Telesat Corporation
Unaudited Interim Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30

See accompanying notes to the unaudited interim condensed consolidated financial statements

Telesat Corporation
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
September 30, 2022
(all amounts in thousands of Canadian dollars, except where otherwise noted)

2. BASIS OF PRESENTATION (cont.)

Basis of Consolidation

Subsidiaries

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

The portion of equity ownership in a subsidiary that is not directly or indirectly attributable to the Company is booked under non-controlling interest. Non-controlling interests in subsidiaries are identified separately from the Company’s equity therein. Those interests of non-controlling shareholders that are present ownership interests entitling their holders to a proportionate share of net assets upon liquidation may initially be measured at fair value or at the non-controlling interests’ proportionate share of the fair value of the acquiree’s identifiable net assets. The choice of measurement is made on an acquisition-by-acquisition basis. Other non-controlling interests are initially measured at fair value. Subsequent to acquisition, the carrying amount of non-controlling interests is the amount of those interests at initial recognition plus the non-controlling interests’ share of subsequent changes in equity.

Profit or loss and each component of other comprehensive income are attributed to the owners of the Company and to the non-controlling interests. Total comprehensive income of the subsidiaries is attributed to the owners of the Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.

Joint arrangements

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

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

The consolidated financial statements have been prepared on an historical cost basis except for certain financial instruments which were measured at their fair values, as explained in the accounting policies below. Historical cost is based on the fair value of the consideration given or received in exchange for assets or liabilities.

3. CHANGES IN ACCOUNTING POLICIES

IFRS Interpretation Committee (“IFRIC”), Software as a Service arrangements

In April 2021, the IFRIC published an agenda decision clarifying how arrangements in respect of a specific part of cloud technology, Software as a Service (“SaaS”) should be accounted for. The IFRIC interpretation provided specific guidance and included explanatory material which provided additional insights with respect to circumstances in relation to configuration and customization costs incurred in implementing SaaS. Among other things, the interpretation clarified the nature of expenditures that met the definition of an intangible asset, the methods of differentiating between intangible assets and expenses and the pattern in which an entity benefits from expenditure that does not qualify as an intangible asset.

The Company adopted the IFRIC agenda decision retroactively.

An adjustment was recorded as a decrease to the opening balance of accumulated earnings as at January 1, 2021 in the amount of $758.

Telesat Corporation
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
September 30, 2022
(all amounts in thousands of Canadian dollars, except where otherwise noted)

3. CHANGES IN ACCOUNTING POLICIES (cont.)

The impact on the balance sheet as at December 31, 2021 was as follows:

The impact on the financial statements for the three and nine months ended September 30, 2021 was as follows:

4. SIGNIFICANT ACCOUNTING POLICIES

Significant accounting policies are detailed in Note 4 of the consolidated financial statements for the year ended December 31, 2021. Significant changes to the accounting policies as a result of adoption of IFRIC, Software as a service arrangements have been disclosed below.

Software as a service arrangements

Based upon guidance received from the International Accounting Standards Board (“IASB”) staff’s analysis of submissions to the IFRS interpretation committee, a SaaS cloud computing arrangement would be evaluated as to whether it met the criteria under IAS 38, Intangible Assets or IFRS 16, Leases. If an arrangement did not meet either of those criteria, the arrangement would be accounted for as a service contract.

Telesat may enter into a SaaS cloud computing arrangement with a supplier where the contract conveys to Telesat a right to receive future access over the contract term to the supplier’s application software running on the supplier’s cloud infrastructure. The right to receive access does not provide Telesat with a software asset and, therefore, the access to the software is a service which is received over the contract term.

The assessment of whether configuration or customization of a software results in an intangible asset for Telesat depends on the nature and output of the configuration and customization performed. In some circumstances, the arrangement may result in additional code from which Telesat has the power to obtain the future economic benefits and to restrict others’ access to those benefits. In that case, in determining whether to recognise the additional code as an intangible asset, Telesat assesses whether the additional code is identifiable and meets the recognition criteria under IAS 38.

Separately acquired intangible rights (i.e. software licenses in cloud computing arrangements) are normally recognized as assets.

Telesat Corporation
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
September 30, 2022
(all amounts in thousands of Canadian dollars, except where otherwise noted)

4. SIGNIFICANT ACCOUNTING POLICIES (cont.)

Critical judgments in applying accounting policies

The critical accounting judgments and estimates used in the application of the Company’s accounting policies are consistent with those outlined in Note 5 of the consolidated financial statements for the year ended December 31, 2021, with the exception of the update noted below.

Software as a service arrangements

The Company’s accounting policy relating to SaaS is described in Note 4. Judgment by management is required to determine whether configuration or customization of a software results in an intangible asset for Telesat.

Future Changes in Accounting Policies

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

Amendments to IAS 1 and IFRS Practice Statement 2

In February 2021, the IASB issued amendments to IAS 1, Presentation of Financial Statements in which it provides guidance and examples to help entities apply materiality judgments to accounting policy disclosures. The amendments require entities to disclose their material accounting policies rather than their significant accounting policies.

The amendments clarify that accounting policy information is material if users of an entity’s financial statements would need it to understand other material information in the financial statements and that accounting policy information may be material because of its nature, even if the related amounts are immaterial. On the other hand, although a transaction, other event or condition to which the accounting policy information relates may be material, it does not necessarily mean that the corresponding accounting policy information is material to the entity’s financial statements.

The amendments are applied prospectively and are effective for annual periods beginning on or after January 1, 2023 with earlier application permitted.

The changes will only impact the level of disclosures within the Company’s financial statements.

The Company is currently evaluating the impact of the amendment.

Amendments to IAS 12

In May 2021, the IASB issued amendments to IAS 12, Income Taxes.

In specified circumstances, companies are exempt from recognizing deferred tax when they recognize assets or liabilities for the first time. The amendments clarify that such initial recognition exemption does not apply to transactions in which equal amounts of deductible and taxable temporary differences arise on initial recognition. Accordingly, entities are required to recognize deferred tax associated with transactions, such as leases and decommissioning obligations, which give rise to equal and offsetting temporary differences.

The amendments are effective for annual reporting periods beginning on or after January 1, 2023 with early adoption permitted.

There will be no impact on the Company’s condensed consolidated financial statements as a result of the amendments.

There are no other new and amended standards determined to be applicable to the Company.

Telesat Corporation
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
September 30, 2022
(all amounts in thousands of Canadian dollars, except where otherwise noted)

5. SEGMENT INFORMATION

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

The Company derives revenue from the following services:

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

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

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

Revenue derived from the above services were as follows:

Equipment sales included within the various services were as follows:

Geographic Information

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

Telesat Corporation
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
September 30, 2022
(all amounts in thousands of Canadian dollars, except where otherwise noted)

5. SEGMENT INFORMATION (cont.)

For disclosure purposes, the satellites and the intangible assets have been classified based on ownership. Satellites, property and other equipment and intangible assets by geographic regions were allocated as follows:

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

Goodwill was not allocated to geographic regions.

Major Customers

For the three and nine months ended September 30, 2022 and 2021, there were two significant customers each representing more than 10% of consolidated revenue.

6. OPERATING EXPENSES

____________

(a)      Compensation and employee benefits included salaries, bonuses, commissions, post-employment benefits and charges arising from share-based compensation.

(b)      Other operating expenses included general and administrative expenses, marketing expenses, insurance expenses, professional fees and facility costs. The balance for the three and nine months ended September 30, 2022 included $Nil

Telesat Corporation
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
September 30, 2022
(all amounts in thousands of Canadian dollars, except where otherwise noted)

6. OPERATING EXPENSES (cont.)

million and $1.4 million, respectively of leases not capitalized due to exemptions and variable lease payments not included in the measurement of the leases liabilities (three and nine months ended September 30, 2021 - $0.2 million and $1.7 million, respectively).

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

During the fourth quarter of 2021, a third-party was engaged to perform a formal valuation of the fair value of the restricted share units (“RSUs”) issued in the second quarter of 2021. The valuation resulted in an increase in compensation and employee benefits of $6.9 million and $9.5 million in the second and third quarter of 2021, respectively. The three and nine months ended September 30, 2021, have been adjusted to reflect the increase to compensation and employee benefits resulting from the formal valuation.

7. INTEREST EXPENSE

8. INCOME TAXES

Telesat Corporation
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
September 30, 2022
(all amounts in thousands of Canadian dollars, except where otherwise noted)

8. INCOME TAXES (cont.)

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

9. SATELLITES, PROPERTY AND OTHER EQUIPMENT

For the nine months ended September 30, 2022, the Company had additions of $36.8 million (September 30, 2021 — $124.0 million) primarily related to acquisitions associated with the LEO program.

10. GOODWILL AND INTANGIBLE ASSETS

Assessments for goodwill and indefinite life intangible assets are performed annually, or more frequently whenever events or changes in circumstances indicate that the carrying amounts of these assets are likely to exceed their recoverable amount.

Goodwill is tested for impairment at the entity level because it represents the lowest level at which goodwill supports the Company’s operations and is monitored internally.

With the exception of trade name, which has not been allocated to any Cash Generating Unit (“CGU”) and is tested for impairment at the asset level, indefinite life intangible assets are tested for impairment at the CGU level. In the case of orbital slots, the CGU is based on geography.

During 2022, we reviewed the more sensitive assumptions to determine whether or not there were any changes in the assumptions from the valuation that was performed at the end of 2021. Based upon the review performed, the only significant material difference noted was related to the discount rates utilized on the valuation of GEO, U.S. C-band clearing proceeds and orbital slots. In all cases, the discount rate increased from 7.5% to 10.0%.

With this change taken into account, there were no impairments on the goodwill or orbital slots.

Changes to the discount rate could yield different estimates of the fair value. Independent of changes to other key variables, if discount rates continue to increase, it may result in a future impairment of goodwill or orbital slots.

Telesat Corporation
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
September 30, 2022
(all amounts in thousands of Canadian dollars, except where otherwise noted)

11. LEASE LIABILITIES

The expected undiscounted contractual cash flows of the lease liabilities as at September 30, 2022 were as follows:

The undiscounted contractual cash flows included $15.0 million of interest payments.

12. INDEBTEDNESS

On October 11, 2019, Telesat Canada issued, through a private placement, US$550 million of 6.5% Senior Unsecured Notes at an interest rate of 6.5%, which mature in October 2027 (“Senior Unsecured Notes”).

On December 6, 2019, Telesat Canada issued, through private placement, US$400 million 4.875% Senior Secured Notes, at an interest rate of 4.875%, which mature in June 2027 (“Senior Secured Notes”).

On April 27, 2021, Telesat Canada issued US$500 million in aggregate principal amount of 5.625% Senior Secured Notes maturing on December 6, 2026 (“2026 Senior Secured Notes”).

During the nine months ended September 30, 2022, Telesat repurchased for retirement Senior Unsecured Notes with a principal amount of $202.1 million (US$160.0 million) by way of open market purchases in exchange for $97.2 million (US$77.0 million). The repurchase resulted in a write-off of the related debt issue costs and prepayment options in the amount of $1.9 million (US$1.5 million), and a gain on extinguishment of debt of $106.9 million (US$84.5 million).

No repurchases occurred during the three months ended September 30, 2022.

13. SHARE CAPITAL

The Class A Common shares together with the Class B Variable Voting shares represent the Corporation’s Public Shares (“Telesat Public Shares”). The Class C Fully Voting shares and Class C Limited Voting shares shall be referred to as (“Class C Shares”). The Telesat Public Shares and Class C Shares shall represent Telesat Corporation Shares (“Telesat Corporation Shares”). Class A Special Voting Share, Class B Special Voting Share and Class C Special Voting Share together are referred as (“Special Voting Shares”).

Telesat Corporation
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
September 30, 2022
(all amounts in thousands of Canadian dollars, except where otherwise noted)

13. SHARE CAPITAL (cont.)

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

The breakdown of the number of shares of Telesat Public Shares, as at September 30, 2022, was as follows:

The number of Class A Common shares and Class B Variable Voting shares in the table above is based on information available to the Company as at September 30, 2022 and while the Company believes the information to be accurate and reliable, it is not able to independently verify the information. The conversion, exercise and exchange mechanics of Telesat Public shares, the Class C shares and the Class A and Class B Limited Partnership Units (“LP Units”) are described in the Company’s Annual Report filed on Form 20-F for the year ended December 31, 2021 that can be obtained on the SEC’s website at http://www.sec.gov and on SEDAR at http://www.sedar.com. As at September 30, 2022 and December 31, 2021, the only Class C shares which were issued were Class C fully voting shares.

In addition, the Company has one Class A Special Voting Share, one Class B Special Voting Share, one Class C Special Voting Share and one Golden Share outstanding, each with a nominal stated value as at September 30, 2022 and December 31, 2021. The voting rights of the Special Voting Shares and the Golden Share are more fully described in the Company’s Annual Report filed on Form 20-F for the year ended December 31, 2021 that can be obtained on the SEC’s website at http://www.sec.gov and on SEDAR at http://www.sedar.com.

During the nine months ended September 30, 2022, 27,573 RSUs were settled for 12,813 Telesat Public Shares, on a net settlement basis.

During the nine months ended September 30, 2022, 562,351 Telesat Public Shares were issued in exchange for an equal number of Class B LP Units in the Partnership.

The number and stated value of the outstanding LP Units of the Partnership were as follows:

Telesat Corporation
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
September 30, 2022
(all amounts in thousands of Canadian dollars, except where otherwise noted)

13. SHARE CAPITAL (cont.)

The breakdown of the number of Class A and Class B LP units, as at September 30, 2022, was as follows:

During the nine months ended September 30, 2022, 562,351 Class B LP Units were exchanged for an equal number of Telesat Public Shares.

The stated value of Class C LP units as of September 30, 2022, was reduced by an adjustment amount of $21.2 million (US$15.3 million) (see Note 14).

On consolidation into the Corporation, the stated value of the LP Units is included under non-controlling interest.

14. NON-CONTROLLING INTEREST

Non-controlling interests represent equity interests in the Partnership that are not attributable to the Company. As of September 30, 2022, the Corporation held a general partnership interest representing approximately 25% economic interest in the Partnership (December 31, 2021 — approximately 24%). The remaining 75% economic interest represents exchangeable units held by the limited partnership unit holders (December 31, 2021 — 76%).

Net income (loss) attributable to non-controlling interests for 2022 represents the non-controlling interests’ portion of the Partnership’s net income (loss).

In connection with the Transaction, a final adjustment amount was required to be made. The adjustment amount is defined within the Transaction agreement and represents any portion of the inducement payment that was unpaid by Loral, combined with the calculated negative net asset value of Loral.

As at September 30, 2022, $21.2 million (US$15.3 million) was accrued against other current financial liabilities and a reduction in the value of the Class C Partnership Units in the Partnership. Upon consolidation, the reduction in value of the Class C Partnership Units is included in the non-controlling interest. The adjustment amount payment is to be made to Red Isle Private Investment Inc. (“Red Isle”).

15. SHARE-BASED COMPENSATION PLANS

On November 19, 2021, Telesat Corporation adopted an omnibus long-term incentive plan (“Omnibus Plan”). The Omnibus Plan allows for a variety of equity-based awards including stock options, RSUs, performance share units (“PSUs”) and deferred share units (“DSUs”). The stock options, RSUs, PSUs and DSUs are collectively referred to as “Award”. Each Award will represent the right to receive Public Shares or, in the case of PSUs, RSUs or DSUs, Public Shares or cash, in accordance with the terms of the Omnibus Plan.

Telesat Holdings Inc. (the predecessor entity to Telesat Canada and Telesat Corporation) adopted a management stock incentive plan in September 2008, as amended (the “2008 Telesat Plan”) and a second management stock incentive plan in April 2013, as amended (the “2013 Telesat Plan”). In the first half of 2021, Telesat Canada also adopted a restricted share unit plan (the “RSU Plan” together with the 2008 Telesat Plan and 2013 Telesat Plan, the “Historic Plan”).

Telesat Corporation
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
September 30, 2022
(all amounts in thousands of Canadian dollars, except where otherwise noted)

15. SHARE-BASED COMPENSATION PLANS (cont.)

The change in number of time vesting stock options outstanding and their weighted average exercise price under the Omnibus Plan and Historic Plan are summarized below:

The movement in the number of RSUs under the Historic Plan were as follows:

The movement in the number of RSUs, PSUs and DSUs under the Omnibus Plan was as follows:

16. EARNINGS PER SHARE

Basic earnings per share is calculated by dividing the net income for the period attributable to shareholders of each class of shares by the weighted average number of shares outstanding during the period.

Diluted earnings per share is calculated to give effect to equity Awards.

Net income (loss) was equal to diluted net income (loss) for all the periods presented.

The following table presents reconciliations of the denominators of the basic and diluted per share computations:

Telesat Corporation
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
September 30, 2022
(all amounts in thousands of Canadian dollars, except where otherwise noted)

16. EARNINGS PER SHARE (cont.)

Effect of diluted securities represents Telesat Corporation Shares assumed to be issued for no consideration. The difference between the number of Telesat Corporation Shares assumed issued on exercise and Telesat Corporation Shares assumed repurchased are treated as an issuance of common shares for no consideration. For the nine months ended September 30, 2021, there were no DSUs or PSUs issued and outstanding.

For the three and nine months ended September 30, 2021, for the purposes of earnings per share, the Common Shares, Non-Voting Participating Preferred Shares and Voting Participating Preferred Shares of Telesat Canada have equivalent economic rights. The quantity of shares of Telesat Canada, have been converted to take into account the impact of the conversion which occurred in the Transaction.

For the three and nine months ended September 30, 2022, for the purpose of earnings per share, all of the Telesat Public Shares and Class C Shares have equivalent economic rights.

17. CAPITAL DISCLOSURES

The Senior Secured Credit Facilities, Senior Secured Notes and 2026 Senior Secured Notes are secured by substantially all of the Company’s assets, excluding the assets of unrestricted subsidiaries. If the Revolving Facility is drawn, the Senior Secured Credit Facilities require the Company to comply with a first lien net leverage ratio test. As at September 30, 2022, the first lien net leverage ratio was 5.30:1.00, which was less than the maximum test ratio of 5.75:1.00.

The Company’s operating results are tracked against budget on a monthly basis, and this analysis is reviewed by senior management. The Company partly manages its interest rate risk on variable interest rate debt through the use of interest rate swaps (Note 19).

18. GOVERNMENT GRANT

In May 2019, Telesat entered into an agreement for a non-refundable government contribution of a value up to $85 million for a period until July 31, 2023 relating to the Telesat Lightspeed Constellation.

For the nine months ended September 30, 2022, the Company recorded $6.9 million relating to the agreement (nine months ended September 30, 2021 — $10.4 million).

Of the amount recorded in the nine months ended September 30, 2022, $3.4 million was recorded as a reduction to satellites, property and other equipment; $0.1 million as a reduction to prepaid expenses and other current assets and $3.4 million was recorded as a reduction to operating expenses (nine months ended September 30, 2021 — $6.9 million as a reduction to satellites, property and other equipment and $3.5 million recorded as a reduction to operating expenses).

19. FINANCIAL INSTRUMENTS

Measurement of Risks

The Company, through its financial assets and liabilities, is exposed to various risks. The following analysis provides a measurement of risks as at September 30, 2022.

Telesat Corporation
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
September 30, 2022
(all amounts in thousands of Canadian dollars, except where otherwise noted)

19. FINANCIAL INSTRUMENTS (cont.)

Credit risk

Credit risk is the risk that a counterparty to a financial asset will default, resulting in the Company incurring a financial loss. As at September 30, 2022, the maximum exposure to credit risk is equal to the carrying value of the financial assets which totaled $1,740.1 million (December 31, 2021 — $1,589.5 million).

The following table provides breakdown by maturity of financial assets as at September 30, 2022: