       

Senior Secured Credit Facilities due January 2014

    1,733,391        1,630,427        1,719,989        1,653,597   

Unamortized discount on Senior Secured Credit Facilities

    (10,785     —          (8,982     —     

Senior Secured Credit Facilities due July 2012

    204,648        195,644        151,261        148,433   

9.25% Senior Notes due August 2014

    658,119        676,217        111,833        115,188   

9.25% Senior Notes due June 2016

    580,719        599,592        580,719        618,466   

6.875% Senior Secured Debentures due January 2028

    125,000        104,688        71        85   

Unamortized discount on 6.875% Senior Secured Debentures

    (24,369     —          —          —     
                               

Total Intelsat Corp obligations

    3,266,723        3,206,568        2,554,891        2,535,769   
                               

Total Intelsat S.A. consolidated long-term debt

    15,320,699      $ 15,551,910        15,952,991      $ 16,733,164   
                               

Less:

       

Current portion of capital lease obligations

    191          —       

Current portion of long-term debt

    97,498          92,498     
                   

Total current portion

    97,689          92,498     
                   

Total consolidated long-term debt, excluding current portion

  $ 15,223,010        $ 15,860,493     
                   

The fair value for publicly traded instruments is determined using quoted market prices and, for non-publicly traded instruments, fair value is based upon composite pricing from a variety of sources, including market leading data providers, market makers, and leading brokerage firms. Substantially all of the inputs used to determine the fair value are classified as Level 1 inputs within the fair value hierarchy from FASB ASC 820, except our senior secured credit facilities, the inputs for which are classified as Level 2. The fair values of the New Dawn obligations and the note payable to Lockheed Martin Corporation approximate their respective book values.

New Dawn Credit Facilities

On December 5, 2008, New Dawn entered into a $215.0 million secured financing arrangement that consists of a senior and mezzanine term loan facilities. The credit facilities are non-recourse to New Dawn’s shareholders, including us and our wholly-owned subsidiaries, beyond the shareholders’ scheduled capital contributions. During the nine months ended September 30, 2010, New Dawn drew $23.5 million under this facility to fund future capital expenditures. The senior facility provides for a commitment of up to $125.0 million. The interest rate on term loans under the senior facility is the aggregate of the London Inter-Bank Offered Rate (“LIBOR”) plus an applicable margin between 3.0% and 4.0% and certain costs, if incurred. The mezzanine facility provides for a commitment of up to $90.0 million. The interest rate on term loans under the mezzanine facility is the

 

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INTELSAT S.A.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)—(Continued)

September 30, 2010

 

aggregate of LIBOR plus an applicable margin between 5.3% and 6.3% and certain costs, if incurred. New Dawn is required to pay a commitment fee at a rate per annum of 1/2% on any unused commitments under the credit facilities. During the nine months ended September 30, 2010, New Dawn incurred satellite related capital expenditures of $36.5 million.

Senior Secured Revolving Credit Facilities

No amounts were outstanding under our revolving credit facilities as of September 30, 2010; however, we had aggregate outstanding letters of credit of $31.8 million under the revolver portion of Intelsat Sub Holdco’s senior secured credit facilities and $1.7 million under the revolver portion of Intelsat Corp’s senior secured credit facilities. Intelsat Sub Holdco and Intelsat Corp had $239.0 million (net of standby letters of credit) and $152.5 million (net of standby letters of credit), respectively, of availability remaining under their senior secured credit facilities at that date. The ability of Intelsat Sub Holdco to borrow under its revolving credit facility is subject to compliance by its indirect parent, Intelsat S.A., with a senior secured debt covenant included in the indenture governing Intelsat S.A.’s senior notes (as in effect on July 3, 2006, the date on which the Intelsat Sub Holdco credit agreement was executed). As a result, under certain circumstances, Intelsat Sub Holdco may not be able to borrow up to the full amount of borrowing availability under its revolving credit facility if Intelsat Corp has certain amounts outstanding under its revolving credit facility.

2010 Debt Transactions

On April 21, 2010, Intelsat S.A. completed a consent solicitation that resulted in the amendment of certain terms of the indenture governing Intelsat S.A.’s 7 5/8% Senior Notes due 2012 and 6 1/2% Senior Notes due 2013. The most significant amendments replaced the limitation on secured debt covenant, which limited secured debt of Intelsat S.A. and its restricted subsidiaries to 15% of their consolidated net tangible assets (subject to certain exceptions), with a new limitation on liens covenant, which generally limits such secured debt to two times the adjusted EBITDA of Intelsat S.A. plus certain general baskets (subject to certain exceptions), and made certain corresponding changes to the sale and leaseback covenant as a result of the addition of the new limitation on liens covenant. As consideration, Intelsat S.A. paid the consenting holders of such notes a consent payment equal to 2% of the outstanding principal amount of notes held by such holders that totaled approximately $15.4 million, which was capitalized and will be amortized over the remaining terms of the notes.

On September 30, 2010, Intelsat Jackson completed an offering of $1.0 billion aggregate principal amount of 7 1/4% Senior Notes due 2020 (the “2020 Jackson Notes”). The majority of the net proceeds from the 2020 Jackson Notes were transferred to Intelsat Jackson’s indirect subsidiary, Intelsat Corp. The funds transferred were used by Intelsat Corp to repurchase $546.3 million of its outstanding 9 1/4% Senior Notes due 2014 (the “2014 Corp Notes”) for $571.7 million and $124.9 million of its outstanding 6 7/8% Senior Secured Debentures due 2028 (the “2028 Corp Notes”) for $151.7 million, pursuant to cash tender offers (the “Tender Offers”). In connection with the Tender Offers, Intelsat Corp received the consent of the holders of the 2014 Corp Notes and the 2028 Corp Notes to amend the indentures governing these notes, among other things, to eliminate substantially all of the restrictive covenants, certain events of default and certain other provisions contained in the indentures.

On October 1, 2010, $34.1 million of the net proceeds from the 2020 Intelsat Jackson Notes were transferred to Intelsat Sub Holdco. Intelsat Sub Holdco used the funds to repurchase and cancel $33.0 million of its outstanding 8 1/2% Senior Notes due 2013 via an open market purchase transaction.

 

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INTELSAT S.A.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)—(Continued)

September 30, 2010

 

 

After giving effect to the Tender Offers and the repurchase of the Intelsat Sub Holdco notes, approximately $227.8 million of the proceeds from the 2020 Jackson Notes remained available for general corporate purposes, which could include the repayment, redemption, retirement or repurchase in the open market of other indebtedness of Intelsat S.A. or its subsidiaries.

Note 9    Derivative Instruments and Hedging Activities

Interest Rate Swaps

We are subject to interest rate risk primarily associated with our variable rate borrowings. Interest rate risk is the risk that changes in interest rates could adversely affect earnings and cash flows. Specific interest rate risk includes: the risk of increasing interest rates on short-term debt; the risk of increasing interest rates for planned new fixed long-term financings; and the risk of increasing interest rates for planned refinancing using long-term fixed rate debt. In order to mitigate this risk, we have entered into interest rate swap agreements to reduce the impact of interest rate movements on future interest expense by converting substantially all of our floating-rate debt to a fixed rate.

As of September 30, 2010, we held interest rate swaps with an aggregate notional amount of $2.3 billion which mature in 2013. These swaps were entered into as further described below to economically hedge the variability in cash flow on a portion of the floating-rate term loans under our senior secured and unsecured credit facilities, but have not been designated as hedges for accounting purposes. On a quarterly basis, we receive a floating rate of interest equal to the three-month LIBOR and pay a fixed rate of interest. Certain of the interest rate swap agreements had options permitting us to terminate the underlying interest rate swaps on March 14, 2011, prior to the stated maturity date of March 14, 2013. On July 23, 2010, we received $31.8 million in cash from our counterparties to the respective interest rate swap agreements in return for the cancellation of our options to terminate the underlying interest rate swaps on March 14, 2011.

Additionally, at September 30, 2010, New Dawn had two floating to fixed interest rate swaps to hedge future interest payments on loans under New Dawn’s senior and mezzanine term loan facilities. The first interest rate swap has varying notional amounts maturing on July 7, 2011. We receive an interest rate of three-month LIBOR and pay a fixed coupon of 1.55%. Interest payments for each quarterly period are deferred until the maturity date and all the accrued interest will be paid at maturity. The second interest rate swap matures on July 7, 2014, with a notional amount of $65.5 million for mezzanine loans and varying notional amounts for underlying senior loans. We receive an interest rate of three-month LIBOR and pay a fixed coupon of 3.72%. Both of these swaps were undesignated as hedges for accounting purposes.

On March 15, 2010, our interest rate swap with an aggregate notional principal amount of $312.5 million matured. On March 14, 2010, our five-year interest rate swap to hedge interest expense on a notional amount of $625.0 million (originally $1.25 billion of debt, and reduced under the original terms of the swap agreement) expired.

The counterparties to our interest rate swap agreements are highly rated financial institutions. In the unlikely event that the counterparties fail to meet the terms of the interest rate swaps, our exposure is limited to the interest rate differential on the notional amount at each quarterly settlement period over the life of the agreement. We do not anticipate non-performance by the counterparties.

The swaps are marked-to-market quarterly with any change in fair value recorded within (gains) losses on derivative financial instruments in our condensed consolidated statements of operations. We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective

 

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INTELSAT S.A.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)—(Continued)

September 30, 2010

 

counterparty’s nonperformance risk in the fair value measurements of our derivatives. The fair value measurement of derivatives could result in either a net asset or a net liability position for us. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting arrangements as applicable and necessary. When the swaps are in a net liability position for us, the credit valuation adjustments are calculated by determining the total expected exposure of the derivatives, incorporating the current and potential future exposures and then applying an applicable credit spread to the exposure. The total expected exposure of a derivative is derived using market-observable inputs, such as yield curves and volatilities. The inputs utilized for our own credit spread are based on implied spreads from traded levels of our debt. Accordingly, during the nine months ended September 30, 2010, we recorded a non-cash credit valuation adjustment of approximately $9.2 million as a reduction to our liability.

As of December 31, 2009 and September 30, 2010, $11.2 million and $6.3 million was included in other current liabilities, respectively, and $88.6 million and $166.2 million was included in other long-term liabilities, respectively, within our condensed consolidated balance sheets related to the interest rate swaps.

Put Option Embedded Derivative Instrument

We have a contingent put option embedded within Intelsat Sub Holdco’s 8 7/8% Senior Notes due 2015, Series B, which meets the criteria under FASB ASC Topic 815, Derivatives and Hedging (“FASB ASC 815”), to be bifurcated from the debt host instrument and classified as a derivative instrument. We estimated the fair value of the embedded derivative on the issuance date and we subsequently revalue the derivative at the end of each reporting period, recognizing any change in fair value through earnings. We use a standard valuation technique whereby the critical assumptions and underlyings include the debt maturity date, issue price, coupon rate, change of control put price, and the estimated date of a change in control. Based on our fair value analysis, the put-option embedded derivative was deemed to have no fair market value at September 30, 2010 as a result of the increase in fair value of the related debt instrument beyond the level at which the derivative is likely to be exercised. Therefore, $14.6 million of non-cash gain was recorded in (gains) losses on derivative financial instruments within our condensed consolidated statements of operations during the nine months ended September 30, 2010.

In accordance with disclosure requirements provided under FASB ASC 815, we include the following tabular presentation, which sets forth the fair value of our derivatives by category (in thousands):

 

        Asset Derivatives     Liability Derivatives  

Derivatives not designated as hedging
instruments

 

Balance Sheet Location

  December 31,
2009
    September 30,
2010
    December 31,
2009
    September 30,
2010
 

Undesignated interest rate swaps (a)

  Other long-term liabilities   $ 15,662      $ —        $ 104,263      $ 166,200   

Undesignated interest rate swaps

  Other current liabilities     —          —          11,249        6,256   

Put option embedded derivative

  Other long-term liabilities     —          —          14,600        —     
                                 

Total derivatives

    $ 15,662      $ —        $ 130,112      $ 172,456   
                                 

 

(a) The value of undesignated interest rate swaps on our condensed consolidated balance sheet at December 31, 2009 is net of $15.7 million, which represents the fair value of options permitting us to terminate certain swaps. The fair value of these options is classified as an asset derivative in the table above. In the third quarter of 2010, these options were cancelled, as discussed above. As of September 30, 2010, there are no asset derivatives included within our condensed consolidated balance sheets.

 

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INTELSAT S.A.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)—(Continued)

September 30, 2010

 

 

The following tabular presentation sets forth the effect of the derivative instruments on the condensed consolidated statements of operations (in thousands):

 

Derivatives not designated as
hedging instruments

 

Presentation in Statements of
Operations

  Three Months
Ended
September 30,
2009
    Three Months
Ended
September 30,
2010
    Nine Months
Ended
September 30,
2009
    Nine Months
Ended
September 30,
2010
 

Undesignated interest rate swaps

  Losses on derivative financial instruments   $ 41,833      $ 31,731      $ 19,029      $ 105,192   

Put option embedded derivative

  Gains on derivative financial instruments     (3,013     (11,781     (24,332     (14,600
                                 

Total (gains) losses on derivative financial instruments

    $ 38,820      $ 19,950      $ (5,303   $ 90,592   
                                 

Note 10    Income Taxes

The majority of our operations are located in taxable jurisdictions, including Luxembourg, the United States and the United Kingdom. Our Luxembourg companies generated a loss for the nine months ended September 30, 2010. Due to our cumulative losses in recent years, and the inherent uncertainty associated with the realization of future income in the near term, we recorded a full valuation allowance against the net operating losses generated in Luxembourg. The difference between tax expense (benefit) reported in the condensed consolidated statements of operations and tax computed at statutory rates is attributable to the valuation allowance on losses generated in Luxembourg, the provision for foreign taxes, which were principally in the United States and the United Kingdom, as well as withholding taxes on revenue earned in many of the foreign markets in which we operate.

As of December 31, 2009 and September 30, 2010, our gross unrecognized tax benefits were $86.9 million and $67.7 million, respectively (including interest and penalties), of which $68.1 million and $44.0 million, respectively, if recognized, would affect our effective tax rate. As of December 31, 2009 and September 30, 2010, we had recorded reserves for interest and penalties in the amount of $5.2 million and $5.0 million, respectively. We continue to recognize interest and, to the extent applicable, penalties with respect to the unrecognized tax benefits as income tax expense. Since December 31, 2009, the change in the balance of unrecognized tax benefits consisted of an increase of $4.0 million related to current period tax positions, a decrease of $20.7 million related to prior period tax positions, an increase related to prior period positions of $3.3 million, and a decrease of $5.8 million related to the expiration of certain statutes of limitations.

During 2009, we recorded additional liabilities related to withholding taxes of $13.6 million in accordance with FASB ASC Topic 740, Income Taxes. During the third quarter of 2010, we received assessments with respect to this liability and it is reasonably possible that we will receive additional assessments for the remaining liability within the next twelve months. It is our intention to appeal these assessments.

We operate in various taxable jurisdictions throughout the world and our tax returns are subject to audit and review from time to time. We consider Luxembourg, the United States and the United Kingdom to be our significant tax jurisdictions. Our Luxembourg, U.S. and U.K. subsidiaries are subject to income tax examination for periods beginning after December 31, 2003. During the third quarter of 2010, the United States Internal Revenue Service closed an audit of Intelsat Holding Corporation and its subsidiaries for the years ended December 31, 2005 and 2006. None of the proposed adjustments have a material impact on our results of operations, financial position or cash flows.

 

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INTELSAT S.A.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)—(Continued)

September 30, 2010

 

 

Within the next twelve months, we believe that there are no jurisdictions in which the outcome of unresolved tax issues or claims is likely to be material to our results of operations, financial position or cash flows.

Prior to August 20, 2004, our subsidiary, Intelsat Corp, joined with The DIRECTV Group and General Motors Corporation in filing a consolidated U.S. federal income tax return. In April 2004, Intelsat Corp entered into a tax separation agreement with The DIRECTV Group that superseded four earlier tax-related agreements among Intelsat Corp and its subsidiaries, The DIRECTV Group and certain of its affiliates. Pursuant to the tax separation agreement, The DIRECTV Group agreed to indemnify Intelsat Corp for all federal and consolidated state and local income taxes a taxing authority may attempt to collect from Intelsat Corp regarding any liability for the federal or consolidated state or local income taxes of General Motors Corporation and The DIRECTV Group, except those income taxes Intelsat Corp is required to pay under the tax separation agreement. In addition, The DIRECTV Group agreed to indemnify Intelsat Corp for any taxes (other than those taxes described in the preceding sentence) related to any periods or portions of such periods ending on, or prior to, the day of the closing of the PanAmSat recapitalization, which occurred on August 20, 2004, in amounts equal to 80% of the first $75.0 million of such other taxes and 100% of any other taxes in excess of the first $75.0 million. As a result, Intelsat Corp’s tax exposure after indemnification related to these periods is capped at $15.0 million, of which $4.0 million has been paid to date. The tax separation agreement with The DIRECTV Group is effective from August 20, 2004 until the expiration of the statute of limitations with respect to all taxes to which the tax separation agreement relates. As of December 31, 2009 and September 30, 2010, we had a tax indemnification receivable of $2.3 million.

Note 11    Restructuring Costs

Our restructuring costs include our historical facilities restructuring plans and management-approved restructuring plans to consolidate and integrate the management and operations of Intelsat and PanAmSat subsequent to consummation of the PanAmSat Acquisition Transactions.

We approved a facilities restructuring plan subsequent to the consummation of the PanAmSat Acquisition Transactions, which included the closure of PanAmSat’s former corporate headquarters in Wilton, Connecticut, as well as two other locations in the United States. These costs relate primarily to payments due on existing lease obligations that are expected to be incurred and paid through 2011. PanAmSat also had recorded liabilities in connection with its 2002 approval of a plan to restructure several of its United States locations and close certain facilities, some of which are currently being leased through 2011. The facilities restructuring liability was $2.9 million and $1.5 million as of December 31, 2009 and September 30, 2010, respectively, the current portion of which is included in accounts payable and accrued liabilities. We made cash payments of $1.2 million during the nine months ended September 30, 2010 in connection with the facilities restructuring plan and we expect to pay $1.5 million within the next 12 months. No additional charges related to the facilities restructuring plan are expected to be incurred.

Note 12    Contingencies

(a) Litigation and Claims

We are subject to litigation in the ordinary course of business. Management does not believe that the resolution of any pending proceedings would have a material adverse effect on our financial position or results of operations.

 

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INTELSAT S.A.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)—(Continued)

September 30, 2010

 

 

(b) LCO Protection

Most of the customer service commitments entered into prior to our privatization were transferred to us pursuant to novation agreements. Certain of these agreements contain provisions, including provisions for lifeline connectivity obligation (“LCO”) protection, which constrain our ability to price services in some circumstances. Our LCO contracts require us to provide customers with the right to renew their service commitments covered by LCO contracts at prices no higher than the prices charged for those services on the privatization date. Under some circumstances, we may also be required by an LCO contract to reduce the price for a service commitment covered by the contract. LCO protection may continue until July 18, 2013. As of September 30, 2010, we had approximately $122.9 million of backlog covered by LCO contracts and to date we have not been required to reduce prices for our LCO-protected service commitments. There can be no assurance that we will not be required to reduce prices in the future under our LCO commitments.

(c) Launch Service Providers

One of our launch service providers, Sea Launch Company L.L.C. (“Sea Launch”), with which we have contracted for the future launch of one satellite, and have options for the launch of four additional satellites, filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in June 2009. As of September 30, 2010, we had approximately $43 million outstanding of payments made to Sea Launch relating to satellite launches that Sea Launch is still required to provide us. In July 2010, the applicable bankruptcy court approved Sea Launch’s reorganization plan and Sea Launch emerged from Chapter 11 proceedings on October 27, 2010.

Note 13    Business and Geographic Segment Information

We operate in a single industry segment in which we provide satellite services to our communications customers around the world. Revenue by region is based on the locations of customers to which services are billed. Our satellites are in geosynchronous orbit, and consequently are not attributable to any geographic location. Of our remaining assets, substantially all are located in the United States.

We earn revenue primarily by providing services over satellite transponder capacity to our customers. Our customers generally obtain satellite capacity from us by placing an order pursuant to one of several master customer service agreements. Our customer agreements also cover services that we procure from third parties and resell, which we refer to as off-network services. These services can include transponder services and other satellite-based transmission services in frequencies not available on our network. Under the category off-network and other revenues, we also include revenues from consulting and other services that we provide to other satellite operators.

The geographic distribution of our revenue was as follows:

 

     Three Months
Ended
September 30,
2009
    Three Months
Ended
September 30,
2010
 

North America

     45     46

Europe

     17     16

Africa and Middle East

     18     17

Latin America and Caribbean

     13     14

Asia Pacific

     7     7

 

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INTELSAT S.A.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)—(Continued)

September 30, 2010

 

 

Approximately 4% of our revenue was derived from our largest customer during each of the three months ended September 30, 2009 and 2010. Our ten largest customers accounted for approximately 21% of our revenue for each of the three months ended September 30, 2009 and 2010.

 

     Nine Months
Ended
September 30,
2009
    Nine Months
Ended
September 30,
2010
 

North America

     46     46

Europe

     17     16

Africa and Middle East

     17     18

Latin America and Caribbean

     12     13

Asia Pacific

     8     7

Approximately 4% of our revenue was derived from our largest customer during each of the nine months ended September 30, 2009 and 2010. Our ten largest customers accounted for approximately 20% and 21% of our revenue for each of the nine months ended September 30, 2009 and 2010, respectively.

Our revenues were derived from the following services, with Off-Network and Other Revenues shown separately from On-Network Revenues (in thousands, except percentages):

 

    Three Months
Ended
September 30,
2009
    Three Months
Ended
September 30,
2010
    Nine Months
Ended
September 30,
2009
    Nine Months
Ended
September 30,
2010
 

On-Network Revenues

               

Transponder services

  $ 453,578        73   $ 466,565        72   $ 1,350,109        71   $ 1,374,357        72

Managed services

    83,489        14     76,737        12     251,872        13     241,857        13

Channel

    33,092        5     29,985        5     101,354        5     91,821        5
                                                               

Total on-network revenues

    570,159        92     573,287        89     1,703,335        89     1,708,035        90

Off-Network and Other Revenues

               

Transponder, MSS and other off-network services

    37,502        6     60,521        9     116,302        7     163,373        9

Satellite-related services

    10,227        2     10,448        2     72,582        4     29,275        1
                                                               

Total off-network and other revenues

    47,729        8     70,969        11     188,884        11     192,648        10
                                                               

Total

  $ 617,888        100   $ 644,256        100   $ 1,892,219        100   $ 1,900,683        100
                                                               

Note 14    Related Party Transactions

(a) Shareholders Agreement

The shareholders of Intelsat Global entered into shareholders agreements on February 4, 2008. The shareholders agreements and the articles of incorporation of Intelsat Global provide, among other things, for the governance of Intelsat Global and its subsidiaries and provide specific rights to and limitations upon the holders of Intelsat Global’s share capital with respect to shares held by such holders.

 

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INTELSAT S.A.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)—(Continued)

September 30, 2010

 

 

(b) Monitoring Fee Agreements and Transaction Fees

Intelsat Luxembourg, our direct wholly-owned subsidiary, has a monitoring fee agreement dated February 4, 2008 (the “2008 MFA”) with BC Partners Limited and Silver Lake Management Company III, L.L.C. (together, the “2008 MFA parties”), pursuant to which the 2008 MFA parties provide certain monitoring, advisory and consulting services to Intelsat Luxembourg. We recorded expense for services associated with the 2008 MFA of $17.4 million and $18.5 million during the nine months ended September 30, 2009 and 2010, respectively.

(c) Ownership by Management

Certain directors, officers and key employees of Intelsat Global and its subsidiaries hold restricted shares, options and SCAs of Intelsat Global (see Note 3—Share-based and Other Compensation Plans). In the aggregate, these shares and arrangements outstanding as of September 30, 2010 provided for the issuance of approximately 12.8% of the voting equity of Intelsat Global on a fully diluted basis.

(d) Sponsor Investments

In October 2010, an entity associated with funds and investment vehicles advised or controlled by BC Partners sold to a non-affiliate $90.9 million principal amount of the Intelsat Luxembourg 11 1/4% Senior Notes due 2017 that it had purchased in 2008.

(e) Horizons

We have a 50% ownership interest in Horizons-1 and Horizons-2 as a result of a joint venture with JSAT (see Note 6—Investments).

(f) New Dawn

We have a 74.9% ownership interest in New Dawn as a result of a project and shareholders’ agreement with Convergence Partners (see Note 6—Investments).

(g) WP Com

We have a 49% ownership interest in WP Com as a result of a joint venture with Corporativo (see Note 6—Investments).

(h) Receivable from Parent

We had a receivable from Intelsat Global as of December 31, 2009 and September 30, 2010 of $3.3 million and $4.8 million, respectively.

Note 15    Supplemental Consolidating Financial Information

In connection with the acquisition of Intelsat S.A. by Intelsat Holdings in January 2005, and related amalgamations, Intelsat Sub Holdco issued $2.6 billion aggregate principal amount of debt (the “2005 Acquisition Finance Notes”), the majority of which was tendered and repurchased in change of control offers in September 2008. The 2005 Acquisition Finance Notes were fully and unconditionally guaranteed, jointly and severally, by Intelsat S.A., Intelsat Luxembourg, Intelsat Jackson, Intermediate Holdco, our indirect wholly-owned subsidiary, and certain wholly-owned subsidiaries of Intelsat Sub Holdco (the “Subsidiary Guarantors”).

 

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INTELSAT S.A.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)—(Continued)

September 30, 2010

 

 

On February 11, 2005, Intelsat S.A. and Zeus Special Subsidiary Limited issued $478.7 million in aggregate principal amount at maturity of 9 1/4% Senior Discount Notes due 2015 (the “2015 Discount Notes”), yielding approximately $305.3 million of net proceeds at issuance. On March 3, 2005, Intelsat Luxembourg transferred substantially all of its assets to Intelsat Sub Holdco and Intelsat Sub Holdco assumed substantially all of the then-existing liabilities of Intelsat Luxembourg. Following these transactions, Zeus Special Subsidiary Limited was amalgamated with Intelsat Luxembourg, and Intelsat Luxembourg became an obligor on the 2015 Discount Notes.

On July 3, 2006, in connection with the PanAmSat Acquisition Transactions, Intelsat Luxembourg transferred the obligation on the 2015 Discount Notes to its wholly-owned subsidiary, Intermediate Holdco. Intermediate Holdco became an obligor on the 2015 Discount Notes and Intelsat Luxembourg became a guarantor of the 2015 Discount Notes. The 2015 Discount Notes are not guaranteed by any of Intelsat Luxembourg’s direct or indirect subsidiaries.

In connection with the PanAmSat Acquisition Transactions, Intelsat Luxembourg issued $1.33 billion of 11 1/4% Senior Notes due 2016 (the “July 2006 Notes”). The July 2006 Notes are fully and unconditionally guaranteed, jointly and severally, by Intelsat S.A. The July 2006 Notes are not guaranteed by any of Intelsat Luxembourg’s direct or indirect subsidiaries.

On February 4, 2008, promptly after the consummation of the New Sponsors Acquisition, Intelsat Luxembourg transferred certain of its assets and certain of its liabilities and obligations (including the July 2006 Notes) to a newly formed direct wholly-owned subsidiary, Intelsat Jackson. Intelsat Jackson became the obligor on the July 2006 Notes and a guarantor of the 2015 Discount Notes and the July 2006 Notes.

In addition, on June 27, 2008, Intelsat Luxembourg issued the 11 1/4% Senior Notes due 2017 and the 11 1/2%/12 1/2% Senior PIK Election Notes due 2017, which are fully and unconditionally guaranteed, jointly and severally, by Intelsat S.A.

Separate financial statements of Intelsat S.A., Intelsat Luxembourg, Intelsat Jackson, Intermediate Holdco, Intelsat Sub Holdco and the Subsidiary Guarantors are not presented because management believes that such financial statements would not be material to investors. Investments in non-guarantor subsidiaries in the following condensed consolidating financial information are accounted for under the equity method of accounting. Consolidating adjustments include the following:

 

   

elimination of investment in subsidiaries;

 

   

elimination of intercompany accounts;

 

   

elimination of intercompany sales between guarantor and non-guarantor subsidiaries; and

 

   

elimination of equity in earnings (losses) of subsidiaries.

 

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INTELSAT S.A. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET

AS OF SEPTEMBER 30, 2010

(in thousands)

 

    Intelsat
S.A.
    Intelsat
Luxembourg
    Intelsat
Jackson
    Intermediate
Holdco
    Intelsat
Sub Holdco
    Intelsat
Sub Holdco
Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    Consolidation
and
Eliminations
    Consolidated  
ASSETS                  

Current assets:

                 

Cash and cash equivalents

  $ 6,694      $ 526      $ 160,249      $ 614      $ 158,790      $ 97,283      $ 324,351      $ (97,283   $ 651,224   

Receivables, net of allowance

    4,752        —          1        —          172,539        172,509        100,147        (172,509     277,439   

Deferred income taxes

    —          —          —          —          1,852        1,852        29,002        (1,852     30,854   

Prepaid expenses and other current assets

    941        6,217        23        4        30,062        29,824        19,787        (30,447     56,411   

Intercompany receivables

    —          9,300        —          —          414,452        11,154,462        240,583        (11,818,797     —     
                                                                       

Total current assets

    12,387        16,043        160,273        618        777,695        11,455,930        713,870        (12,120,888     1,015,928   

Satellites and other property and equipment, net

    —          —          —          —          3,373,913        3,373,395        2,535,249        (3,374,535     5,908,022   

Goodwill

    —          —          —          —          3,434,165        —          3,346,662        —          6,780,827   

Non-amortizable intangible assets

    —          —          —          —          1,805,130        —          652,970        —          2,458,100   

Amortizable intangible assets, net

    —          —          —          —          433,916        —          446,972        —          880,888   

Investment in affiliates

    571,306        5,808,209        10,509,212        7,098,708        (36,084     (28,696     83,180        (23,922,655     83,180   

Other assets

    13,027        116,455        40,619        3,214        169,070        146,262        86,839        (146,262     429,224   
                                                                       

Total assets

  $ 596,720      $ 5,940,707      $ 10,710,104      $ 7,102,540      $ 9,957,805      $ 14,946,891      $ 7,865,742      $ (39,564,340   $ 17,556,169   
                                                                       
LIABILITIES AND SHAREHOLDER’S EQUITY                  

Current liabilities:

                 

Accounts payable and accrued liabilities

  $ 1,058      $ 184      $ 535      $ —        $ 122,824      $ 121,509      $ 120,046      $ (122,132   $ 244,024   

Accrued interest payable

    26,657        77,538        91,589        7,686        38,906        369        31,612        (369     273,988   

Current portion of long-term debt

    —          —          —          —          3,448        —          89,050        —          92,498   

Deferred satellite performance incentives

    —          —          —          —          4,277        4,277        11,223        (4,277     15,500   

Other current liabilities

    —          —          1,207        —          74,920        74,512        55,834        (74,512     131,961   

Intercompany payables

    451,213        —          160,092        53,030        —          —          —          (664,335     —     
                                                                       

Total current liabilities

    478,928        77,722        253,423        60,716        244,375        200,667        307,765        (865,625     757,971   

Long-term debt, net of current portion

    709,487        5,232,138        4,597,029        485,565        2,226,859        —          2,609,415        —          15,860,493   

Deferred satellite performance incentives, net of current portion

    —          —          —          —          20,499        20,499        97,941        (20,499     118,440   

Deferred revenue, net of current portion

    —          —          —          —          258,463        258,463        75,195        (258,463     333,658   

Deferred income taxes

    —          —          —          —          —          —          486,419        —          486,419   

Accrued retirement benefits

    —          —          —          —          73,515        73,515        163,363        (73,515     236,878   

Other long-term liabilities

    —          58,568        51,443        —          35,386        17,792        192,262        (15,466     339,985   

Redeemable noncontrolling interest

    —          —          —          —          —          —          17,487        —          17,487   

Shareholder’s equity (deficit):

                 

Ordinary shares

    5,000        669,036        4,959,000        3,602,000        484,000        200        70        (9,714,306     5,000   

Other shareholder’s equity (deficit)

    (596,695     (96,757     849,209        2,954,259        6,614,708        14,375,755        3,915,825        (28,616,466     (600,162
                                                                       

Total liabilities and shareholder’s equity

  $ 596,720      $ 5,940,707      $ 10,710,104      $ 7,102,540      $ 9,957,805      $ 14,946,891      $ 7,865,742      $ (39,564,340   $ 17,556,169   
                                                                       

(Certain totals may not add due to the effects of rounding)

 

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INTELSAT S.A. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2009

(in thousands)

 

    Intelsat
S.A.
    Intelsat
Luxembourg
    Intelsat
Jackson
    Intermediate
Holdco
    Intelsat
Sub Holdco
    Intelsat
Sub Holdco
Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    Consolidation
and
Eliminations
    Consolidated  
ASSETS                  

Current assets:

                 

Cash and cash equivalents

  $ 21,817      $ 16,115      $ 2,207      $ 41      $ 227,610      $ 104,992      $ 209,781      $ (104,992   $ 477,571   

Receivables, net of allowance

    3,282        —          —          —          180,019        180,013        111,238        (180,013     294,539   

Deferred income taxes

    —          —          —          —          1,077        1,077        49,566        (1,077     50,643   

Prepaid expenses and other current assets

    680        —          —          —          16,206        16,023        19,918        (19,266     33,561   

Intercompany receivables

    —          —          —          —          638,361        11,526,269        107,008        (12,271,638     —     
                                                                       

Total current assets

    25,779        16,115        2,207        41        1,063,273        11,828,374        497,511        (12,576,986     856,314   

Satellites and other property and equipment, net

    —          —          —          —          3,220,658        3,220,466        2,559,435        (3,218,604     5,781,955   

Goodwill

    —          —          —          —          3,434,165        —          3,346,662        —          6,780,827   

Non-amortizable intangible assets

    —          —          —          —          1,805,130        —          652,970        —          2,458,100   

Amortizable intangible assets, net

    —          —          —          —          490,684        —          487,915        —          978,599   

Investment in affiliates

    962,656        6,091,942        9,971,587        7,407,372        (32,832     (41,903     88,902        (24,358,822     88,902   

Other assets

    —          124,926        27,955        3,789        255,663        121,747        92,382        (228,224     398,238   
                                                                       

Total assets

  $ 988,435      $ 6,232,983      $ 10,001,749      $ 7,411,202      $ 10,236,741      $ 15,128,684      $ 7,725,777      $ (40,382,636   $ 17,342,935   
                                                                       
LIABILITIES AND SHAREHOLDER’S EQUITY                  

Current liabilities:

                 

Accounts payable and accrued liabilities

  $ 2,196      $ 508      $ 243      $ —        $ 83,443      $ 81,436      $ 123,255      $ (84,680   $ 206,401   

Accrued interest payable

    11,651        220,740        20,356        —          82,911        3,416        33,718        (3,416     369,376   

Current portion of long-term debt

    —          —          —          —          8,448        5,000        89,241        (5,000     97,689   

Deferred satellite performance incentives

    —          —          —          —          3,974        3,974        14,709        (3,974     18,683   

Other current liabilities

    —          —          1,293        —          72,737        72,298        48,464        (72,298     122,494   

Intercompany payables

    474,422        12,595        206,467        51,884        —          —          —          (745,368     —     
                                                                       

Total current liabilities

    488,269        233,843        228,359        51,884        251,513        166,124        309,387        (914,736     814,643   

Long-term debt, net of current portion

    674,806        4,954,990        3,597,292        481,901        2,221,559        —          3,292,462        —          15,223,010   

Deferred satellite performance incentives, net of current portion

    —          —          —          —          23,201        23,201        105,573        (23,201     128,774   

Deferred revenue, net of current portion

    —          —          —          —          197,938        197,938        56,698        (197,938     254,636   

Deferred income taxes

    37,985        14,090        50,656        3,746        —          —          548,719        (106,477     548,719   

Accrued retirement benefits

    —          —          —          —          73,222        73,222        166,651        (73,222     239,873   

Other long-term liabilities

    —          63,433        33,500        —          61,936        29,510        176,290        (29,510     335,159   

Redeemable noncontrolling interest

    —          —          —          —          —          —          8,884        —          8,884   

Shareholder’s equity:

                 

Ordinary shares

    5,000        669,036        4,959,000        3,602,000        484,000        200        70        (9,714,306     5,000   

Other shareholder’s equity

    (217,625     297,591        1,132,942        3,271,671        6,923,372        14,638,489        3,061,043        (29,323,246     (215,763
                                                                       

Total liabilities and shareholder’s equity

  $ 988,435      $ 6,232,983      $ 10,001,749      $ 7,411,202      $ 10,236,741      $ 15,128,684      $ 7,725,777      $ (40,382,636   $ 17,342,935   
                                                                       

(Certain totals may not add due to the effects of rounding)

 

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INTELSAT S.A. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010

(in thousands)

 

    Intelsat
S.A.
    Intelsat
Luxembourg
    Intelsat
Jackson
    Intermediate
Holdco
    Intelsat
Sub Holdco
    Intelsat
Sub Holdco
Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    Consolidation
and
Eliminations
    Consolidated  

Revenue

  $ —        $ —        $ —        $ —        $ 394,140      $ 394,140      $ 417,521      $ (561,545   $ 644,256   
                                                                       

Operating expenses:

                 

Direct costs of revenue (exclusive of depreciation and amortization)

    —          —          —          —          87,801        405,573        184,324        (572,966     104,732   

Selling, general and administrative

    1,023        6,487        197        17        6,915        5,587        31,382        (5,599     46,009   

Depreciation and amortization

    —          —          —          —          112,320        93,394        86,653        (93,374     198,993   

Impairment of asset value

    —          —          —          —          —          —          —          —          —     

Losses (gains) on derivative financial instruments

    —          —          8,576        —          (8,625     —          19,999        —          19,950   
                                                                       

Total operating expenses

    1,023        6,487        8,773        17        198,411        504,554        322,358        (671,939     369,684   
                                                                       

Income (loss) from operations

    (1,023     (6,487     (8,773     (17     195,729        (110,414     95,163        110,394        274,572   

Interest expense, net

    31,209        152,404        79,020        11,902        28,734        (11     42,262        11        345,531   

Loss on early extinguishment of debt

    —          —          —          —          —          —          (75,805     —          (75,805

Subsidiary income (loss)

    (74,241     86,265        174,058        183,589        9,398        12,307        —          (391,376     —     

Other income, net

    —          —          —          —          878        848        2,722        (848     3,600   
                                                                       

Income (loss) before income taxes

    (106,473     (72,626     86,265        171,670        177,271        (97,248     (20,182     (281,841     (143,164

Provision for (benefit from) income taxes

    —          —          —          —          (6,317     413        (29,400     (507     (35,811
                                                                       

Net income (loss)

    (106,473     (72,626     86,265        171,670        183,588        (97,661     9,218        (281,334     (107,353

Net loss attributable to noncontrolling interest

    —          —          —          —          —          —          953        —          953   
                                                                       

Net income (loss) attributable to Intelsat, S.A.

  $ (106,473   $ (72,626   $ 86,265      $ 171,670      $ 183,588      $ (97,661   $ 10,171      $ (281,334   $ (106,400
                                                                       

(Certain totals may not add due to the effects of rounding)

 

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INTELSAT S.A. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009

(in thousands)

 

    Intelsat
S.A.
    Intelsat
Luxembourg
    Intelsat
Jackson
    Intermediate
Holdco
    Intelsat
Sub Holdco
    Intelsat
Sub  Holdco
Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    Consolidation
and
Eliminations
    Consolidated  

Revenue

  $ —        $ —        $ —        $ —        $ 384,484      $ 384,484      $ 377,605      $ (528,685   $ 617,888   
                                                                       

Operating expenses:

                 

Direct costs of revenue (exclusive of depreciation and amortization)

    —          23        —          —          78,102        391,036        152,846        (535,235     86,772   

Selling, general and administrative

    5,201        5,815        111        —          10,438        9,776        34,776        (9,778     56,339   

Depreciation and amortization

    —          —          —          —          113,865        91,662        86,126        (91,662     199,991   

Losses on derivative financial instruments

    —          —          15,079        —          2,118        —          21,623        —          38,820   
                                                                       

Total operating expenses

    5,201        5,838        15,190        —          204,523        492,474        295,371        (636,675     381,922   
                                                                       

Income (loss) from operations

    (5,201     (5,838     (15,190     —          179,961        (107,990     82,234        107,990        235,966   

Interest expense, net

    25,426        158,553        71,335        11,344        32,697        927        38,631        (1,409     337,504   

Loss on early extinguishment of debt

    —          —          —          —          (52     —          (51     —          (103

Subsidiary income (loss)

    (64,132     100,261        186,786        160,143        (2,309     (794     —          (379,955     —     

Other income (expense), net

    —          (1     —          —          640        639        2,742        (639     3,381   
                                                                       

Income (loss) before income taxes

    (94,759     (64,131     100,261        148,799        145,543        (109,072     46,294        (271,195     (98,260

Provision for (benefit from) income taxes

    —          1        —          —          (14,600     (9,377     11,123        9,377        (3,476
                                                                       

Net income (loss)

    (94,759     (64,132     100,261        148,799        160,143        (99,695     35,171        (280,572     (94,784

Net loss attributable to noncontrolling interest

    —          —          —          —          —          —          508        —          508   
                                                                       

Net income (loss) attributable to Intelsat, Ltd.

  $ (94,759   $ (64,132   $ 100,261      $ 148,799      $ 160,143      $ (99,695   $ 35,679      $ (280,572   $ (94,276
                                                                       

(Certain totals may not add due to the effects of rounding)

 

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INTELSAT S.A. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

(in thousands)

 

    Intelsat
S.A.
    Intelsat
Luxembourg
    Intelsat
Jackson
    Intermediate
Holdco
    Intelsat
Sub Holdco
    Intelsat Sub
Holdco
Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    Consolidation
and
Eliminations
    Consolidated  

Revenue

  $ —        $ —        $ —        $ —        $ 1,167,859      $ 1,167,859      $ 1,221,877      $ (1,656,912   $ 1,900,683   
                                                                       

Operating expenses:

                 

Direct costs of revenue (exclusive of depreciation and amortization)

    —          —          —          —          256,046        1,194,929        532,640        (1,680,995     302,620   

Selling, general and administrative

    3,081        18,938        353        52        27,574        23,435        94,603        (23,447     144,589   

Depreciation and amortization

    —          —          —          —          332,238        275,275        264,723        (275,247     596,989   

Impairment of asset value

    —          —          —          —          —          —          110,625        —          110,625   

Losses (gains) on derivative financial instruments

    —          —          36,950        —          (1,813     —          55,455        —          90,592   
                                                                       

Total operating expenses

    3,081        18,938        37,303        52        614,045        1,493,639        1,058,046        (1,979,689     1,245,415   
                                                                       

Income (loss) from operations

    (3,081     (18,938     (37,303     (52     553,814        (325,780     163,831        322,777        655,268   

Interest expense, net

    91,991        458,041        234,731        35,602        83,073        274        131,580        (274     1,035,018   

Loss on early extinguishment of debt

    —          —          —          —          —          —          (75,805     —          (75,805

Subsidiary income (loss)

    (329,667     134,535        355,912        370,677        4,171        13,145        —          (548,773     —     

Other income, net

    —          —          1        —          3,930        3,925        4,012        (3,925     7,943   
                                                                       

Income (loss) before income taxes

    (424,739     (342,444     83,879        335,023        478,842        (308,984     (39,542     (229,647     (447,612

Provision for (benefit from) income taxes

    (37,985     (14,090     (50,656     (3,746     108,166        8,287        (56,514     (8,381     (54,919
                                                                       

Net income (loss)

    (386,754     (328,354     134,535        338,769        370,676        (317,271     16,972        (221,266     (392,693

Net loss attributable to noncontrolling interest

    —          —          —          —          —          —          3,029        —          3,029   
                                                                       

Net income (loss) attributable to Intelsat, S.A.

  $ (386,754   $ (328,354   $ 134,535      $ 338,769      $ 370,676      $ (317,271   $ 20,001      $ (221,266   $ (389,664
                                                                       

(Certain totals may not add due to the effects of rounding)

 

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INTELSAT S.A. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009

(in thousands)

 

    Intelsat
S.A.
    Intelsat
Luxembourg
    Intelsat Jackson     Intermediate
Holdco
    Intelsat
Sub Holdco
    Intelsat Sub
Holdco
Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    Consolidation
and
Eliminations
    Consolidated  

Revenue

  $ —        $ —        $ —        $ —        $ 1,142,460      $ 1,142,460      $ 1,176,514      $ (1,569,215   $ 1,892,219   
                                                                       

Operating expenses:

                 

Direct costs of revenue (exclusive of depreciation and amortization)

    —          23        —          —          226,514        1,161,683        495,214        (1,585,858     297,576   

Selling, general and administrative

    23,263        17,430        218        15        24,737        22,454        111,755        (26,897     172,975   

Depreciation and amortization

    —          —          —          —          350,110        282,203        260,969        (282,203     611,079   

Impairment of asset value

    —          —          —          —          355,000        —          144,100        —          499,100   

(Gains) losses on derivative financial instruments

    —          —          3,893        —          (23,011     —          13,815        —          (5,303
                                                                       

Total operating expenses

    23,263        17,453        4,111        15        933,350        1,466,340        1,025,853        (1,894,958     1,575,427   
                                                                       

Income (loss) from operations

    (23,263     (17,453     (4,111     (15     209,110        (323,880     150,661        325,743        316,792   

Interest expense, net

    87,217        472,058        215,377        33,352        94,992        1,540        126,007        (2,706     1,027,837   

Loss on early extinguishment of debt

    (380     —          —          —          (52     —          (51     (14,496     (14,979

Subsidiary income (loss)

    (562,335     (72,779     146,709        124,069        (1,002     358        —          364,980        —     

Other income (expense), net

    —          (1     —          —          2,208        2,210        7,372        (2,210     9,579   
                                                                       

Income (loss) before income taxes

    (673,195     (562,291     (72,779     90,702        115,272        (322,852     31,975        676,723        (716,445

Provision for (benefit from) income taxes

    —          44        —          —          (8,797     (3,867     (22,574     3,867        (31,327
                                                                       

Net income (loss)

    (673,195     (562,335     (72,779     90,702        124,069        (318,985     54,549        672,856        (685,118

Net loss attributable to noncontrolling interest

    —          —          —          —          —          —          456        —          456   
                                                                       

Net income (loss) attributable to Intelsat, Ltd.

  $ (673,195   $ (562,335   $ (72,779   $ 90,702      $ 124,069      $ (318,985   $ 55,005      $ 672,856      $ (684,662
                                                                       

(Certain totals may not add due to the effects of rounding)

 

37


Table of Contents

 

INTELSAT S.A. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

(in thousands)

 

    Intelsat
S.A.
    Intelsat
Luxembourg
    Intelsat
Jackson
    Intermediate
Holdco
    Intelsat
Sub Holdco
    Intelsat Sub
Holdco
Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    Consolidation
and
Eliminations
    Consolidated  

Cash flows from operating activities:

  $ (37,073   $ (340,120   $ (131,351   $ (22,587   $ 754,013      $ 240,953      $ 356,167      $ (198,982   $ 621,020   
                                                                       

Cash flows from investing activities:

                 

Payments for satellites and other property and equipment (including capitalized interest)

    —          —          —          —          (430,085     (344,148     (299,939     390,823        (683,349

Proceeds from sale of other property and equipment

    —          —          —          —          46,656        46,656        —          (93,312     —     

Proceeds from sale of investment

    —          —          —          —          28,594        28,594        —          (28,594     28,594   

Repayment from (disbursements for) intercompany loans

    (433     —          —          —          (211,830     56,135        —          156,128        —     

Capital contribution to unconsolidated affiliates

    —          —          —          —          —          —          (12,209     —          (12,209

Investment in subsidiaries

    (6,500     —          (834,000     —          (2,667     —          —          843,167        —     

Dividend from affiliates

    3,000        161,781        231,955        255,014        —          —          —          (651,750     —     

Other investing activities

    —          —          —          —          —          —          9,585        —          9,585   
                                                                       

Net cash provided by (used in) investing activities

    (3,933     161,781        (602,045     255,014        (569,332     (212,763     (302,563     616,462        (657,379
                                                                       

Cash flows from financing activities:

                 

Repayments of long-term debt

    —          —          —          —          (7,586     (5,000     (738,003     5,000        (745,589

Proceeds from issuance of long-term debt

    —          —          1,000,000        —          —          —          23,461        4        1,023,465   

Proceeds from (repayment of) intercompany borrowing

    23,253        167,235        38,011        100        12,010        (27,984     (16,769     (195,856     —     

Debt issuance costs

    (15,370     (1,485     15,208        —          —          —          —          (30,416     (32,063

Payment of premium on early retirement of debt

    —          —          —          —          —          —          (44,118     —          (44,118

Principal payments on deferred satellite performance incentives

    —          —          —          —          (2,399     (2,399     (9,547     2,399        (11,946

Principal payments on capital lease obligations

    —          —          —          —          —          —          (191     —          (191

Capital contribution from parent

    18,000        —          —          —          —          —          843,167        (843,167     18,000   

Dividends to shareholders

    —          (3,000     (161,781     (231,955     (255,014     —          —          651,750        —     

Noncontrolling interest in New Dawn

    —          —          —          —          —          —          1,035        —          1,035   
                                                                       

Net cash provided by (used in) financing activities

    25,883        162,750        891,438        (231,855     (252,989     (35,383     59,035        (410,286     208,593   
                                                                       

Effect of exchange rate changes on cash and cash equivalents

    —          —          —          1        (512     (516     1,931        515        1,419   
                                                                       

Net change in cash and cash equivalents

    (15,123     (15,589     158,042        573        (68,820     (7,709     114,570        7,709        173,653   

Cash and cash equivalents, beginning of period

    21,817        16,115        2,207        41        227,610        104,992        209,781        (104,992     477,571   
                                                                       

Cash and cash equivalents, end of period

  $ 6,694      $ 526      $ 160,249      $ 614      $ 158,790      $ 97,283      $ 324,351      $ (97,283   $ 651,224   
                                                                       

(Certain totals may not add due to the effects of rounding)

 

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INTELSAT S.A. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009

(in thousands)

 

    Intelsat
S.A.
    Intelsat
Luxembourg
    Intelsat
Jackson
    Intermediate
Holdco
    Intelsat
Sub Holdco
    Intelsat Sub
Holdco
Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    Consolidation
and
Eliminations
    Consolidated  

Cash flows from operating activities:

  $ (60,226   $ (338,644   $ (171,289   $ (9   $ 792,122      $ 438,721      $ 327,348      $ (438,721   $ 549,302   
                                                                       

Cash flows from investing activities:

                 

Payments for satellites and other property and equipment (including capitalized interest)

    —          —          —          —          (451,005     (451,005     (230,199     676,174        (456,035

Proceeds from sale of other property and equipment

    —          —          —          —          97,208        97,208        128,648        (322,378     686   

Repayment from (disbursements for) intercompany loans

    —          —          —          —          (90,865     13,048        (70,111     147,928        —     

Capital contribution to unconsolidated affiliates

    —          —          —          —          —          —          (12,210     —          (12,210

Investment in affiliate debt

    —          —          —          —          (347,953     —          —          347,953        —     

Dividend from affiliates

    3,000        160,871        232,935        232,935        —          —          —          (629,741     —     

Other investing activities

    —          —          —          —          —          —          5,437        —          5,437   
                                                                       

Net cash provided by (used in) investing activities

    3,000        160,871        232,935        232,935        (792,615     (340,749     (178,435     219,936        (462,122
                                                                       

Cash flows from financing activities:

                 

Repayments of long-term debt

    —          —          —          —          (8,415     (5,000     (67,817     (342,952     (424,184

Repayment of loan proceeds received from Intelsat Holdings

    —          —          (34,000     —          —          —          —          —          (34,000

Proceeds from issuance of long-term debt

    —          —          —          —          354,000        —          75,195        —          429,195   

Proceeds from (repayment of) intercompany borrowing

    51,625        —          122,399        —          —          —          (13,048     (160,976     —     

Debt issuance costs

    —          —          —          —          (7,331     —          —          —          (7,331

Principal payments on deferred satellite performance incentives

    —          —          —          —          (7,307     (7,307     (12,262     7,307        (19,569

Principal payments on capital lease obligations

    —          —          —          —          (1,492     (1,492     (271     1,492        (1,763

Dividends to shareholders

    —          (3,000     (160,871     (232,935     (232,935     —          —          629,741        —     
                                                                       

Net cash provided by (used in) financing activities

    51,625        (3,000     (72,472     (232,935     96,520        (13,799     (18,203     134,612        (57,652
                                                                       

Effect of exchange rate changes on cash and cash equivalents

    —          (1     —          —          (1,134     (1,132     5,939        1,132        4,804   

Net change in cash and cash equivalents

    (5,601     (180,774     (10,826     (9     94,893        83,041        136,649        (83,041     34,332   

Cash and cash equivalents, beginning of period

    6,286        181,650        20,166        50        149,003        74,815        113,056        (74,815     470,211   
                                                                       

Cash and cash equivalents, end of period

  $ 685      $ 876      $ 9,340      $ 41      $ 243,896      $ 157,856      $ 249,705      $ (157,856   $ 504,543   
                                                                       

(Certain totals may not add due to the effects of rounding)

 

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INTELSAT S.A.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2010

(in thousands, except percentages, share and per share amounts and where otherwise noted)

On March 3, 2005, Intelsat Luxembourg transferred substantially all of its assets to Intelsat Sub Holdco and Intelsat Sub Holdco assumed substantially all of the then-existing liabilities of Intelsat Luxembourg.

In connection with the PanAmSat Acquisition Transactions, Intelsat Luxembourg issued $750.0 million of 9.25% Senior Notes due 2016 (the “Jackson Guaranteed Notes”). The Jackson Guaranteed Notes are fully and unconditionally guaranteed, jointly and severally, by Intelsat, its indirect wholly-owned subsidiary, Intelsat Sub Holdco, and the Subsidiary Guarantors.

On February 4, 2008, promptly after the consummation of the New Sponsors Acquisition, Intelsat Luxembourg transferred certain of its assets and certain of its liabilities and obligations (including the Jackson Guaranteed Notes) to Intelsat Jackson. Intelsat Jackson became the obligor on the Jackson Guaranteed Notes and Intelsat Luxembourg confirmed its guarantee of the Jackson Guaranteed Notes.

Separate financial statements of Intelsat S.A., Intelsat Luxembourg, Intelsat Jackson, Intelsat Sub Holdco and the Subsidiary Guarantors are not presented because management believes that such financial statement would not be material to investors.

Investments in non-guarantor subsidiaries in the following condensed consolidating financial information are accounted for under the equity method of accounting. Consolidating adjustments include the following:

 

   

elimination of investment in subsidiaries;

 

   

elimination of intercompany accounts;

 

   

elimination of intercompany sales between guarantor and non-guarantor subsidiaries; and

 

   

elimination of equity in earnings (losses) of subsidiaries.

 

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INTELSAT S.A. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET

AS OF SEPTEMBER 30, 2010

(in thousands)

 

    Intelsat
S.A.
    Intelsat
Luxembourg
    Intelsat
Jackson
    Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    Consolidation
and
Eliminations
    Consolidated  
ASSETS              

Current assets:

             

Cash and cash equivalents

  $ 6,694      $ 526      $ 319,039      $ 158,790      $ 324,965      $ (158,790   $ 651,224   

Receivables, net of allowance

    4,752        —          172,539        172,539        100,148        (172,539     277,439   

Deferred income taxes

    —          —          1,852        1,852        29,002        (1,852     30,854   

Prepaid expenses and other current assets

    941        6,217        30,085        30,062        19,790        (30,684     56,411   

Intercompany receivables

    —          9,300        254,362        414,452        187,553        (865,667     —     
                                                       

Total current assets

    12,387        16,043        777,877        777,695        661,458        (1,229,532     1,015,928   

Satellites and other property and equipment, net

    —          —          3,373,913        3,373,913        2,535,250        (3,375,054     5,908,022   

Goodwill

    —          —          3,434,165        3,434,165        3,346,662        (3,434,165     6,780,827   

Non-amortizable intangible assets

    —          —          1,805,130        1,805,130        652,970        (1,805,130     2,458,100   

Amortizable intangible assets, net

    —          —          433,916        433,916        446,972        (433,916     880,888   

Investment in affiliates

    571,306        5,808,209        3,374,417        (36,084     83,180        (9,717,848     83,180   

Other assets

    13,027        116,455        209,689        169,070        90,053        (169,070     429,224   
                                                       

Total assets

  $ 596,720      $ 5,940,707      $ 13,409,107      $ 9,957,805      $ 7,816,545      $ (20,164,715   $ 17,556,169   
                                                       
LIABILITIES AND SHAREHOLDER’S EQUITY              

Current liabilities:

             

Accounts payable and accrued liabilities

  $ 1,058      $ 184      $ 123,360      $ 122,824      $ 120,046      $ (123,448   $ 244,024   

Accrued interest payable

    26,657        77,538        130,495        38,906        39,298        (38,906     273,988   

Current portion of long-term debt

    —          —          3,448        3,448        89,050        (3,448     92,498   

Deferred satellite performance incentives

    —          —          4,277        4,277        11,223        (4,277     15,500   

Other current liabilities

    —          —          76,127        74,920        55,834        (74,920     131,961   

Intercompany payables

    451,213        —          —          —          —          (451,213     —     
                                                       

Total current liabilities

    478,928        77,722        337,707        244,375        315,451        (696,212     757,971   

Long-term debt, net of current portion

    709,487        5,232,138        6,823,888        2,226,859        3,094,980        (2,226,859     15,860,493   

Deferred satellite performance incentives, net of current portion

    —          —          20,499        20,499        97,941        (20,499     118,440   

Deferred revenue, net of current portion

    —          —          258,463        258,463        75,195        (258,463     333,658   

Deferred income taxes

    —          —          —          —          486,419        —          486,419   

Accrued retirement benefits

    —          —          73,515        73,515        163,363        (73,515     236,878   

Other long-term liabilities

    —          58,568        86,826        35,386        192,263        (33,058     339,985   

Redeemable noncontrolling interest

    —          —          —          —          17,487        —          17,487   

Shareholder’s equity (deficit):

             

Ordinary shares

    5,000        669,036        4,959,000        484,000        3,602,070        (9,714,106     5,000   

Other shareholder’s equity (deficit)

    (596,695     (96,757     849,209        6,614,708        (228,624     (7,142,003     (600,162
                                                       

Total liabilities and shareholder’s equity

  $ 596,720      $ 5,940,707      $ 13,409,107      $ 9,957,805      $ 7,816,545      $ (20,164,715   $ 17,556,169   
                                                       

(Certain totals may not add due to the effects of rounding)

 

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INTELSAT S.A. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2009

(in thousands)

 

    Intelsat
S.A.
    Intelsat
Luxembourg
    Intelsat
Jackson
    Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    Consolidation
and
Eliminations
    Consolidated  
ASSETS              

Current assets:

             

Cash and cash equivalents

  $ 21,817      $ 16,115      $ 229,817      $ 227,610      $ 209,822      $ (227,610   $ 477,571   

Receivables, net of allowance

    3,282        —          180,019        180,019        111,238        (180,019     294,539   

Deferred income taxes

    —          —          1,077        1,077        49,566        (1,077     50,643   

Prepaid expenses and other current assets

    680        —          16,206        16,206        19,918        (19,449     33,561   

Intercompany receivables

    —          —          431,894        638,361        55,123        (1,125,378     —     
                                                       

Total current assets

    25,779        16,115        859,013        1,063,273        445,667        (1,553,533     856,314   

Satellites and other property and equipment, net

    —          —          3,220,658        3,220,658        2,559,435        (3,218,796     5,781,955   

Goodwill

    —          —          3,434,165        3,434,165        3,346,662        (3,434,165     6,780,827   

Non-amortizable intangible assets

    —          —          1,805,130        1,805,130        652,970        (1,805,130     2,458,100   

Amortizable intangible assets, net

    —          —          490,684        490,684        487,915        (490,684     978,599   

Investment in affiliates

    962,656        6,091,942        2,531,383        (32,832     88,902        (9,553,149     88,902   

Other assets

    —          124,926        283,619        255,663        96,170        (362,140     398,238   
                                                       

Total assets

  $ 988,435      $ 6,232,983      $ 12,624,652      $ 10,236,741      $ 7,677,721      $ (20,417,597   $ 17,342,935   
                                                       
LIABILITIES AND SHAREHOLDER’S EQUITY              

Current liabilities:

             

Accounts payable and accrued liabilities

  $ 2,196      $ 508      $ 83,686      $ 83,443      $ 123,254      $ (86,686   $ 206,401   

Accrued interest payable

    11,651        220,740        103,268        82,911        33,717        (82,911     369,376   

Current portion of long-term debt

    —          —          8,448        8,448        89,241        (8,448     97,689   

Deferred satellite performance incentives

    —          —          3,974        3,974        14,709        (3,974     18,683   

Other current liabilities

    —          —          74,030        72,737        48,464        (72,737     122,494   

Intercompany payables

    474,422        12,595        —          —          —          (487,017     —     
                                                       

Total current liabilities

    488,269        233,843        273,406        251,513        309,385        (741,773     814,643   

Long-term debt, net of current portion

    674,806        4,954,990        5,818,851        2,221,559        3,774,363        (2,221,559     15,223,010   

Deferred satellite performance incentives, net of current portion

    —          —          23,201        23,201        105,573        (23,201     128,774   

Deferred revenue, net of current portion

    —          —          197,938        197,938        56,698        (197,938     254,636   

Deferred income taxes

    37,985        14,090        50,656        —          552,465        (106,477     548,719   

Accrued retirement benefits

    —          —          73,222        73,222        166,651        (73,222     239,873   

Other long-term liabilities

    —          63,433        95,436        61,936        176,290        (61,936     335,159   

Redeemable noncontrolling interest

    —          —          —          —          8,884        —          8,884   

Shareholder’s equity:

             

Ordinary shares

    5,000        669,036        4,959,000        484,000        3,602,070        (9,714,106     5,000   

Other shareholder’s equity

    (217,625     297,591        1,132,942        6,923,372        (1,074,658     (7,277,385     (215,763
                                                       

Total liabilities and shareholder’s equity

  $ 988,435      $ 6,232,983      $ 12,624,652      $ 10,236,741      $ 7,677,721      $ (20,417,597   $ 17,342,935   
                                                       

(Certain totals may not add due to the effects of rounding)

 

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INTELSAT S.A. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010

(in thousands)

 

     Intelsat
S.A.
    Intelsat
Luxembourg
    Intelsat
Jackson
    Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    Consolidation
and
Eliminations
    Consolidated  

Revenue

   $ —        $ —        $ 394,140      $ 394,140      $ 417,521      $ (561,545   $ 644,256   
                                                        

Operating expenses:

              

Direct costs of revenue (exclusive of depreciation and amortization)

     —          —          87,801        87,801        184,324        (255,194     104,732   

Selling, general and administrative

     1,023        6,487        7,112        6,915        31,399        (6,927     46,009   

Depreciation and amortization

     —          —          112,320        112,320        86,653        (112,300     198,993   

Losses (gains) on derivative financial instruments

     —          —          (49     (8,625     19,999        8,625        19,950   
                                                        

Total operating expenses

     1,023        6,487        207,184        198,411        322,375        (365,796     369,684   
                                                        

Income (loss) from operations

     (1,023     (6,487     186,956        195,729        95,146        (195,749     274,572   

Interest expense, net

     31,209        152,404        107,755        28,734        54,163        (28,734     345,531   

Loss on early extinguishment of debt

     —          —          —          —          (75,805     —          (75,805

Subsidiary income (loss)

     (74,241     86,265        (131     9,398        —          (21,291     —     

Other income, net

     —          —          878        878        2,722        (878     3,600   
                                                        

Income (loss) before income taxes

     (106,473     (72,626     79,948        177,271        (32,100     (189,184     (143,164

Provision for (benefit from) income taxes

     —          —          (6,317     (6,317     (29,400     6,223        (35,811
                                                        

Net income (loss)

     (106,473     (72,626     86,265        183,588        (2,700     (195,407     (107,353

Net loss attributable to noncontrolling interest

     —          —          —          —          953        —          953   
                                                        

Net income (loss) attributable to Intelsat, S.A.

   $ (106,473   $ (72,626   $ 86,265      $ 183,588      $ (1,747   $ (195,407   $ (106,400
                                                        

(Certain totals may not add due to the effects of rounding)

 

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INTELSAT S.A. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009

(in thousands)

 

     Intelsat
S.A.
    Intelsat
Luxembourg
    Intelsat
Jackson
    Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    Consolidation
and
Eliminations
    Consolidated  

Revenue

   $ —        $ —        $ 384,484      $ 384,484      $ 377,605      $ (528,685   $ 617,888   
                                                        

Operating expenses:

              

Direct costs of revenue (exclusive of depreciation and amortization)

     —          23        78,102        78,102        152,846        (222,301     86,772   

Selling, general and administrative

     5,201        5,815        10,549        10,438        34,776        (10,440     56,339   

Depreciation and amortization

     —          —          113,865        113,865        86,126        (113,865     199,991   

Losses on derivative financial instruments

     —          —          17,197        2,118        21,623        (2,118     38,820   
                                                        

Total operating expenses

     5,201        5,838        219,713        204,523        295,371        (348,724     381,922   
                                                        

Income (loss) from operations

     (5,201     (5,838     164,771        179,961        82,234        (179,961     235,966   

Interest expense, net

     25,426        158,553        104,033        32,697        49,975        (33,180     337,504   

Loss on early extinguishment of debt

     —          —          (52     (52     (51     52        (103

Subsidiary income (loss)

     (64,132     100,261        24,335        (2,309     —          (58,155     —     

Other income (expense), net

     —          (1     640        640        2,742        (640     3,381   
                                                        

Income (loss) before income taxes

     (94,759     (64,131     85,661        145,543        34,950        (205,524     (98,260

Provision for (benefit from) income taxes

     —          1        (14,600     (14,600     11,123        14,600        (3,476
                                                        

Net income (loss)

     (94,759     (64,132     100,261        160,143        23,827        (220,124     (94,784

Net loss attributable to noncontrolling interest

     —          —          —          —          508        —          508   
                                                        

Net income (loss) attributable to Intelsat, Ltd.

   $ (94,759   $ (64,132   $ 100,261      $ 160,143      $ 24,335      $ (220,124   $ (94,276
                                                        

(Certain totals may not add due to the effects of rounding)

 

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INTELSAT S.A. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

(in thousands)

 

     Intelsat
S.A.
    Intelsat
Luxembourg
    Intelsat
Jackson
    Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    Consolidation
and
Eliminations
    Consolidated  

Revenue

   $ —        $ —        $ 1,167,859      $ 1,167,859      $ 1,221,877      $ (1,656,912   $ 1,900,683   
                                                        

Operating expenses:

              

Direct costs of revenue (exclusive of depreciation and amortization)

     —          —          256,046        256,046        532,640        (742,112     302,620   

Selling, general and administrative

     3,081        18,938        27,927        27,574        94,655        (27,586     144,589   

Depreciation and amortization

     —          —          332,238        332,238        264,723        (332,210     596,989   

Impairment of asset value

     —          —          —          —          110,625        —          110,625   

Losses (gains) on derivative financial instruments

     —          —          35,137        (1,813     55,455        1,813        90,592   
                                                        

Total operating expenses

     3,081        18,938        651,348        614,045        1,058,098        (1,100,095     1,245,415   
                                                        

Income (loss) from operations

     (3,081     (18,938     516,511        553,814        163,779        (556,817     655,268   

Interest expense, net

     91,991        458,041        317,804        83,073        167,182        (83,073     1,035,018   

Loss on early extinguishment of debt

     —          —          —          —          (75,805     —          (75,805

Subsidiary income (loss)

     (329,667     134,535        (10,594     4,171        —          201,555        —     

Other income, net

     —          —          3,932        3,929        4,012        (3,930     7,943   
                                                        

Income (loss) before income taxes

     (424,739     (342,444     192,045        478,841        (75,196     (276,119     (447,612

Provision for (benefit from) income taxes

     (37,985     (14,090     57,510        108,166        (60,260     (108,260     (54,919
                                                        

Net income (loss)

     (386,754     (328,354     134,535        370,675        (14,936     (167,859     (392,693

Net loss attributable to noncontrolling interest

     —          —          —          —          3,029        —          3,029   
                                                        

Net income (loss) attributable to Intelsat, S.A.

   $ (386,754   $ (328,354   $ 134,535      $ 370,675      $ (11,907   $ (167,859   $ (389,664
                                                        

(Certain totals may not add due to the effects of rounding)

 

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INTELSAT S.A. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009

(in thousands)

 

     Intelsat
S.A.
    Intelsat
Luxembourg
    Intelsat
Jackson
    Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    Consolidation
and
Eliminations
    Consolidated  

Revenue

   $ —        $ —        $ 1,142,460      $ 1,142,460      $ 1,176,514      $ (1,569,215   $ 1,892,219   
                                                        

Operating expenses:

              

Direct costs of revenue (exclusive of depreciation and amortization)

     —          23        226,514        226,514        495,214        (650,689     297,576   

Selling, general and administrative

     23,263        17,430        24,955        24,737        111,770        (29,180     172,975   

Depreciation and amortization

     —          —          350,110        350,110        260,969        (350,110     611,079   

Impairment of asset value

     —          —          355,000        355,000        144,100        (355,000     499,100   

(Gains) losses on derivative financial instruments

     —          —          (19,118     (23,011     13,815        23,011        (5,303
                                                        

Total operating expenses

     23,263        17,453        937,461        933,350        1,025,868        (1,361,968     1,575,427   
                                                        

Income (loss) from operations

     (23,263     (17,453     204,999        209,110        150,646        (207,247     316,792   

Interest expense, net

     87,217        472,058        310,369        94,992        159,359        (96,158     1,027,837   

Loss on early extinguishment of debt

     (380     —          (52     (52     (51     (14,444     (14,979

Subsidiary income (loss)

     (562,335     (72,779     21,638        (1,002     —          614,478        —     

Other income (expense), net

     —          (1     2,208        2,208        7,372        (2,208     9,579   
                                                        

Income (loss) before income taxes

     (673,195     (562,291     (81,576     115,272        (1,392     486,737        (716,445

Provision for (benefit from) income taxes

     —          44        (8,797     (8,797     (22,574     8,797        (31,327
                                                        

Net income (loss)

     (673,195     (562,335     (72,779     124,069        21,182        477,940        (685,118

Net loss attributable to noncontrolling interest

     —          —          —          —          456        —          456   
                                                        

Net income (loss) attributable to Intelsat, Ltd.

   $ (673,195   $ (562,335   $ (72,779   $ 124,069      $ 21,638      $ 477,940      $ (684,662
                                                        

(Certain totals may not add due to the effects of rounding)

 

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INTELSAT S.A. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

(in thousands)

 

     Intelsat
S.A.
    Intelsat
Luxembourg
    Intelsat
Jackson
    Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    Consolidation
and
Eliminations
    Consolidated  

Cash flows from operating activities:

   $ (37,073   $ (340,120   $ 622,662      $ 754,013      $ 333,580      $ (712,042   $ 621,020   
                                                        

Cash flows from investing activities:

              

Payments for satellites and other property and equipment (including capitalized interest)

     —          —          (430,085     (430,085     (299,939     476,760        (683,349

Proceeds from sale of other property and equipment

     —          —          46,656        46,656        —          (93,312     —     

Proceeds from sale of investment

     —          —          28,594        28,594        —          (28,594     28,594   

Disbursements for intercompany loans

     (433     —          (211,830     (211,830     —          424,093        —     

Capital contribution to unconsolidated affiliates

     —          —          —          —          (12,209     —          (12,209

Investment in subsidiaries

     (6,500     —          (836,667     (2,667     —          845,834        —     

Dividend from affiliates

     3,000        161,781        231,955        —          255,014        (651,750     —     

Other investing activities

     —          —          —          —          9,585        —          9,585   
                                                        

Net cash provided by (used in) investing activities

     (3,933     161,781        (1,171,377     (569,332     (47,549     973,031        (657,379
                                                        

Cash flows from financing activities:

              

Repayments of long-term debt

     —          —          (7,586     (7,586     (738,003     7,586        (745,589

Proceeds from issuance of long-term debt

     —          —          1,000,000        —          23,461        4        1,023,465   

Proceeds from (repayment of) intercompany borrowing

     23,253        167,235        50,021        12,010        (16,669     (235,850     —     

Debt issuance costs

     (15,370     (1,485     15,208        —          —          (30,416     (32,063

Payment of premium on early retirement of debt

     —          —          —          —          (44,118     —          (44,118

Principal payments on deferred satellite performance incentives

     —          —          (2,399     (2,399     (9,547     2,399        (11,946

Principal payments on capital lease obligations

     —          —          —          —          (191     —          (191

Capital contribution from parent

     18,000        —          —          —          843,167        (843,167     18,000   

Dividend to shareholders

     —          (3,000     (416,795     (255,014     (231,955     906,764        —     

Noncontrolling interest in New Dawn

     —          —          —          —          1,035        —          1,035   
                                                        

Net cash provided by (used in) financing activities

     25,883        162,750        638,449        (252,989     (172,820     (192,680     208,593   
                                                        

Effect of exchange rate changes on cash

     —          —          (512     (512     1,932        511        1,419   
                                                        

Net change in cash and cash equivalents

     (15,123     (15,589     89,222        (68,820     115,143        68,820        173,653   

Cash and cash equivalents, beginning of period

     21,817        16,115        229,817        227,610        209,822        (227,610     477,571   
                                                        

Cash and cash equivalents, end of period

   $ 6,694      $ 526      $ 319,039      $ 158,790      $ 324,965      $ (158,790   $ 651,224   
                                                        

(Certain totals may not add due to the effects of rounding)

 

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INTELSAT S.A. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009

(in thousands)

 

     Intelsat
S.A.
    Intelsat
Luxembourg
    Intelsat
Jackson
    Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    Consolidation
and
Eliminations
    Consolidated  

Cash flows from operating activities:

   $ (60,226   $ (338,644   $ 620,832      $ 792,122      $ 327,340      $ (792,122   $ 549,302   
                                                        

Cash flows from investing activities:

              

Payments for satellites and other property and equipment (including capitalized interest)

     —          —          (451,005     (451,005     (230,199     676,174        (456,035

Proceeds from sale of other property and equipment

     —          —          97,208        97,208        128,648        (322,378     686   

Repayment from (disbursements for) intercompany loans

     —          —          (90,865     (90,865     (70,111     251,841        —     

Capital contribution to unconsolidated affiliates

     —          —          —          —          (12,210     —          (12,210

Investment in affiliate debt

     —          —          (347,953     (347,953     —          695,906        —     

Dividend from affiliates

     3,000        160,871        232,935        —          232,935        (629,741     —     

Other investing activities

     —          —          —          —          5,437        —          5,437   
                                                        

Net cash provided by (used in) investing activities

     3,000        160,871        (559,680     (792,615     54,500        671,802        (462,122
                                                        

Cash flows from financing activities:

              

Repayments of long-term debt

     —          —          (8,415     (8,415     (67,817     (339,537     (424,184

Repayment of loan proceeds received from Intelsat Holdings

     —          —          (34,000     —          —          —          (34,000

Proceeds from issuance of long-term debt

     —          —          354,000        354,000        75,195        (354,000     429,195   

Proceeds from (repayment of) intercompany borrowing

     51,625        —          122,399        —          (13,048     (160,976     —     

Debt issuance costs

     —          —          (7,331     (7,331     —          7,331        (7,331

Principal payments on deferred satellite performance incentives

     —          —          (7,307     (7,307     (12,262     7,307        (19,569

Principal payments on capital lease obligations

     —          —          (1,492     (1,492     (271     1,492        (1,763

Dividend to shareholders

     —          (3,000     (393,806     (232,935     (232,935     862,676        —     
                                                        

Net cash provided by (used in) financing activities

     51,625        (3,000     24,048        96,520        (251,138     24,293        (57,652
                                                        

Effect of exchange rate changes on cash

     —          (1     (1,134     (1,134     5,939        1,134        4,804   

Net change in cash and cash equivalents

     (5,601     (180,774     84,066        94,893        136,641        (94,893     34,332   

Cash and cash equivalents, beginning of period

     6,286        181,650        169,169        149,003        113,106        (149,003     470,211   
                                                        

Cash and cash equivalents, end of period

   $ 685      $ 876      $ 253,235      $ 243,896      $ 249,747      $ (243,896   $ 504,543   
                                                        

(Certain totals may not add due to the effects of rounding)

 

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

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and their notes included elsewhere in this Quarterly Report. See “Forward-Looking Statements” for a discussion of factors that could cause our future financial condition and results of operations to be different from those discussed below.

Overview

We operate the world’s largest fixed satellite services (“FSS”) business, providing a critical layer in the global communications infrastructure. We provide our infrastructure services on a satellite fleet comprised of over 50 satellites covering 99% of the earth’s populated regions. Our satellite capacity is complemented by IntelsatONESM, our terrestrial network comprised of leased fiber optic cable and owned and operated teleports. We operate more satellite capacity in orbit, have more satellite capacity under contract, serve more commercial customers and deliver services in more countries than any other commercial satellite operator.

Results of Operations

Three Months Ended September 30, 2009 and 2010

The following table sets forth our comparative statements of operations for the periods shown with the increase (decrease) and percentage changes, except those deemed not meaningful (“NM”), between the periods presented (in thousands, except percentages):

 

     Three Months
Ended
September 30,
2009
    Three Months
Ended
September 30,
2010
    Three Months Ended
September 30, 2010
Compared to

Three Months Ended
September 30, 2009
 
       Increase
(Decrease)
    Percentage
Change
 

Revenue

   $ 617,888      $ 644,256      $ 26,368        4

Operating expenses:

        

Direct costs of revenue (exclusive of depreciation and amortization)

     86,772        104,732        17,960        21   

Selling, general and administrative

     56,339        46,009        (10,330     (18

Depreciation and amortization

     199,991        198,993        (998     (0

Losses on derivative financial instruments

     38,820        19,950        (18,870     (49
                          

Total operating expenses

     381,922        369,684        (12,238     (3
                          

Income from operations

     235,966        274,572        38,606        16   

Interest expense, net

     337,504        345,531        8,027        2   

Loss on early extinguishment of debt

     (103     (75,805     (75,702     NM   

Other income, net

     3,381        3,600        219        6   
                          

Loss before income taxes

     (98,260     (143,164     (44,904     46   

Benefit from income taxes

     (3,476     (35,811     (32,335     NM   
                          

Net loss

     (94,784     (107,353     (12,569     13

Net loss attributable to noncontrolling interest

     508        953        445        88   
                          

Net loss attributable to Intelsat S.A.

   $ (94,276   $ (106,400   $ (12,124     13
                          

Revenue

We earn revenue primarily by providing services over satellite transponder capacity to our customers. Our customers generally obtain satellite capacity from us by placing an order pursuant to one of several master customer service agreements. Our customer agreements also cover services that we procure from third parties

 

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and resell, which we refer to as off-network services. These services can include transponder services and other satellite-based transmission services sourced from other operators, often in frequencies not available on our network. Under the category Off-Network and Other Revenues, we also include revenues from consulting and other services as well as sales of customer premises equipment.

The following table sets forth our comparative revenue by service type, with Off-Network and Other Revenues shown separately from On-Network Revenues, for the periods shown (in thousands, except percentages):

 

     Three Months
Ended
September 30, 2009
     Three Months
Ended
September 30, 2010
     Increase
(Decrease)
    Percentage
Change
 

On-Network Revenues

          

Transponder services

   $ 453,578       $ 466,565       $ 12,987        3

Managed services

     83,489         76,737         (6,752     (8

Channel

     33,092         29,985         (3,107     (9
                            

Total on-network revenues

     570,159         573,287         3,128        —     

Off-Network and Other Revenues

          

Transponder, MSS and other off-network services

     37,502         60,521         23,019        61   

Satellite-related services

     10,227         10,448         221        2   
                            

Total off-network and other revenues

     47,729         70,969         23,240        49   
                            

Total

   $ 617,888       $ 644,256       $ 26,368        4
                            

Total revenue for the three months ended September 30, 2010 increased by $26.4 million, or 4%, as compared to the three months ended September 30, 2009. By service type, our revenues increased or decreased due to the following:

On-Network Revenues:

 

   

Transponder services—an aggregate increase of $13.0 million, due primarily to a net increase of $20.2 million in revenue resulting from favorable terms, new business and renewals from network services customers primarily in the Africa and Middle East and Latin America and Caribbean regions, as well as the migration of a customer from managed services to transponder services and growth in capacity sold by our Intelsat General business. These increases were partially offset by an aggregate decrease of $7.2 million in revenues related to the IS-4 satellite anomaly, which primarily affected the revenue from customers in the Europe and the Africa and Middle East regions, and the Galaxy 15 satellite anomaly, which primarily affected revenue from media customers in the North America region.

 

   

Managed services—an aggregate decrease of $6.7 million primarily due to the migration of a network services customer from managed services to transponder services.

 

   

Channel—an aggregate decrease of $3.1 million related to a continued decline from the migration of point-to-point satellite traffic to fiber optic cables, a trend which we expect will continue.

Off-Network and Other Revenues:

 

   

Transponder, MSS and other off-network services—an aggregate increase of $23.0 million, due primarily to a $13.5 million increase in revenues from transponder services and a $6.9 million increase in mobile satellite services (“MSS”) revenues from usage-based mobile services, both of which were sold by our Intelsat General business.

 

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Operating Expenses

Direct Costs of Revenue (Exclusive of Depreciation and Amortization)

Direct costs of revenue increased by $18.0 million, or 21%, to $104.7 million for the three months ended September 30, 2010 as compared to the three months ended September 30, 2009. The increase was primarily due to an increase of $17.4 million for purchases of off-network FSS and MSS capacity primarily related to increased transponder services sold by our Intelsat General business and an increase of $1.9 million in satellite-related insurance costs related to recently launched satellites, partially offset by a decrease of $2.0 million in cost of equipment primarily related to products sold by our Intelsat General business.

Selling, General and Administrative

Selling, general and administrative expenses decreased by $10.3 million, or 18%, to $46.0 million for the three months ended September 30, 2010 as compared to the three months ended September 30, 2009. The decrease was primarily due to a $5.0 million decrease in bad debt expense, $2.1 million in lower stock compensation costs associated with the amended and restated Intelsat Global, Ltd. 2008 Incentive Plan, and a decrease of $1.2 million in staff-related expenses.

Depreciation and Amortization

Depreciation and amortization expense decreased by $1.0 million to $199.0 million for the three months ended September 30, 2010 as compared to the three months ended September 30, 2009. This decrease was primarily due to the following:

 

   

a decrease of $16.7 million in depreciation expense due to certain satellites becoming fully depreciated and the impairment of our IS-4 and Galaxy 15 satellites following the anomalies that occurred in 2010; and

 

   

a decrease of $3.8 million in amortization expense primarily due to changes in the expected pattern of consumption of amortizable intangible assets; partially offset by

 

   

an increase of $15.5 million in depreciation expense resulting from the impact of satellites placed into service during the second half of 2009 and the first quarter of 2010.

(Gains) Losses on Derivative Financial Instruments

Losses on derivative financial instruments were $19.9 million for the three months ended September 30, 2010 compared to $38.8 million for the three months ended September 30, 2009. For the three months ended September 30, 2010, the loss on derivative financial instruments related to a $31.7 million loss on our interest rate swaps, partially offset by an $11.8 million gain on our put option embedded derivative related to Intelsat Sub Holdco’s 8 7/8% Senior Notes due 2015, Series B (the “2009 Sub Holdco Notes”).

Interest Expense, Net

Interest expense, net consists of the gross interest expense we incur less the amount of interest we capitalize related to capital assets under construction and less interest income earned. As of September 30, 2010 we also held interest rate swaps with an aggregate notional amount of $2.3 billion to economically hedge the variability in cash flow on a portion of the floating-rate term loans under our senior secured and unsecured credit facilities. The swaps have not been designated as hedges for accounting purposes. Interest expense, net increased by $8.0 million, or 2%, to $345.5 million for the three months ended September 30, 2010, as compared to $337.5 million for the three months ended September 30, 2009. The increase in interest expense, net was principally due to the following:

 

   

a net increase of $5.8 million in interest expense associated with interest paid-in-kind that was accreted into the principal of Intelsat Luxembourg’s 11 1/2%/12 1/2% Senior PIK Election Notes due 2017 (the

 

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“2017 PIK Notes”) and the issuance of Intelsat Jackson’s 8 1/2% Senior Notes due 2019, the proceeds of which were primarily used to purchase and cancel $400 million of the 2017 PIK Notes in October 2009; partially offset by

 

   

a decrease of $4.0 million from higher capitalized interest expense due to an increase in the number of satellites under construction in 2010 as compared to 2009.

The non-cash portion of total interest expense, net was $81.3 million for the three months ended September 30, 2010 and included $57.4 million of payment-in-kind interest expense. The remaining non-cash interest expense was primarily associated with the amortization of deferred financing fees incurred as a result of new or refinanced debt and the amortization and accretion of discounts and premiums.

Loss on Early Extinguishment of Debt

Loss on early extinguishment of debt was $75.8 million during the three months ended September 30, 2010 as compared to $0.1 million during the three months ended September 30, 2009. The 2010 loss was recognized in connection with the purchase by Intelsat Corporation (“Intelsat Corp”) of $546.3 million of its outstanding 9 1/4% Senior Notes due 2014 (the “2014 Corp Notes”) for $565.4 million (excluding accrued and unpaid interest of $6.3 million) and $124.9 million of its outstanding 6 7/8% Senior Secured Debentures due 2028 (the “2028 Corp Notes”) for $149.9 million (excluding accrued and unpaid interest of $1.8 million), pursuant to cash tender offers. The loss of $75.8 million was caused by a $46.7 million difference between the carrying value of the Intelsat Corp notes purchased and the total cash amount paid (including related fees), and a write-off of $29.1 million unamortized debt discounts and debt issuance costs.

Benefit from Income Taxes

Our benefit from income taxes was $35.8 million and $3.5 million during the three months ended September 30, 2010 and 2009, respectively. The difference was principally due to a reduction in unrecognized tax benefits of $26.5 million and to pre-tax losses in certain taxable jurisdictions, primarily related to the loss on early extinguishment of debt in the United States during the three months ended September 30, 2010.

 

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Nine Months Ended September 30, 2009 and 2010

The following table sets forth our comparative statements of operations for the periods shown with the increase (decrease) and percentage changes, except those deemed not meaningful (“NM”), between the periods presented (in thousands, except percentages):

 

     Nine Months
Ended
September 30,
2009
    Nine Months
Ended
September 30,
2010
    Nine Months Ended
September 30, 2010
Compared to

Nine Months Ended
September 30, 2009
 
       Increase
(Decrease)
    Percentage
Change
 

Revenue

   $ 1,892,219      $ 1,900,683      $ 8,464        0

Operating expenses:

        

Direct costs of revenue (exclusive of depreciation and amortization)

     297,576        302,620        5,044        2   

Selling, general and administrative

     172,975        144,589        (28,386     (16

Depreciation and amortization

     611,079        596,989        (14,090     (2

Impairment of asset value

     499,100        110,625        (388,475     (78

(Gains) losses on derivative financial instruments

     (5,303     90,592        95,895        NM   
                          

Total operating expenses

     1,575,427        1,245,415        (330,012     (21
                          

Income from operations

     316,792        655,268        338,476        NM   

Interest expense, net

     1,027,837        1,035,018        7,181        1   

Loss on early extinguishment of debt

     (14,979     (75,805     (60,826     NM   

Other income, net

     9,579        7,943        (1,636     (17
                          

Loss before income taxes

     (716,445     (447,612     268,833        (38

Benefit from income taxes

     (31,327     (54,919     (23,592     75   
                          

Net loss

     (685,118     (392,693     292,425        (43 )% 

Net loss attributable to noncontrolling interest

     456        3,029        2,573        NM   
                          

Net loss attributable to Intelsat S.A.

   $ (684,662   $ (389,664   $ 294,998        (43 )% 
                          

Revenue

The following table sets forth our comparative revenue by service type, with Off-Network and Other Revenues shown separately from On-Network Revenues, for the periods shown (in thousands, except percentages):

 

     Nine Months
Ended
September 30,
2009
     Nine Months
Ended
September 30,
2010
     Increase
(Decrease)
    Percentage
Change
 

On-Network Revenues

          

Transponder services

   $ 1,350,109       $ 1,374,357       $ 24,248        2

Managed services

     251,872         241,857         (10,015     (4

Channel

     101,354         91,821         (9,533     (9
                            

Total on-network revenues

     1,703,335         1,708,035         4,700        —     

Off-Network and Other Revenues

          

Transponder, MSS and other off-network services

     116,302         163,373         47,071        40   

Satellite-related services

     72,582         29,275         (43,307     (60
                            

Total off-network and other revenues

     188,884         192,648         3,764        2   
                            

Total

   $ 1,892,219       $ 1,900,683       $ 8,464        —  
                            

 

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Total revenue for the nine months ended September 30, 2010 increased by $8.5 million, or 2%, as compared to the nine months ended September 30, 2009. Netted within this increase was a decline in satellite-related services revenues as a result of launch vehicle resales that occurred during the nine months ended September 30, 2009, with no similar resales in the nine months ended September 30, 2010. Excluding the launch vehicle resales, total revenue for the nine months ended September 30, 2010 would have increased by 3% as compared to the nine months ended September 30, 2009. By service type, our revenues increased or decreased due to the following:

On-Network Revenues:

 

   

Transponder services—an aggregate increase of $24.2 million, due primarily to a net increase of $42.3 million in revenues from network service customers resulting from strong renewals and new business derived from new satellite capacity entering service primarily in the Latin America and Caribbean and the Africa and Middle East regions, and the migration of a customer from managed services to transponder services, as well as growth in services sold by our Intelsat General business. These increases were partially offset by an aggregate decrease of $18.1 million in revenues related to the IS-4 satellite anomaly, which primarily affected revenue from customers in the Europe and the Africa and Middle East regions, and the Galaxy 15 satellite anomaly, which primarily affected revenues in the North America region.

 

   

Managed services—an aggregate decrease of $10.0 million, due to a $12.9 million decline in revenues primarily related to the migration of a network services customer from managed services to transponder services, partially offset by an increase in occasional video services sold to media customers in the Latin America and Caribbean region, primarily associated with a global soccer tournament.

 

   

Channel—an aggregate decrease of $9.5 million related to a continued decline from the migration of point-to-point satellite traffic to fiber optic cables, a trend which we expect will continue.

Off-Network and Other Revenues:

 

   

Transponder, MSS and other off-network services—an aggregate increase of $47.1 million, due primarily to a $31.9 million increase in revenues from transponder services and a $11.0 million increase in MSS revenues from usage-based mobile services, both of which are related to customers of our Intelsat General business.

 

   

Satellite-related services—an aggregate decrease of $43.3 million, resulting primarily from $44.0 million in launch vehicle resale revenues recorded during the nine months ended September 30, 2009, with no similar resales occurring during the nine months ended September 30, 2010.

Operating Expenses

Direct Costs of Revenue (Exclusive of Depreciation and Amortization)

Direct costs of revenue increased by $5.0 million, or 2%, to $302.6 million for the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009. The increase was primarily due to an increase of $39.2 million for purchases of off-network FSS and MSS capacity related to increased transponder services sold primarily by our Intelsat General business, partially offset by a decrease of $35.2 million primarily related to the resale of two launch vehicles by our satellite-related services business in 2009, with no similar resales during the nine months ended September 30, 2010.

 

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Selling, General and Administrative

Selling, general and administrative expenses decreased by $28.4 million, or 16%, to $144.6 million for the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009. The decrease was primarily due to a $26.2 million decrease resulting from higher compensation costs in 2009 stemming from new equity awards and revisions to the terms of existing equity awards as compared to 2010.

Depreciation and Amortization

Depreciation and amortization expense decreased by $14.1 million, or 2%, to $597.0 million for the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009. This decrease was primarily due to the following:

 

   

a decrease of $53.1 million in depreciation expense due to certain satellites becoming fully depreciated and the impairment of our IS-4 and Galaxy 15 satellites following the anomalies that occurred in 2010;

 

   

a decrease of $11.7 million in amortization expense primarily due to changes in the expected pattern of consumption of amortizable intangible assets; and

 

   

a decrease of $4.5 million in depreciation expense due to certain ground and other assets becoming fully depreciated and placed in service; partially offset by

 

   

an increase of $42.5 million in depreciation expense resulting from the impact of satellites placed into service during the second half of 2009 and the first quarter of 2010; and

 

   

an increase of $12.4 million from changes in the estimated remaining useful lives of certain satellites.

Impairment of Asset Value

Impairment of asset value was $110.6 million for the nine months ended September 30, 2010 as compared to $499.1 million for the nine months ended September 30, 2009. The charges incurred during the nine months ended September 30, 2010 included a $104.1 million non-cash impairment charge for the impairment of our Galaxy 15 satellite after an anomaly occurred in April 2010, as well as a $6.5 million non-cash impairment charge for the impairment of our IS-4 satellite, which was deemed unrecoverable after an anomaly occurred in February 2010.

(Gains) Losses on Derivative Financial Instruments

Losses on derivative financial instruments were $90.6 million for the nine months ended September 30, 2010 compared to $5.3 million of gains on derivative financial instruments for the nine months ended September 30, 2009. For the nine months ended September 30, 2010, the loss on derivative financial instruments related to a $105.2 million loss on our interest rate swaps primarily due to the change in fair value, partially offset by a $14.6 million gain on the put option embedded derivative related to the 2009 Sub Holdco Notes.

Interest Expense, Net

Interest expense, net increased by $7.2 million, or 1%, to $1.0 billion for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009. The increase in interest expense, net was principally due to the following:

 

   

a net increase of $20.7 million in interest expense associated with interest paid-in-kind that was accreted into the principal of the 2017 PIK Notes and the issuance of Intelsat Jackson’s 8 1/2% Senior Notes due 2019, the proceeds of which were primarily used to purchase and cancel $400 million of the 2017 PIK Notes in October 2009; and

 

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an increase of $4.3 million in interest and amortization expense associated with the completion of the Intelsat S.A. consent solicitation in the second quarter of 2010, the fees for which were capitalized and are being amortized over the terms of the notes; and

 

   

an increase of $3.5 million associated with funding under the New Dawn senior and mezzanine term loan facilities; partially offset by

 

   

a decrease of $16.9 million from higher capitalized interest expense due to an increase in the number of satellites under construction in 2010 as compared to 2009; and

 

   

a decrease of $12.2 million due to lower interest rates on our variable rate debt in 2010 as compared to 2009.

The non-cash portion of total interest expense, net was $276.3 million for the nine months ended September 30, 2010 and included $203.7 million of payment-in-kind interest expense. The remaining non-cash interest expense was primarily associated with the amortization of deferred financing fees incurred as a result of new or refinanced debt and the amortization and accretion of discounts and premiums.

Loss on Early Extinguishment of Debt

Loss on early extinguishment of debt was $75.8 million during the nine months ended September 30, 2010 as compared to $15.0 million during the nine months ended September 30, 2009. The 2010 loss was recognized in connection with Intelsat Corp’s purchase of $546.3 million of its outstanding 2014 Corp Notes for $565.4 million (excluding accrued and unpaid interest of $6.3 million) and $124.9 million of its outstanding 2028 Corp Notes for $149.9 million (excluding accrued and unpaid interest of $1.8 million) pursuant to cash tender offers. The loss of $75.8 million was caused by a $46.7 million difference between the carrying value of the Intelsat Corp notes purchased and the total cash amount paid (including related fees), and a write-off of $29.1 million unamortized debt discounts and debt issuance costs. The 2009 loss was recognized in connection with Intelsat Sub Holdco’s purchase of $114.2 million of Intelsat S.A.’s outstanding 7 5/8% Senior Notes due 2012 for $93.3 million and $346.5 million of Intelsat S.A.’s outstanding 6 1/2% Senior Notes due 2013 for $254.6 million. The 2009 loss was primarily driven by the difference between the carrying value of the Intelsat S.A. notes purchased and the cash paid for the purchase. The value of Intelsat S.A.’s notes had been adjusted to fair value as of February 4, 2008 in connection with the New Sponsors Acquisition Transactions.

Other Income, Net

Other income, net was $7.9 million for the nine months ended September 30, 2010 as compared to $9.6 million for the nine months ended September 30, 2009. The decrease of $1.6 million was primarily due to a $3.4 million decrease in exchange rate gains, primarily due to the U.S. dollar weakening against the Brazilian real, which impacts our service contracts with our Brazilian customers, partially offset by a $1.3 million gain related to our sale of Viasat, Inc. common stock during the first quarter of 2010.

Benefit from Income Taxes

Our benefit from income taxes was $54.9 million and $31.3 million during the nine months ended September 30, 2010 and 2009, respectively. The difference was principally due to a reduction in unrecognized tax benefits of $26.5 million and to higher pre-tax losses in certain taxable jurisdictions, primarily related to the loss on early extinguishment of debt and satellite impairment charges in the United States during the nine months ended September 30, 2010, partially offset by higher impairment charges in 2009.

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 was enacted in March 2010. Included in the new legislation is a provision that affected the tax treatment of Medicare Part D subsidy payments. With the change in law, the subsidy will still not be taxed, but an equal amount of expenditures by the plan sponsor will not be deductible. Therefore, the expected

 

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future tax deduction will be reduced by an amount equal to the subsidy, and any previously recognized deferred tax asset must be reversed. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC” or the “Codification”) Topic 740, Income Taxes, the expense associated with adjusting this deferred tax asset is recognized as tax expense in continuing operations in the period the change in tax law is enacted. We recorded an increase of $2.9 million to tax expense related to the change in law during the nine months ended September 30, 2010.

EBITDA

EBITDA consists of earnings before net interest, loss on early extinguishment of debt, taxes and depreciation and amortization. EBITDA is a measure commonly used in the FSS sector, and we present EBITDA to enhance the understanding of our operating performance. We use EBITDA as one criterion for evaluating our performance relative to that of our peers. We believe that EBITDA is an operating performance measure, and not a liquidity measure, that provides investors and analysts with a measure of operating results unaffected by differences in capital structures, capital investment cycles and ages of related assets among otherwise comparable companies. However, EBITDA is not a measure of financial performance under United States generally accepted accounting principles (“U.S. GAAP”), and our EBITDA may not be comparable to similarly titled measures of other companies. EBITDA should not be considered as an alternative to operating income (loss) or net income (loss) attributable to Intelsat S.A., determined in accordance with U.S. GAAP, as an indicator of our operating performance, or as an alternative to cash flows from operating activities, determined in accordance with U.S. GAAP, as an indicator of cash flows, or as a measure of liquidity.

A reconciliation of net loss attributable to Intelsat S.A. to EBITDA for the periods shown is as follows (in thousands):

 

     Three Months
Ended
September 30,
2009
    Three Months
Ended
September 30,
2010
    Nine Months
Ended
September 30,
2009
    Nine Months
Ended
September 30,
2010
 

Net loss attributable to Intelsat S.A.

   $ (94,276   $ (106,400   $ (684,662   $ (389,664

Add:

        

Interest expense, net

     337,504        345,531        1,027,837        1,035,018   

Loss on early extinguishment of debt

     103        75,805        14,979        75,805   

Benefit from income taxes

     (3,476     (35,811     (31,327     (54,919

Depreciation and amortization

     199,991        198,993        611,079        596,989   
                                

EBITDA

   $ 439,846      $ 478,118      $ 937,906      $ 1,263,229   
                                

Liquidity and Capital Resources

Cash Flow Items

Our cash flows consisted of the following for the periods shown (in thousands):

 

     Nine Months
Ended
September 30,
2009
    Nine Months
Ended
September 30,
2010
 

Net cash provided by operating activities

   $ 549,302      $ 621,020   

Net cash used in investing activities

     (462,122     (657,379

Net cash provided by (used in) financing activities

     (57,652     208,593   

Net change in cash and cash equivalents

     34,332        173,653   

 

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Net Cash Provided by Operating Activities

Net cash provided by operating activities increased by $71.7 million during the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009. During the nine months ended September 30, 2010, cash flows from operating activities reflected a $90.0 million cash inflow related to deferred revenue for amounts received from customers for long-term service contracts. Also reflected is a $61.4 million cash outflow related to prepaid expenses and other assets primarily due to a prepayment for the procurement of a long-term service contract partially offset by cash received of $31.8 million from the cancellation of our options to terminate certain undesignated interest rate swaps prior to their maturity date, and a $36.7 million cash outflow related to accounts payable and accrued liabilities primarily due to employee related payables as well as lower accrued interest expense due to the repurchase of the 2014 Corp Notes and the 2028 Corp Notes (see “—2010 Debt Transactions” for further discussion).

Net Cash Used in Investing Activities

Net cash used in investing activities increased by $195.3 million during the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009. This increase was primarily due to higher capital expenditures of $227.3 million in 2010 associated with satellites under construction, partially offset by proceeds from the sale of our shares of Viasat, Inc. common stock of $28.6 million in the first quarter of 2010.

Net Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities was $208.6 million during the nine months ended September 30, 2010 as compared to cash used in financing activities of $57.7 million during the nine months ended September 30, 2009. During the nine months ended September 30, 2010, cash flows from financing activities reflected $745.6 million of long-term debt repayments which includes the repurchase of $546.3 million of the 2014 Corp Notes for $571.7 million and the repurchase of $124.9 million of the 2028 Corp Notes for $151.7 million pursuant to cash tender offers (the “Tender Offers”), a $44.1 million premium paid in connection with the Tender Offers and $1.0 billion of proceeds from the issuance of Intelsat Jackson’s 7 1/4% Senior Notes due 2020. In addition, we incurred $32.1 million of debt issuance costs during the nine months ended September 30, 2010. Also, during the second quarter of 2010 we received an $18.0 million contribution from our parent, Intelsat Holdings, a portion of which we used to fund the consent payment related to Intelsat S.A.’s consent solicitation (see “—2010 Debt Transactions”).

Long-Term Debt

We are a highly leveraged company and, in connection with the consummation of the New Sponsors Acquisition Transactions, we became a significantly more highly leveraged company, which has resulted in a significant increase in our interest expense.

In connection with the New Sponsors Acquisition Transactions, our pre-acquisition long-term debt was adjusted to fair value as of the effective date of the acquisition, resulting in a net decrease of $182.5 million. This net difference between the fair value and par value of the debt is being amortized as an increase to interest expense over the remaining term of the related debt using the effective interest method.

Senior Secured Credit Facilities

Intelsat Sub Holdco Senior Secured Credit Facility

Intelsat Sub Holdco entered into an amended and restated credit agreement (the “Sub Holdco Credit Agreement”) on July 3, 2006. The Sub Holdco Credit Agreement provides for a $344.8 million Tranche B Term Loan facility due 2013 and a $270.8 million revolving credit facility due 2012. Up to $200.0 million of the revolving credit facility is available for issuance of letters of credit. Additionally, up to $35.0 million of the revolving credit facility is available for swingline loans.

 

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Intelsat Sub Holdco is required to pay a commitment fee for the unused commitments under the revolving credit facility, if any, at a rate per annum of 0.375%. Both the face amount of any outstanding letters of credit and any swingline loans reduce availability under the revolving credit facility on a dollar for dollar basis. Obligations under the Sub Holdco Credit Agreement are guaranteed by certain of Intelsat Sub Holdco’s subsidiaries, as well as by Intermediate Holdco, and secured by a perfected first priority security interest to the extent legally permissible in substantially all of the tangible and intangible assets of Intelsat Sub Holdco and the subsidiary guarantors, with certain agreed exceptions.

On January 25, 2008, Intelsat Sub Holdco entered into Amendment No. 3 to the Sub Holdco Credit Agreement, which became effective upon the consummation of the New Sponsors Acquisition and amended and modified the Sub Holdco Credit Agreement to, among other things:

 

  (a) change the applicable margin (i) on Above Bank Rate (“ABR”) loans under the Tranche B Term Loan, revolving credit loan and swingline loan facilities to a rate of 1.5% per annum and (ii) on London Interbank Offered Rate (“LIBOR”) loans under the Tranche B Term Loan, revolving credit loan and swingline loan facilities to a rate of 2.5% per annum;

 

  (b) reduce the size of the revolving facility by $50.0 million and add a $50.0 million incremental revolving credit facility provision;

 

  (c) add language requiring the payment of a prepayment premium for prepayments of term loans prior to February 4, 2010;

 

  (d) make certain changes permitting the New Sponsors Acquisition; and

 

  (e) add a financial maintenance covenant requiring compliance with a Consolidated Secured Debt to Consolidated EBITDA Ratio (as defined in the Sub Holdco Credit Agreement) of less than or equal to 1.5 to 1.0.

The Consolidated Secured Debt to Consolidated EBITDA Ratio is determined by comparing Consolidated Secured Debt to Consolidated EBITDA, each as defined under the Sub Holdco Credit Agreement. We were in compliance with this financial maintenance covenant ratio with a Consolidated Secured Debt to Consolidated EBITDA Ratio of 0.1 to 1.0 as of September 30, 2010. In the event we were to fail to comply with this financial maintenance covenant ratio and were unable to obtain waivers, we would default under the Intelsat Sub Holdco Credit Agreement, and the lenders under the Intelsat Sub Holdco Credit Agreement could accelerate our obligations thereunder, which would result in an event of default under our existing notes and Intelsat Jackson’s unsecured credit agreements.

No amounts were outstanding under the revolving credit facility as of September 30, 2010; however, $31.8 million in letters of credit were issued and outstanding under the facility. The borrowing availability under the revolving credit facility was $239.0 million at such date. The ability of Intelsat Sub Holdco to borrow under its revolving credit facility is subject to compliance by its indirect parent, Intelsat S.A., with a secured debt covenant included in the indenture governing Intelsat S.A.’s senior notes (as in effect on July 3, 2006, the date on which the Sub Holdco Credit Agreement was executed). As a result, under certain circumstances, Intelsat Sub Holdco may not be able to borrow up to the full amount of borrowing availability under its revolving credit facility if Intelsat Corp has certain amounts outstanding under its revolving credit facility.

Intelsat Corp Senior Secured Credit Facility

As of September 30, 2010, Intelsat Corp had a revolving credit facility and certain term loans outstanding under the Intelsat Corporation Amended and Restated Credit Agreement (the “Intelsat Corp Amended and Restated Credit Agreement”), which consisted of a $355.9 million Tranche A-3 Senior Secured Term Loan due 2012, a $1.8 billion Tranche B-2 Senior Secured Term Loan facility due 2014, and a $175.0 million revolving credit facility due 2012. Up to $150.0 million of the revolving credit facility is available for issuance of letters of credit. Additionally, up to $35.0 million of the revolving credit facility is available for swingline loans.

 

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Intelsat Corp is required to pay a commitment fee for the unused commitments under the revolving credit facility, if any, at a rate per annum of 0.375%. Both the face amount of any outstanding letters of credit and any swingline loans reduce availability under the revolving credit facility on a dollar for dollar basis. Obligations under the Intelsat Corp Amended and Restated Credit Agreement continue to be guaranteed by certain of Intelsat Corp’s subsidiaries and are secured by a perfected first priority security interest to the extent legally permissible in substantially all of the borrower’s and the guarantors’ tangible and intangible assets, with certain agreed exceptions.

On January 25, 2008, Intelsat Corp entered into Amendment No. 2 to the Intelsat Corp Amended and Restated Credit Agreement, which became effective upon the consummation of the New Sponsors Acquisition and amended and modified the Intelsat Corp Amended and Restated Credit Agreement to, among other things:

 

  (a) change the applicable margin (i) on ABR loans that are term loans to a rate of 1.5% per annum, (ii) on LIBOR loans that are term loans to a rate of 2.5% per annum, (iii) on ABR loans that are revolving credit loans or swingline loans to a rate of between 1.5% and 1.875%, and (iv) on LIBOR loans that are revolving credit loans or swingline loans to a rate of between 2.5% and 2.875%;

 

  (b) reduce the size of the revolving facility by $75.0 million and add a $75.0 million incremental revolving credit facility provision;

 

  (c) require the payment of a prepayment premium for prepayments of term loans prior to February 4, 2011 (with respect to Tranche B-2-A Term Loans) or February 14, 2010 (with respect to Tranche B-2-B Term Loans);

 

  (d) make certain changes permitting the New Sponsors Acquisition; and

 

  (e) add a financial maintenance covenant requiring compliance with a Consolidated Secured Debt to Consolidated EBITDA Ratio (as defined in the Intelsat Corp Amended and Restated Credit Agreement) of less than or equal to 4.5 to 1.0.

On February 4, 2008, in connection with the New Sponsors Acquisition, Intelsat Corp also executed a Joinder Agreement by and among Intelsat Corp, the several lenders party thereto and certain other parties, to the Intelsat Corp Amended and Restated Credit Agreement pursuant to which it incurred an additional $150.0 million in aggregate principal amount of Tranche B-2 Term Loan.

The Consolidated Secured Debt to Consolidated EBITDA Ratio is determined by comparing Consolidated Secured Debt to Consolidated EBITDA, each as defined under the Intelsat Corp Amended and Restated Credit Agreement. We were in compliance with this financial maintenance covenant ratio, with a Consolidated Secured Debt to Consolidated EBITDA Ratio of 2.1 to 1.0, as of September 30, 2010. In the event we were to fail to comply with this financial maintenance covenant ratio and were unable to obtain waivers, we would default under the Intelsat Corp Amended and Restated Credit Agreement, and the lenders under the Intelsat Corp Amended and Restated Credit Agreement could accelerate our obligations thereunder, which would result in an event of default under our existing notes and Intelsat Jackson’s unsecured credit agreements.

No amounts were outstanding under the revolving credit facility as of September 30, 2010; however, $1.7 million in letters of credit were issued and outstanding under the facility. The borrowing availability under the revolving credit facility was $152.5 million at such date, assuming that one of the lenders under the revolving credit facility, responsible for approximately $20.8 million of the $175.0 million of aggregate lending commitments, would not provide any funds in response to any future borrowing request. Such lender did not provide any funds in response to a September 2008 borrowing request we made under the revolving credit facility.

 

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Long-Term Debt Changes in 2009

On February 12, 2009, our indirect subsidiary, Intelsat Sub Holdco, purchased $114.2 million of Intelsat S.A.’s outstanding 7 5/8% Senior Notes due 2012 (the “2012 Intelsat S.A. Notes”) for $93.3 million and $346.5 million of Intelsat S.A.’s outstanding 6 1/2% Senior Notes due 2013 (the “2013 Intelsat S.A Notes”) for $254.6 million pursuant to a tender offer. Intelsat Sub Holdco funded the tender offer through an offering of $400.0 million aggregate principal amount at maturity of the 2009 Sub Holdco Notes, completed on February 12, 2009, which yielded $348.3 million of proceeds at issuance, together with cash on hand. The 2009 Sub Holdco Notes have terms substantially similar to Intelsat Sub Holdco’s outstanding 8 7/8% Senior Notes due 2015 issued in September 2008.

On July 31, 2009, Intelsat Sub Holdco redeemed the approximately $0.4 million principal amount of its outstanding 8 5/8% Senior Notes due 2015 and the approximately $0.4 million principal amount of its outstanding 8 1/4% Senior Notes due 2013.

On July 31, 2009, Intelsat Corp redeemed the approximately $1.0 million principal amount of its outstanding 9% Senior Notes due 2014 and the approximately $0.01 million principal amount of its outstanding 9% Senior Notes due 2016.

On October 20, 2009, our indirect subsidiary, Intelsat Jackson, completed an offering of $500.0 million aggregate principal amount of 8 1/2% Senior Notes due 2019, which yielded $487.1 million of cash proceeds at issuance (the “2009 Jackson Notes Offering”). Upon consummation of the 2009 Jackson Notes Offering, Intelsat Jackson paid a dividend to Intelsat Luxembourg in an amount equal to the price paid by Intelsat Luxembourg to purchase $400.0 million face amount of the 2017 PIK Notes from Banc of America Securities LLC at a discount. Intelsat Luxembourg then canceled the purchased 2017 PIK Notes. After giving effect to the purchase of the 2017 PIK Notes and fees and expenses related thereto and the 2009 Jackson Notes Offering, $101.1 million of the proceeds from the 2009 Jackson Notes Offering remained available for general corporate purposes.

2010 Debt Transactions

On April 21, 2010, Intelsat S.A. completed a consent solicitation that resulted in the amendment of certain terms of the indenture governing the 2012 Intelsat S.A. Notes and the 2013 Intelsat S.A. Notes. The most significant amendments replaced the limitation on secured debt covenant, which limited secured debt of Intelsat S.A. and its restricted subsidiaries to 15% of their consolidated net tangible assets (subject to certain exceptions), with a new limitation on liens covenant, which generally limits such secured debt to two times the adjusted EBITDA of Intelsat S.A. (as defined) plus certain general baskets (subject to certain exceptions), and made certain corresponding changes to the sale and leaseback covenant as a result of the addition of the new limitation on liens covenant. As consideration, Intelsat S.A. paid the consenting holders of such notes a consent payment equal to 2% of the outstanding principal amount of notes held by such holders that totaled approximately $15.4 million.

On September 30, 2010, Intelsat Jackson completed an offering of $1.0 billion principal amount of the 7 1/4% Senior Notes due 2020 (the “2020 Jackson Notes”). The majority of the net proceeds from the 2020 Jackson Notes were transferred to Intelsat Jackson’s indirect subsidiary, Intelsat Corp. The funds transferred were used by Intelsat Corp to repurchase $546.3 million of its outstanding 2014 Corp Notes and $124.9 million of its outstanding 2028 Corp Notes, pursuant to the Tender Offers. In connection with the Tender Offers, Intelsat Corp received the consent of the holders of the 2014 Corp Notes and the 2028 Corp Notes to amend the indentures governing these notes, among other things, to eliminate substantially all of the restrictive covenants, certain events of default and certain other provisions contained in the indentures.

On October 1, 2010, $34.1 million of the net proceeds from the 2020 Intelsat Jackson Notes were transferred to Intelsat Sub Holdco. Intelsat Sub Holdco used the funds to repurchase and cancel $33.0 million of its outstanding 8 1/2% Senior Notes due 2013 via an open market purchase transaction.

 

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After giving effect to the Tender Offers and the repurchase of the Intelsat Sub Holdco notes, $227.8 million of the proceeds from the 2020 Jackson Notes remained available for general corporate purposes, which could include the repayment, redemption, retirement or repurchase in the open market of other indebtedness of Intelsat S.A. or its subsidiaries.

New Dawn Credit Facilities

On December 5, 2008, New Dawn entered into a $215.0 million secured financing arrangement that consists of senior and mezzanine term loan facilities. The credit facilities are non-recourse to New Dawn’s shareholders, including Intelsat S.A. and its wholly-owned subsidiaries, beyond the shareholders’ scheduled capital contributions. During the nine months ended September 30, 2010, New Dawn incurred satellite related capital expenditures of $36.5 million, and as of September 30, 2010, it had aggregate outstanding borrowings of $143.6 million under its credit facilities.

Sub Holdco Adjusted EBITDA and Intelsat Luxembourg Adjusted EBITDA

In addition to EBITDA, which is calculated as set forth in “—Results of Operations—EBITDA” above, we calculate a measure called Sub Holdco Adjusted EBITDA, based on the term Consolidated EBITDA, as defined in the Sub Holdco Credit Agreement. Sub Holdco Adjusted EBITDA consists of EBITDA as adjusted to exclude or include certain unusual items, certain other operating expense items and other adjustments permitted in calculating covenant compliance under the Sub Holdco Credit Agreement as described in the table and related footnotes below. Sub Holdco Adjusted EBITDA, as presented below, is calculated only with respect to Intelsat Sub Holdco and its subsidiaries. Sub Holdco Adjusted EBITDA is a material component of certain ratios used in the Sub Holdco Credit Agreement, such as the secured debt leverage ratio and the total leverage ratio.

Under the Sub Holdco Credit Agreement, Intelsat Sub Holdco must maintain a pro forma secured net debt leverage ratio not greater than 1.50 to 1.00 at the end of each fiscal quarter, and generally may not incur additional indebtedness (subject to certain exceptions) if the total leverage ratio calculated on a pro forma basis at the time of incurrence would exceed 4.75 to 1.00. In addition, under the investments and dividends covenants contained in the Sub Holdco Credit Agreement, the ability of Intelsat Sub Holdco to make investments and pay dividends is restricted by formulas based on the amount of Sub Holdco Adjusted EBITDA measured from April 1, 2006.

In addition to EBITDA and Sub Holdco Adjusted EBITDA, we also calculate a measure called Intelsat Luxembourg Adjusted EBITDA (previously referred to as New Bermuda Adjusted EBITDA), based on the term Adjusted EBITDA, as defined in the indenture governing Intelsat Luxembourg’s 11 1/4% Senior Notes due 2017 and the 2017 PIK Notes (collectively, the “2008 Luxembourg Notes”).

Intelsat Luxembourg Adjusted EBITDA consists of EBITDA as adjusted to exclude or include certain unusual items, certain other operating expense items and other adjustments permitted in calculating covenant compliance under the indenture of Intelsat Luxembourg as described in the table and related footnotes below. Intelsat Luxembourg Adjusted EBITDA as presented below is calculated only with respect to Intelsat Luxembourg and its subsidiaries. Intelsat Luxembourg Adjusted EBITDA is a material component of certain ratios used in the indenture governing the 2008 Luxembourg Notes, such as the debt to Intelsat Luxembourg Adjusted EBITDA ratio and the secured indebtedness leverage ratio.

Under Intelsat Luxembourg’s indenture, Intelsat Luxembourg generally may not incur additional indebtedness (subject to certain exceptions) if the debt to Intelsat Luxembourg Adjusted EBITDA ratio calculated on a pro forma basis at the time of such incurrence would exceed 8.00 to 1.00 and Intelsat Luxembourg cannot incur certain liens to secure indebtedness (subject to certain exceptions) if the secured indebtedness leverage ratio, after giving effect to the incurrence, exceeds 2.50 to 1.00. In addition, under this indenture, satisfaction of a 6.75 to 1.00 debt to Intelsat Luxembourg Adjusted EBITDA ratio is generally (subject

 

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to certain exceptions) a condition to the making of restricted payments by Intelsat Luxembourg. Furthermore, under the restricted payments covenants contained in this indenture (subject to certain exceptions), the ability of Intelsat Luxembourg to make restricted payments (including the making of investments and the payment of dividends) is restricted by a formula based on the amount of Intelsat Luxembourg Adjusted EBITDA measured from January 1, 2008 and calculated without making pro forma adjustments. There are similar additional covenants in debt agreements of other subsidiaries of Intelsat S.A., including Intelsat Jackson, Intelsat Corp, Intermediate Holdco and Intelsat Sub Holdco, that significantly restrict the ability of these entities to incur additional indebtedness and make restricted payments, in some cases based on the satisfaction of applicable leverage ratios.

We believe that the inclusion of Sub Holdco Adjusted EBITDA and Intelsat Luxembourg Adjusted EBITDA in this Quarterly Report is appropriate to provide additional information to investors about the calculation of certain covenants in the Sub Holdco Credit Agreement and the indenture governing the 2008 Luxembourg Notes as mentioned above. We believe that some investors may use Sub Holdco Adjusted EBITDA and Intelsat Luxembourg Adjusted EBITDA to evaluate our liquidity and financial condition. Sub Holdco Adjusted EBITDA and Intelsat Luxembourg Adjusted EBITDA are not measures of financial performance under U.S. GAAP, and Sub Holdco Adjusted EBITDA and Intelsat Luxembourg Adjusted EBITDA may not be comparable to similarly titled measures of other companies. Sub Holdco Adjusted EBITDA and Intelsat Luxembourg Adjusted EBITDA should not be considered as alternatives to operating income (loss) or net income (loss) attributable to Intelsat S.A., determined in accordance with U.S. GAAP, as indicators of our operating performance, or as alternatives to cash flows from operating activities, determined in accordance with U.S. GAAP, as indicators of cash flows, or as measures of liquidity.

 

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A reconciliation of net cash provided by Intelsat S.A. operating activities to net loss attributable to Intelsat S.A.; net loss attributable to Intelsat S.A. to Intelsat S.A. EBITDA; Intelsat S.A. EBITDA to Intelsat Luxembourg Adjusted EBITDA; and Intelsat Luxembourg Adjusted EBITDA to Sub Holdco Adjusted EBITDA is as follows (in thousands):

 

     Nine Months
Ended
September 30,
2009
    Nine Months
Ended
September 30,
2010
 

Reconciliation of net cash provided by operating activities to net loss attributable to Intelsat S.A.:

    

Net cash provided by operating activities

   $ 549,302      $ 621,020   

Depreciation and amortization

     (611,079     (596,989

Impairment of asset value

     (499,100     (110,625

Provision for doubtful accounts

     (5,696     (4,120

Foreign currency transaction gain

     4,804        1,419   

Loss on disposal of assets

     (2,561     (343

Share-based and other compensation expense

     (24,037     4,645   

Deferred income taxes

     55,295        49,656   

Amortization of discount, premium, issuance costs and other non-cash items

     (93,226     (72,584

Interest paid-in-kind

     (226,956     (203,715

Loss on early extinguishment of debt

     (14,496     (73,247

Share in gain of unconsolidated affiliates

     388        377   

Gain on sale of investment

     —          1,261   

Unrealized gains (losses) on derivative financial instruments

     64,478        (43,257

Other non-cash items

     (162     (2,602

Net loss attributable to noncontrolling interest

     456        3,029   

Changes in operating assets and liabilities, net of effect of acquisition

     117,928        36,411   
                

Net loss attributable to Intelsat S.A.

     (684,662     (389,664
                

Add (Subtract):

    

Interest expense, net

     1,027,837        1,035,018   

Loss on early extinguishment of debt

     14,979        75,805   

Benefit from income taxes

     (31,327     (54,919

Depreciation and amortization

     611,079        596,989   
                

Intelsat S.A. EBITDA

     937,906        1,263,229   
                

Add (Subtract):

    

Parent and intercompany expenses, net (1)

     9,083        6,388   

EBITDA from unrestricted subsidiaries (2)

     (986     (2,895

Compensation and benefits (3)

     22,087        (4,307

Management fees (4)

     17,391        18,534   

Share in gain of unconsolidated affiliates (5)

     (388     (377

Impairment of asset value (6)

     499,100        110,625   

(Gains) losses on derivative financial instruments (7)

     (5,303     90,592   

Gain on sale of investment (8)

     —          (1,260

Non-recurring and other non-cash items (9)

     15,755        12,078   

Satellite performance incentives (10)

     (6,602     (6,539
                

Intelsat Luxembourg Adjusted EBITDA

     1,488,043        1,486,068   
                

Add (Subtract):

    

Intelsat Corp Adjusted EBITDA (11)

     (571,777     (576,011

Parent and intercompany expenses (12)

     193        1,070   

Satellite performance incentives (10)

     6,602        6,539   
                

Sub Holdco Adjusted EBITDA

   $ 923,061      $ 917,666   
                

 

(1) Represents expenses incurred at Intelsat S.A. for employee salaries and benefits, office operating costs and other expenses.

 

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(2) Reflects EBITDA of our unrestricted subsidiary, New Dawn, which is excluded under the definitions of Intelsat Luxembourg Adjusted EBITDA and Sub Holdco Adjusted EBITDA.

 

(3) Reflects the portion of the expenses incurred relating to our equity compensation plans, defined benefit retirement plan and other postretirement benefits that are excludable under the definitions of Intelsat Luxembourg Adjusted EBITDA and Sub Holdco Adjusted EBITDA.

 

(4) Reflects expenses incurred in connection with the monitoring fee agreements to provide certain monitoring, advisory and consulting services to Intelsat Luxembourg and its subsidiaries.

 

(5) Represents gain incurred under the equity method of accounting.

 

(6) Represents a first quarter 2009 non-cash impairment charge recorded to write-down our intangible assets determined to have indefinite useful lives in accordance with FASB ASC Topic 350, Intangibles—Goodwill and Other, a first quarter 2010 write-off of our IS-4 satellite, which was deemed to be unrecoverable due to an anomaly, including a write-off of the related deferred performance incentive obligations, and a second quarter 2010 impairment charge related to our Galaxy 15 satellite.

 

(7) Represents the changes in the fair value of the undesignated interest rate swaps as well as the difference between the amount of floating rate interest we receive and the amount of fixed rate interest we pay and the change in the fair value of our put option embedded derivative related to the 2009 Sub Holdco Notes, which are recognized in operating income.

 

(8) Represents the gain on the sale of our shares of Viasat, Inc. common stock during the nine months ended September 30, 2010.

 

(9) Reflects certain non-recurring gains and losses and non-cash items, including costs associated with the migration of our jurisdiction of organization from Bermuda to Luxembourg, expense for services on the Galaxy 13/Horizons-1 and Horizons-2 satellites and non-cash income related to the recognition of deferred revenue on a straight-line basis of certain prepaid capacity contracts, which are excluded under the definitions of Intelsat Luxembourg Adjusted EBITDA and Sub Holdco Adjusted EBITDA.

 

(10) Represents satellite performance incentive interest expense required to be excluded from interest expense for the calculation of Intelsat Luxembourg Adjusted EBITDA, but permitted to be included as part of interest expense for the calculation of Sub Holdco Adjusted EBITDA.

 

(11) This measure is reported publicly by our subsidiary, Intelsat Corp, which is not a subsidiary of Intelsat Sub Holdco.

 

(12) Reflects expenses of Intelsat Luxembourg and other holding companies not consolidated under Intelsat Sub Holdco.

Funding Sources and Uses

We are a highly leveraged company and have incurred significant additional debt over the last several years, which has resulted in a large increase in our obligations related to debt service, including increased interest expense. We currently expect to use cash on hand, cash flows from operations and availability under our senior secured credit facilities to fund our most significant cash outlays, including debt service requirements and capital expenditures, in the next twelve months. From time to time we may repurchase our existing indebtedness, including outstanding securities of Intelsat S.A. or its subsidiaries, in the open market or otherwise.

Backlog

We have historically had and currently have a substantial backlog, which provides some assurance regarding our future revenue expectations. Backlog is our expected future revenue under customer contracts, and includes both cancelable and non-cancelable contracts, although 96% of our backlog as of September 30, 2010 related to contracts that either were non-cancelable or were cancelable subject to substantial termination fees. In certain cases of breach for non-payment or customer bankruptcy, we may not be able to recover the full value of certain contracts or termination fees. Our backlog also includes our pro rata share of backlog of our joint venture investments. Our backlog was approximately $9.4 billion and $9.3 billion as of June 30, 2010 and September 30, 2010, respectively. This backlog reduces the volatility of our net cash provided by operating activities more than would be typical for a company outside our industry.

 

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Capital Expenditures

Our capital expenditures depend on our business strategies and reflect our commercial responses to opportunities and trends in our industry. Our actual capital expenditures may differ from our expected capital expenditures if, among other things, we enter into any currently unplanned strategic transactions. Levels of capital spending from one year to the next are also influenced by the nature of the satellite life cycle and by the capital-intensive nature of the satellite industry. For example, we incur significant capital expenditures during the years in which satellites are under construction. We typically procure a new satellite within a timeframe that would allow the satellite to be deployed at least one year prior to the end of the service life of the satellite to be replaced. As a result, we frequently experience significant variances in our capital expenditures from year to year.

Payments for satellites and other property and equipment during the nine months ended September 30, 2010 were $683.3 million, which included $36.5 million of payments made by New Dawn. We have nine satellites in development, including our Intelsat New Dawn satellite, with one additional launch planned in 2010. We successfully launched IS-16 in the first quarter of 2010.

We expect our 2010 total capital expenditures to remain within a range of approximately $825 million to $900 million. However, several late 2010 contract milestones could affect the timing of capital expenditure payments between 2010 and 2011. Our annual capital expenditures for fiscal years 2011 and 2012 are expected to remain at a range of approximately $800 million to $875 million and $450 million to $525 million, respectively. We intend to fund our capital expenditure requirements through cash on hand, cash provided from operating activities and, if necessary, borrowings under the revolving facilities of our senior secured credit facilities.

Disclosures about Market Risk

See Item 3—Quantitative and Qualitative Disclosures About Market Risk.

Off-Balance Sheet Arrangements

On August 1, 2005, Intelsat Corp formed a second satellite joint investment with JSAT to build and launch a Ku-band satellite, Horizons-2. The Horizons-2 satellite was launched in December 2007 and placed into service in February 2008. Our investment is being accounted for using the equity method of accounting. The total future joint investment in Horizons-2 is expected to be $100.7 million as of September 30, 2010, of which each of the joint venture partners is required to fund their 50% share. Our share of the results of Horizons-2 is included in other income, net in the accompanying condensed consolidated statements of operations and was income of $0.3 million and $0.2 million during the nine months ended September 30, 2009 and 2010, respectively. As of December 31, 2009 and September 30, 2010, the investment balance of $75.3 million and $71.8 million, respectively, was included within other assets in the accompanying condensed consolidated balance sheets.

In connection with our investment obligation in Horizons-2, we entered into a capital contribution and subscription agreement in August 2005, which requires us to fund our 50% share of the amounts due under Horizons-2’s loan agreement with a third-party lender. Pursuant to this agreement, we made contributions of $12.2 million during each of the nine months ended September 30, 2009 and 2010. We have entered into a security and pledge agreement with a third-party lender and, pursuant to this agreement, granted a security interest in our contribution obligation to the lender. Therefore, we have recorded this obligation as an indirect guarantee. We recorded a liability of $12.2 million within accrued liabilities as of December 31, 2009 and September 30, 2010, and a liability of $48.8 million and $36.6 million within other long-term liabilities as of December 31, 2009 and September 30, 2010, respectively, in the accompanying condensed consolidated balance sheets.

We do not have any other significant off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations or liquidity.

 

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Recently Adopted Accounting Pronouncements

During the third quarter of 2009, the FASB issued Accounting Standards Update 2009-13 (EITF 08-1), Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”). ASC Subtopic 605-25, Revenue Recognition-Multiple-Element-Arrangements (“ASC Subtopic 605-25”), sets forth requirements that must be met for an entity to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered.

Historically, we have entered into contracts with customers to deliver multiple services such as tracking, telemetry and control, satellite capacity and equipment. These elements usually have separate delivery dates. Under the previous guidance, in certain situations we deferred the revenue of all deliverables until the undelivered item had been provided because we were unable to demonstrate vendor-specific objective evidence (“VSOE”) or third-party evidence (“TPE”) for the undelivered items, primarily capacity. The arrangements with multiple deliverables are not common and are non-standard; therefore, they do not constitute a significant portion of the contracts entered into during a given year.

ASU 2009-13 amends ASC Subtopic 605-25 to eliminate the requirement that all undelivered elements must have VSOE or TPE before an entity can recognize the portion that is attributable to items already delivered. In the absence of VSOE or TPE of the stand-alone selling price for one or more delivered or undelivered elements in the arrangement, entities will be required to make a best estimate of the selling prices of those elements. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 with early adoption permitted.

We elected to early adopt ASU 2009-13 on a prospective basis, effective for the first quarter of 2010. The adoption of ASU 2009-13 did not have a material impact on our condensed consolidated statements of operations for the three and nine months ended September 30, 2010 and is not expected to significantly impact future periods.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are primarily exposed to the market risk associated with unfavorable movements in interest rates and foreign currencies. The risk inherent in our market risk sensitive instruments and positions is the potential loss arising from adverse changes in those factors. In addition, with respect to our interest rate swaps as described below, we are exposed to counterparty credit risk, which we seek to minimize through credit support agreements and the review and monitoring of all counterparties. We do not purchase or hold any derivative financial instruments for speculative purposes. On March 15, 2010, our interest rate basis swap with an aggregate notional principal amount of $312.5 million matured. On March 14, 2010, our five-year interest rate swap to hedge interest expense on a notional amount of $625.0 million (originally $1.25 billion of debt, and reduced under the original terms of the swap agreement) expired. On July 23, 2010 the interest rate swap options that permitted us to terminate underlying interest rate swaps covering a notional amount of $717.0 million on March 14, 2011 prior to the stated maturity of March 14, 2013, were cancelled upon receipt of $31.8 million in cash from our counterparties to the respective interest rate swap agreements. During the nine months ended September 30, 2010, there were no other material changes to our market risk sensitive instruments and positions as discussed in our Annual Report on Form 10-K for the year ended December 31, 2009.

 

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and timely reported as provided in SEC rules and forms. We periodically review the design and effectiveness of our disclosure controls and procedures

 

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worldwide, including compliance with various laws and regulations that apply to our operations. We make modifications to improve the design and effectiveness of our disclosure controls and procedures, and may take other corrective action, if our reviews identify a need for such modifications or actions. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

We have carried out an evaluation, under the supervision and the participation of our management, including our principal executive officer and our principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act), as of September 30, 2010. Based upon that evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2010.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

We are subject to litigation in the ordinary course of business, but management does not believe that the resolution of any pending proceedings would have a material adverse effect on our financial position or results of operations.

 

Item 1A. Risk Factors

No material changes in the risks related to our business have occurred since we filed our Annual Report on Form 10-K for the year ended December 31, 2009.

 

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

None.

 

Item 3. Defaults upon Senior Securities

None.

 

Item 4. (Removed and Reserved)

 

Item 5. Other Information

None.

 

Item 6. Exhibits

 

Exhibit No.

  

Document Description

  4.1    Indenture for the 7 1/4% Senior Notes due 2020 dated as of September 30, 2010 by and among Intelsat Jackson Holdings S.A., as Issuer, Intelsat S.A. and Intelsat (Luxembourg) S.A., as Parent Guarantors, the subsidiary guarantors named therein and Wells Fargo Bank, National Association, as Trustee (including the forms of the 2020 Jackson Notes) (incorporated by reference to Exhibit 4.1 of Intelsat S.A.’s Current Report on Form 8-K, File No. 000-50262, filed on October 4, 2010).
  4.2    Registration Rights Agreement dated as of September 30, 2010 by and among Intelsat Jackson Holdings S.A., as Issuer, Intelsat S.A. and Intelsat (Luxembourg) S.A., as Parent Guarantors, the subsidiary guarantors named therein, and Credit Suisse Securities (USA) LLC, as Representative of the several initial purchasers named on Schedule I (incorporated by reference to Exhibit 4.2 of Intelsat S.A.’s Current Report on Form 8-K, File No. 000-50262, filed on October 4, 2010).
  4.3    Third Supplemental Indenture for the 9 1/4% Senior Notes due 2014, dated as of September 29, 2010 among Intelsat Corporation, the subsidiary guarantors named therein and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.3 of Intelsat S.A.’s Current Report on Form 8-K, File No. 000-50262, filed on October 4, 2010).
  4.4    First Supplemental Indenture for the 6 7/8% Senior Secured Debentures due 2028, dated as of September 29, 2010 between Intelsat Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.4 of Intelsat S.A.’s Current Report on Form 8-K, File No. 000-50262, filed on October 4, 2010).
31.1    Certification of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended. *
31.2    Certification of the Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended. *
32.1    Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350. *
32.2    Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350. *

 

* Filed herewith.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    INTELSAT S.A.
Date: November 8, 2010   By   

/s/ DAVID MCGLADE

    David McGlade
    Deputy Chairman and Chief Executive Officer
    INTELSAT S.A.
Date: November 8, 2010   By   

/s/ MICHAEL MCDONNELL

    Michael McDonnell
    Executive Vice President and Chief Financial Officer

 

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