LORAL SPACE & COMMUNICATIONS INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

[February 29, 2012]

LORAL SPACE & COMMUNICATIONS INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis should be read in conjunction with our consolidated financial statements (the "financial statements") included in Item 15 of this Annual Report on Form 10-K.

Loral Space & Communications Inc., a Delaware corporation, together with its subsidiaries is a leading satellite communications company engaged in satellite manufacturing with ownership interests in satellite-based communications services.

On October 31, 2007, Loral and its Canadian Partner, Public Sector Pension Investment Board ("PSP"), through Telesat Holdings, Inc. ("Telesat Holdco"), a then newly-formed joint venture, completed the acquisition of Telesat Canada ("Telesat") from BCE Inc. ("BCE"). In connection with this acquisition, Loral transferred on that same date substantially all of the assets and related liabilities of Loral Skynet Corporation ("Loral Skynet") to Telesat. Loral holds a 64% economic interest and 331/3% voting interest in Telesat Holdco. Loral accounts for this investment using the equity method of accounting.

We refer to the acquisition of Telesat and the related transfer of Loral Skynet to Telesat as the Telesat transaction.

Disclosure Regarding Forward-Looking Statements Except for the historical information contained in the following discussion and analysis, the matters discussed below are not historical facts, but are "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995. In addition, we or our representatives have made and may continue to make forward-looking statements, orally or in writing, in other contexts. These forward-looking statements can be identified by the use of words such as "believes," "expects," "plans," "may," "will," "would," "could," "should," "anticipates," "estimates," "project," "intend," or "outlook" or other variations of these words. These statements, including without limitation those relating to Telesat, are not guarantees of future performance and involve risks and uncertainties that are difficult to predict or quantify. Actual events or results may differ materially as a result of a wide variety of factors and conditions, many of which are beyond our control. For a detailed discussion of these and other factors and conditions, please refer to the Commitments and Contingencies section below and to our other periodic reports filed with the Securities and Exchange Commission ("SEC"). We operate in an industry sector in which the value of securities may be volatile and may be influenced by economic and other factors beyond our control. We undertake no obligation to update any forward-looking statements.

46 -------------------------------------------------------------------------------- Table of Contents Overview Businesses Loral has two segments, satellite manufacturing and satellite services. Loral participates in satellite services operations principally through its ownership interest in Telesat.

Satellite Manufacturing Space Systems/Loral, Inc. ("SS/L") is a designer, manufacturer and integrator of powerful satellites and satellite systems for commercial and government customers worldwide. SS/L's design, engineering and manufacturing capabilities have allowed it to develop a large portfolio of highly engineered, mission-critical satellites and secure a strong industry presence. This position provides SS/L with the ability to produce satellites that meet a broad range of customer requirements for broadband internet service to the home, mobile video and internet service, broadcast feeds for television and radio distribution, phone service, civil and defense communications, direct-to-home television broadcast, satellite radio, telecommunications backhaul and trunking, weather and environment monitoring and air traffic control. In addition, SS/L has applied its design and manufacturing expertise to produce spacecraft subsystems, such as batteries for the International Space Station, and to integrate government and other add-on missions on commercial satellites, which are referred to as hosted payloads.

As of December 31, 2011, SS/L had $1.4 billion in backlog for 22 satellites for customers including, among others, Intelsat Global S.A., SES S.A., Telesat Holdings Inc., Hispasat, S.A., EchoStar Corporation, Sirius-XM Satellite Radio, TerreStar Networks, Inc., Asia Satellite Telecommunications Co. Ltd., Hughes Network Systems, LLC, ViaSat, Inc., Eutelsat/ictQatar, DIRECTV, Sing Tel Optus, Satélites Mexicanos, S.A. de C.V., Asia Broadcast Satellite and Telenor Satellite Broadcasting. From January 1, 2012 to February 15, 2012, SS/L was awarded contracts for three satellites, including two satellites for NBN Co.

Limited.

Satellite demand is driven by fleet replacement cycles, increased video, internet and data bandwidth demand and new satellite applications. SS/L expects its future success to derive from maintaining and expanding its share of the satellite construction contracts of its existing customers based on its engineering, technical and manufacturing leadership; its value proposition and record of reliability; the increased demand for new applications requiring high power and capacity satellites such as HDTV, 3-D TV and broadband; and SS/L's expansion of governmental contracts based on its record of reliability and experience with fixed-price contract manufacturing. We also expect SS/L to benefit from the increased revenues from larger and more complex satellites.

The costs of satellite manufacturing include costs for material, subcontracts, direct labor and manufacturing overhead. Due to the long lead times required for certain of our purchased parts, and the desire to obtain volume-related price concessions, SS/L has entered into various purchase commitments with suppliers in advance of receipt of a satellite order. SS/L's costs for material and subcontracts have been relatively stable and are generally provided by suppliers with which SS/L has a long-established history. The number of available suppliers and the cost of qualifying the component for use in a space environment to SS/L's unique requirements limit the flexibility and advantages inherent in multiple sourcing options.

Satellite manufacturers have high fixed costs relating primarily to labor and overhead. Based on its current cost structure, we estimate that SS/L covers its fixed costs, including depreciation and amortization, with an average of four to five satellite awards a year depending on the size, power, pricing and complexity of the satellite. Cash flow in the satellite manufacturing business tends to be uneven. It takes two to three years to complete a satellite project and numerous assumptions are built into the estimated costs. SS/L's cash receipts are tied to the achievement of contract milestones that depend in part on the ability of its subcontractors to deliver on time. In addition, the timing of satellite awards is difficult to predict, contributing to the unevenness of revenue and making it more challenging to align the workforce to the workflow.

47 -------------------------------------------------------------------------------- Table of Contents While its requirement for ongoing capital investment to maintain its current capacity is relatively low, SS/L expects to spend approximately $200 million over the three-year period ending December 31, 2013, including $37 million of expenditures in 2011, related to an infrastructure campaign that includes the building of a second thermal vacuum chamber, completing certain building and systems modifications and purchasing additional test and satellite handling equipment to meet its contractual obligations more efficiently. Upon completion of this infrastructure campaign, we anticipate returning to a more customary level of annual capital expenditures of $30 million to $40 million, excluding major system upgrades caused by additional expansion or technology insertion.

The satellite manufacturing industry is a knowledge-intensive business, the success of which relies heavily on its technological heritage and the skills of its workforce. The breadth and depth of talent and experience resident in SS/L's workforce of approximately 2,900 personnel is one of our key competitive resources.

Satellites are extraordinarily complex devices designed to operate in the very hostile environment of space. This complexity may lead to unanticipated costs during the design, manufacture and testing of a satellite. SS/L establishes provisions for costs based on historical experience and program complexity to cover anticipated costs. As most of SS/L's contracts are fixed price, cost increases in excess of these provisions reduce profitability and may result in losses to SS/L, which may be material. Because the satellite manufacturing industry is highly competitive, buyers have the advantage over suppliers in negotiating prices, and terms and conditions resulting in reduced margins and increased assumptions of risk by manufacturers such as SS/L.

Satellite Services Loral holds a 64% economic interest and a 33 1/3% voting interest in Telesat, the world's fourth largest satellite operator with approximately $5.3 billion of backlog as of December 31, 2011.

Telesat is a leading global fixed satellite services operator, with offices and facilities around the world. Telesat provides its satellite and communication services from a fleet of satellites that occupy Canadian and other orbital locations.

The satellite services business is capital intensive and the build-out of a satellite fleet requires substantial time and investment. Once the investment in a satellite is made, the incremental costs to maintain and operate the satellite is relatively low over the life of the satellite with the exception of in-orbit insurance. Telesat has been able to generate a large contracted revenue backlog by entering into long-term contracts with some of its customers for all or substantially all of a satellite's life. Historically, this has resulted in revenue from the satellite services business being fairly predictable.

At December 31, 2011, Telesat provided satellite services to customers from its fleet of 12 in-orbit satellites. In addition, Telesat owns the Canadian Ka-band payload on the ViaSat-1 satellite which was launched in October 2011. Telesat currently has two satellites under construction: Nimiq 6, which Telesat anticipates will be launched in the first half of 2012, and Anik G1, which Telesat anticipates will be launched in the second half of 2012.

Telesat's commitment to providing strong customer service and its focus on innovation and technical expertise has allowed it to successfully build its business to date. Building on its existing contractual revenue backlog, Telesat's focus is on taking disciplined steps to grow its core business and sell newly launched and existing in-orbit satellite services, and, in a disciplined manner, use the cash flow generated by existing business, contracted expansion satellites and cost savings to strengthen the business.

Telesat believes its satellites offer a strong combination of existing revenue backlog, revenue growth and a strong foundation upon which it will seek to continue to grow its revenue and cash flows. The growth is expected to come from the Canadian payload on the ViaSat-1 satellite, its Nimiq 6 satellite, its Anik G1 satellite, and the sale of available capacity on its existing in-orbit satellites.

Telesat believes that it is well-positioned to serve its customers and the markets in which it participates. Telesat actively pursues opportunities to develop new satellites, particularly in conjunction with current or prospective customers, who will commit to long term service agreements prior to the time the satellite construction contract is signed. Although Telesat regularly pursues opportunities to develop new satellites, it does not procure additional or replacement satellites until it believes there is a demonstrated need and a sound business plan for such satellite capacity.

48-------------------------------------------------------------------------------- Table of Contents Telesat anticipates that it can increase revenue without a proportional increase in operating expenses, allowing for operating margin expansion. The satellite services business is capital intensive and the build-out of a satellite fleet requires substantial time and investment. Once the investment in a satellite is made, the incremental cost to maintain and operate the satellite is relatively low over the life of the satellite, with the exception of in-orbit insurance.

The relatively fixed cost nature of the business, combined with contracted revenue growth and other growth opportunities, is expected to produce growth in income and operating cash flow.

In 2012, Telesat will remain focused on: increasing utilization on its existing satellites, continuing construction of the satellites it is currently procuring, securing additional customer requirements to support the procurement of additional satellites and maintaining cost and operating discipline.

On April 11, 2011, Telesat acquired from Loral the Canadian payload on the ViaSat-1 satellite and a 15-year revenue contract with Xplornet Communications Inc. to make use of the payload. The ViaSat-1 satellite was successfully launched in October 2011 and entered into commercial service in December 2011.

Telesat determined that following the launch in May 2011 of the Telstar 14R/Estrela do Sul 2 satellite, the satellite's north solar array failed to fully deploy. The north solar array anomaly has diminished the amount of power available for the satellite's transponders and has reduced the life expectancy of the satellite. However, the satellite will support all of the existing services to customers formerly provided by Telstar 14/Estrela do Sul, the satellite it replaced at 63° West Longitude, as well as provide some additional capacity for expansion.

Telesat has insurance policies that provide coverage for a total, constructive total or partial loss of Telstar 14R /Estrela do Sul 2. During the third quarter of 2011, Telesat filed a claim under its policies with its insurers. In December 2011, Telesat received insurance proceeds in the amount of $132.7 million. The proceeds will be reinvested in satellite procurements in accordance with the terms and conditions of the Credit Agreement.

Telesat's operating results are subject to fluctuations as a result of exchange rate variations. Approximately 47% of Telesat's revenues received in Canada for the year ended December 31, 2011, a large portion of its expenses and a substantial portion of its indebtedness and capital expenditures were denominated in U.S. dollars. The most significant impact of variations in the exchange rate is on the U.S. dollar denominated debt financing. A five percent change in the value of the Canadian dollar against the U.S. dollar at December 31, 2011 would have increased or decreased Telesat's net income for the year ended December 31, 2011 by approximately $155 million. During the period from October 31, 2007 to December 31, 2011, Telesat's U.S. term loan facility, senior notes and senior subordinated notes have increased by approximately $192 million due to the stronger U.S. dollar. During that same time period, however, the liability created by the fair value of the currency basis swap, which synthetically converts $1.054 billion of the U.S. term loan facility debt into CAD 1.224 billion of debt, decreased by approximately $158 million.

Strategic Developments Telesat's Board of Directors and shareholders have authorized management to explore a refinancing/recapitalization transaction, which, if consummated, could result in, among other things, the incurrence by Telesat of up to approximately CAD 530 million of additional debt and payments to Telesat's option holders and distributions to Telesat's shareholders of up to approximately CAD 705 million, of which up to approximately CAD 420 million would be paid to Loral. Among the factors that may affect the determination whether to proceed with this potential transaction are market conditions for refinancing and incurrence of additional indebtedness. If any transaction results in receipt of proceeds by Loral, Loral would evaluate all alternatives for the use of such proceeds, including stock repurchases and/or a dividend to Loral stockholders.

With regard to SS/L, Loral has been exploring various strategic initiatives relating to the separation of its satellite manufacturing subsidiary from Loral, including a potential spin-off as well as other strategic alternatives. In connection with a potential spin-off, the Loral Board of Directors previously formed a committee of independent directors to negotiate and approve the terms and conditions of the stock that would be distributed in respect of the Company's non-voting common stock pursuant to a spin-off of SS/L and to evaluate alternatives with respect thereto. The Company is considering alternatives to a spin-off for the separation of SS/L from Loral and, as a result, the Company has asked the committee to defer further work on its assignment.

There can be no assurance whether or when any transaction involving Loral, Telesat or SS/L will occur.

49 -------------------------------------------------------------------------------- Table of Contents General We regularly explore and evaluate possible other strategic transactions and alliances. We also periodically engage in discussions with satellite service providers, satellite manufacturers and others regarding such matters, which may include joint ventures and strategic relationships as well as business combinations or the acquisition or disposition of assets. In order to pursue certain of these opportunities, we will require additional funds. There can be no assurance that we will enter into additional strategic transactions or alliances, nor do we know if we will be able to obtain the necessary financing for these transactions on favorable terms, if at all.

In 2008, Loral agreed to purchase the Canadian coverage portion of the ViaSat-1 satellite, which was successfully launched in October 2011. The ViaSat-1 satellite is a high capacity Ka-band spot beam satellite for broadband services that was launched into the 115o West longitude orbital location. Loral also entered into an agreement with Xplornet, Canada's largest rural broadband provider, to deliver high throughput satellite Ka-band capacity for broadband services in Canada. Under the agreement, Xplornet agreed to contract with Loral for the Canadian capacity on the ViaSat-1 satellite and associated gateway services for the expected life of the satellite, now projected to commence in late 2011 or early 2012, and Loral agreed to construct and operate four gateways in Canada. Approximately $50 million had been invested by Loral through April 11, 2011. A portion of these costs was funded by prepayments in 2010 from Xplornet of CAD 2.5 million as required under the agreement. On April 11, 2011, Loral assigned its investment in the Canadian broadband business, including the Canadian coverage portion of the ViaSat-1 satellite, to Telesat for $13 million plus reimbursement of approximately $48 million, representing Loral's net costs incurred through the closing date (see Note 17 to the financial statements). In addition, in connection with the assignment, Telesat agreed that if it obtains certain supplemental capacity on the payload, Loral will be entitled to receive, for four years, one-half of any net revenue actually earned by Telesat on such supplemental capacity.

In connection with the acquisition of our ownership interest in Telesat in 2007, Loral has agreed that, subject to certain exceptions described in Telesat's shareholders agreement, for so long as Loral has an interest in Telesat, it will not compete in the business of leasing, selling or otherwise furnishing fixed satellite service, broadcast satellite service or audio and video broadcast direct to home service using transponder capacity in the C-band, Ku-band and Ka-band (including in each case extended band) frequencies and the business of providing end-to-end data solutions on networks comprised of earth terminals, space segment, and, where appropriate, networking hubs.

Consolidated Operating Results Please refer to Critical Accounting Matters set forth below in this section.

The following discussion of revenues and Adjusted EBITDA (see Note 16 to the financial statements) reflects the results of our business segments for 2011, 2010 and 2009. The balance of the discussion relates to our consolidated results unless otherwise noted.

The common definition of EBITDA is "Earnings Before Interest, Taxes, Depreciation and Amortization." In evaluating financial performance, we use revenues and operating income before depreciation, amortization and stock-based compensation (excluding stock-based compensation from SS/L phantom stock appreciation rights expected to be settled in cash), gain on disposition of net assets and directors' indemnification expense ("Adjusted EBITDA") as the measure of a segment's profit or loss. Adjusted EBITDA is equivalent to the common definition of EBITDA before: gain on disposition of net assets; directors' indemnification expense; gains or losses on litigation not related to our operations; other expense; and equity in net income of affiliates.

Adjusted EBITDA allows us and investors to compare our operating results with that of competitors exclusive of depreciation and amortization, interest and investment income, interest expense, gain on disposition of net assets, directors' indemnification expense, gains or losses on litigation not related to our operations, other expense and equity in net income of affiliates. Financial results of competitors in our industry have significant variations that can result from timing of capital expenditures, the amount of intangible assets recorded, the differences in assets' lives, the timing and amount of investments, the effects of other expense, which are typically for non-recurring transactions not related to the on-going business, and effects of investments not directly managed. The use of Adjusted EBITDA allows us and investors to compare operating results exclusive of these items. Competitors in our industry have significantly different capital structures. The use of Adjusted EBITDA maintains comparability of performance by excluding interest expense.

50-------------------------------------------------------------------------------- Table of Contents We believe the use of Adjusted EBITDA along with U.S. GAAP financial measures enhances the understanding of our operating results and is useful to us and investors in comparing performance with competitors, estimating enterprise value and making investment decisions. Adjusted EBITDA as used here may not be comparable to similarly titled measures reported by competitors. We also use Adjusted EBITDA to evaluate operating performance of our segments, to allocate resources and capital to such segments, to measure performance for incentive compensation programs and to evaluate future growth opportunities. Adjusted EBITDA should be used in conjunction with U.S. GAAP financial measures and is not presented as an alternative to cash flow from operations as a measure of our liquidity or as an alternative to net income as an indicator of our operating performance.

Loral has two segments: Satellite Manufacturing and Satellite Services. Our segment reporting data includes unconsolidated affiliates that meet the reportable segment criteria. The Satellite Services segment includes 100% of the results reported by Telesat for the years ended December 31, 2011, 2010 and 2009. Although we analyze Telesat's revenue and expenses under the Satellite Services segment, we eliminate its results in our consolidated financial statements, where we report our 64% share of Telesat's results under the equity method of accounting.

The following reconciles Revenues and Adjusted EBITDA on a segment basis to the information as reported in our financial statements (in millions): Revenues: September 30, September 30, September 30, Year Ended December 31, 2011 2010 2009 (In millions) Satellite Manufacturing $ 1,108.2 $ 1,165.1 $ 1,008.7 Satellite Services 817.3 797.3 691.6 Segment revenues 1,925.5 1,962.4 1,700.3 Eliminations(1) (0.8 ) (6.1 ) (15.3 ) Affiliate eliminations(2) (817.3 ) (797.3 ) (691.6 ) Revenues as reported(3) $ 1,107.4 $ 1,159.0 $ 993.4 See explanations below for Notes 1, 2 and 3.

Changes in revenues from period to period are influenced by the size, timing and number of satellite contracts awarded in the current and preceding years and the length of the construction period for satellite contracts awarded. Revenues are recognized on the cost-to-cost percentage of completion method over the construction period, which usually ranges between 24 and 36 months. Large satellites with significant new development can require up to 48 months for completion.

Revenues from Satellite Manufacturing before eliminations decreased $57 million for the year ended December 31, 2011 as compared to 2010, due to an $81 million reduction in revenues generated by the percentage of completion effect of lower costs incurred in 2011 resulting from the timing of manufacturing activity and the average size and profitability of satellites under construction during the period and the Telstar 14R anomaly impact of $13 million, partially offset by improved factory efficiency (which reduces the estimated cost to complete and increases the percentage of completion and the revenue recognized) of $37 million. Eliminations for the year ended December 31, 2011 and 2010 consist primarily of revenue applicable to Loral's interest in a portion of the payload of the ViaSat-1 satellite which was being constructed by SS/L (see Note 17 to the financial statements). Eliminations decreased in 2011 due to the sale of Loral's portion of the ViaSat-1 payload on April 11, 2011.

Satellite Services segment revenue increased by $20 million for the year ended December 31, 2011 as compared to 2010 primarily due to the impact of the change in the U.S. dollar/Canadian dollar exchange rate on Canadian dollar denominated revenues. In addition, revenue growth in Telesat's international enterprise activities and in its Infosat subsidiary was partially offset by a scheduled rate reduction on a long-term contract. Satellite Services segment revenues excluding foreign exchange impact would have increased by approximately $3 million for the year ended December 31, 2011 as compared with 2010.

51-------------------------------------------------------------------------------- Table of Contents Revenues from Satellite Manufacturing before eliminations increased $156 million for 2010 as compared to 2009, due to $112 million of higher revenues generated by increased satellite contract awards, improved factory performance (which reduces the estimated cost to complete and increases the percentage of completion and the revenue recognized) of $59 million and a $5 million increase in performance incentives earned, net of penalties, partially offset by a revenue decrease of $20 million from prior year contract scope additions, which generated higher revenues in 2009. Eliminations for 2010 and 2009 consist primarily of revenue applicable to Loral's interest in a portion of the payload of the ViaSat-1 satellite which is being constructed by SS/L (see Note 17 to the financial statements).

Satellite Services segment revenue increased by $106 million for 2010 as compared to 2009 primarily due to the impact of the change in the U.S.

dollar/Canadian dollar exchange rate on Canadian dollar denominated revenues, settlements from two terminated contracts, an increase in equipment sales due to the completion of a significant project, growth in Telstar 18 service, the full year effect of Nimiq 5 and increased revenue from Telstar 11N, partially offset by the termination of leasehold interests in Telstar 10, the removal of Nimiq 3 from service and decreased revenue from services provided to the automotive industry. Satellite Services segment revenues would have increased by approximately $63 million for 2010 as compared with 2009 if the U.S.

dollar/Canadian dollar exchange rate had been unchanged between the two periods.

Adjusted EBITDA: September 30, September 30, September 30, Year Ended December 31, 2011 2010 2009 (In millions) Satellite Manufacturing $ 137.7 $ 143.1 $ 90.6 Satellite Services 629.2 606.7 488.1 Corporate expenses (17.2 ) (17.9 ) (21.4 ) Segment Adjusted EBITDA before eliminations 749.7 731.9 557.3 Eliminations(1) (0.3 ) (1.5 ) (1.7 ) Affiliate eliminations(2) (629.2 ) (606.7 ) (488.1 ) Adjusted EBITDA $ 120.2 $ 123.7 $ 67.5 See explanations below for Notes 1 and 2.

Satellite Manufacturing segment Adjusted EBITDA decreased $5 million for the year ended December 31, 2011 compared with the year ended December 31, 2010. The decrease was primarily due to a $14 million increase in research and development expenses, a $13 million increase in marketing expenses primarily as a result of increased proposal activity, a $27 million reduction that resulted from the lower profitability on the mix of satellites under construction in 2011 and the Telstar 14R anomaly impact of $13 million, partially offset by margin increases of $35 million from improved factory efficiency and $27 million as a result of a loss recorded in 2010 on a 2010 contract award. The Adjusted EBITDA margin remained the same at 12% for the years ended December 31, 2011 and 2010.

Satellite Services segment Adjusted EBITDA increased by $23 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010 primarily due to the revenue increase described above and cost reductions related to operating discipline, lower revenue related expenses and lower in-orbit insurance premiums, partially offset by the impact of U.S.

dollar/Canadian dollar exchange rate on Canadian dollar denominated expenses and increased cost of equipment sales. Satellite Services segment Adjusted EBITDA excluding foreign exchange impact would have increased by $10 million for the year ended December 31, 2011 as compared with the year ended December 31, 2010.

Corporate expenses decreased by approximately $1 million for the year ended December 31, 2011 compared to the year ended December 31, 2010 primarily due to reduced fringe expenses related to stock-based compensation.

52-------------------------------------------------------------------------------- Table of Contents Satellite Manufacturing segment Adjusted EBITDA increased $53 million for 2010 compared with 2009. The increase consists of $55 million from improved factory performance, $35 million from the increased sales volume, $9 million from performance incentives earned, net of penalties and a $4 million decrease in selling, general and administrative expenses (other than depreciation and amortization), partially offset by a decrease of $20 million from prior year contract scope additions, a $27 million loss resulting from a contract award in the third quarter of 2010 and a $3 million increase in stock-based compensation from SS/L phantom stock appreciation rights that are expected to be paid in cash. As a result, the Adjusted EBITDA margin increased to 12% in 2010 from 9% in 2009.

Satellite Services segment Adjusted EBITDA increased by $119 million for 2010 as compared to 2009 primarily due to the revenue increase described above, expense reductions as a result of efficiencies gained from restructuring, reductions in third party satellite capacity, elimination of expenses associated with decreased revenue from services provided to the automotive industry and restructuring charges of $3 million in 2009, partially offset by the impact of the U.S. dollar/Canadian dollar exchange rate on Canadian dollar denominated expenses. Satellite Services segment Adjusted EBITDA would have increased by approximately $87 million for 2010 as compared with 2009 if the U.S.

dollar/Canadian dollar exchange rate had been unchanged between the two periods.

Corporate expenses decreased for 2010 compared to 2009 primarily due to a $4 million reduction in deferred compensation expense because the maximum award under the deferred compensation plan was reached in 2009, and a $2 million decrease in legal fees, partially offset by a $2 million increase in stock-based compensation from SS/L phantom stock appreciation rights that are expected to be paid in cash.

Reconciliation of Adjusted EBITDA to Net Income: September 30, September 30, September 30, Year Ended December 31, 2011 2010 2009 (In millions) Adjusted EBITDA $ 120.2 $ 123.7 $ 67.5 Depreciation, amortization and stock-based compensation(4) (33.7 ) (36.3 ) (47.3 ) Gain on disposition of net assets 6.9 - - Directors' indemnification expense (5) - (6.8 ) - Operating income 93.4 80.6 20.2 Interest and investment income 21.4 13.5 8.3 Interest expense (2.7 ) (3.1 ) (1.4 ) Gain on litigation(6) 4.5 5.0 - Other expense (6.6 ) (2.9 ) (0.1 ) Income tax (provision) benefit (7) (89.1 ) 308.6 (5.6 ) Equity in net income of affiliates 106.3 85.6 210.3 Net income $ 127.2 $ 487.3 $ 231.7 (1) Represents the elimination of intercompany sales and intercompany Adjusted EBITDA, primarily for satellites under construction by SS/L for Loral and its wholly owned subsidiaries.

(2) Represents the elimination of amounts attributed to Telesat whose results are reported in our consolidated statements of operations as equity in net income of affiliates.

(3) Includes revenues from affiliates of $140.0 million, $137.2 million and $92.1 million for the years ended December 31, 2011, 2010 and 2009, respectively.

(4) Includes non-cash stock-based compensation of $1.2 million, $2.5 million and $7.5 million for the years ended December 31, 2011, 2010 and 2009, respectively (see Note 11 to the financial statements).

(5) Represents the indemnification of legal expenses, net of insurance recovery, incurred by MHR-affiliated directors in defense of claims asserted against them in their capacity as directors of Loral.

(6) Represents income from directors' and officers insurance recoveries related to plaintiffs' fees in shareholder litigation.

(7) During the fourth quarter of 2010, we determined, based on all available evidence, that a full valuation allowance was no longer required on our deferred tax assets and, therefore, $335.3 million of the valuation allowance was reversed as an income tax benefit (see Note 10 to the financial statements).

53 -------------------------------------------------------------------------------- Table of Contents 2011 Compared with 2010 and 2010 Compared with 2009 The following compares our consolidated results for 2011, 2010 and 2009 as presented in our financial statements: Revenue from Satellite Manufacturing September 30, September 30, September 30, September 30, September 30, % Increase (Decrease) Year Ended 2011 2010 December 31, vs. vs.

2011 2010 2009 2010 2009 (In millions) Revenue from Satellite Manufacturing $ 1,108 $ 1,165 $ 1,008 (5 %) 16 % Eliminations (1 ) (6 ) (15 ) (83 %) (60 %) Revenue from Satellite Manufacturing as reported $ 1,107 $ 1,159 $ 993 (4 %) 17 % Revenues from Satellite Manufacturing before eliminations decreased $57 million for the year ended December 31, 2011 as compared to 2010, due to an $81 million reduction in revenues generated by the percentage of completion effect of lower costs incurred in 2011 resulting from the timing of manufacturing activity and the average size and profitability of satellites under construction during the period and the Telstar 14R anomaly impact of $13 million, partially offset by improved factory efficiency (which reduces the estimated cost to complete and increases the percentage of completion and the revenue recognized) of $37 million. Eliminations for the year ended December 31, 2011 and 2010 consist primarily of revenue applicable to Loral's interest in a portion of the payload of the ViaSat-1 satellite which was being constructed by SS/L (see Note 17 to the financial statements). Eliminations decreased in 2011 due to the sale of Loral's portion of the ViaSat-1 payload on April 11, 2011. As a result, revenues from Satellite Manufacturing as reported decreased $52 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010.

Revenues from Satellite Manufacturing before eliminations increased for 2010 as compared to 2009 due to $112 million of higher revenues generated by increased satellite contract awards, improved factory performance (which reduces the estimated cost to complete and increases the percentage of completion and the revenue recognized) of $59 million and a $5 million increase in performance incentives earned, net of penalties, partially offset by a revenue decrease of $20 million from prior year contract scope additions, which generated higher revenues in 2009. Eliminations for 2010 and 2009 consist primarily of revenue applicable to Loral's interest in a portion of the payload of the ViaSat-1 satellite which is being constructed by SS/L (see Note 17 to the financial statements). As a result, revenues from Satellite Manufacturing as reported increased $166 million for 2010 as compared to 2009.

Cost of Satellite Manufacturing September 30, September 30, September 30, September 30, September 30, % Increase (Decrease) Year Ended 2011 2010 December 31, vs. vs.

2011 2010 2009 2010 2009 (In millions) Cost of Satellite Manufacturing $ 909 $ 987 $ 880 (8 %) 12 % Cost of Satellite Manufacturing as a % of Satellite Manufacturing revenues as reported 82 % 85 % 89 % Cost of Satellite Manufacturing decreased by $78 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010 as a result of a $48 million decrease from the timing of manufacturing activity, a $24 million decrease from a loss recorded in 2010 on a 2010 contract award and a $5 million reduction in depreciation and amortization.

Cost of Satellite Manufacturing increased by $107 million for 2010 as compared to 2009 as a result of a $92 million increase from the higher sales volume and the $27 million loss from a contract award in the third quarter of 2010, partially offset by a $7 million decrease in amortization and a $2 million decrease in stock-based compensation.

54-------------------------------------------------------------------------------- Table of Contents Selling, General and Administrative Expenses September 30, September 30, September 30, September 30, September 30, % Increase (Decrease) Year Ended 2011 2010 December 31, vs. vs.

2011 2010 2009 2010 2009 (In millions) Selling, general and administrative expenses 112 85 93 32 % (4 %) % of revenues as reported 10 % 7 % 9 % Selling, general and administrative expenses increased by $27 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010, primarily due to a $13 million increase in marketing expenses primarily as a result of increased proposal activity and a $14 million increase in research and development expenses.

Selling, general and administrative expenses decreased by $8 million for 2010 as compared to 2009, primarily due to a $5 million reduction in deferred compensation expense because the maximum award under the deferred compensation plan was reached in 2009, a $3 million decrease in research and development expenses, a $3 million increase in the allowance for billed receivables in the third quarter of 2009 and a $2 million decrease in legal fees, partially offset by a $4 million increase in new business acquisition expenses and a $3 million increase in stock-based compensation.

Gain on Disposition of Net Assets Gain on disposition of net assets for the year ended December 31, 2011 represents the gain associated with the sale of Loral's portion of the ViaSat-1 payload and related net assets to Telesat, net of the elimination of Loral's 64% ownership interest in Telesat.

Directors' Indemnification Expense Directors' indemnification expense for the year ended December 31, 2010 represents our indemnification of legal expenses incurred by MHR-affiliated directors in defense of claims asserted against them in their capacity as directors of Loral, net of directors and officers insurance recoveries (see Note 15 to the financial statements).

Interest and Investment Income September 30, September 30, September 30, Year Ended December 31, 2011 2010 2009 (In millions) Interest and investment income $ 21 $ 14 $ 8 Interest and investment income increased by $7 million for 2011 as compared to 2010, primarily due to $5 million of increased interest income on long-term orbital receivables as a result of satellite launches and interest income on directors and officers liability insurance claims.

Interest and investment income increased by $6 million for 2010 as compared to 2009, primarily due to increased interest income on long-term orbital receivables as a result of satellite launches.

55-------------------------------------------------------------------------------- Table of Contents Interest Expense September 30, September 30, September 30, Year Ended December 31, 2011 2010 2009 (In millions) Interest expense $ 3 $ 3 $ 1 Interest expense for 2011, 2010 and 2009 consists primarily of fees and amortization of issuance costs related to the SS/L credit agreement and the interest related to the ChinaSat transponders. Interest expense for 2009 includes a $1 million reversal of interest expense previously recorded due to the favorable resolution of a contingent liability.

Gain on Litigation For each of the years ended December 31, 2011 and 2010, we recorded income of $5.0 million from directors and officers insurance recoveries related to plaintiffs fees for shareholders litigation arising from the issuance of our Series-1 Preferred Stock which was concluded during 2008 (see Note 15 to the financial statements).

Other Expense Other expense for the year ended December 31, 2011, includes expenses related to the evaluation of strategic alternatives for SS/L and preparation for a potential spin-off of SS/L.

Other expense for the year ended December 31, 2010, includes expenses related to the evaluation of strategic alternatives for SS/L and preparation and filing of registration statements and amendments related to a potential initial public offering of SS/L, partially offset by the reversal of a liability related to the sale of certain assets in a prior year.

Income Tax Provision Until the fourth quarter of 2010, we maintained a 100% valuation allowance against our net deferred tax assets except with regard to the deferred tax assets related to AMT credit carryforwards. During the fourth quarter of 2010, we determined, based on all available evidence, that it was more likely than not that we would realize the benefit from a significant portion of our deferred tax assets in the future, and therefore, a full valuation allowance was no longer required. Accordingly, during the fourth quarter of 2010, we reversed $335.3 million of our valuation allowance as a deferred income tax benefit. As of December 31, 2011, we maintained a valuation allowance of $10.9 million against our deferred tax assets for certain tax credit and loss carryovers due to the limited carryforward periods and character of such attributes and will continue to maintain such valuation allowance until sufficient positive evidence exists to support its full or partial reversal.

For 2011, we recorded a current tax provision of $19.9 million (which included a provision of $17.1 million to increase our liability for uncertain tax positions ("UTPs") ) and a deferred tax provision of $69.2 million (which included a benefit of $17.9 million for UTPs), resulting in a total provision of $89.1 million on pre-tax income of $110.0 million. For 2010, we recorded a current tax provision of $16.6 million (which included a provision of $11.5 million to increase our liability for UTPs) and a deferred tax benefit of $325.2 million (which included a benefit of $14.1 million for UTPs), resulting in a total tax benefit of $308.6 million on pre-tax income of $93.1 million. For 2009, we recorded a current tax provision of $5.8 million (which included a provision of $2.3 million to increase our liability for UTPs) and a deferred tax benefit of $0.2 million, resulting in a total provision of $5.6 million on pre-tax income of $27.0 million.

For 2011, the additional provision is primarily attributable to the impact of our equity in net income of Telesat on the deferred income tax provision after having reversed our valuation allowance in the fourth quarter of 2010.

See Critical Accounting Matters - Taxation below for discussion of our accounting method for income taxes.

56-------------------------------------------------------------------------------- Table of Contents Equity in Net Income of Affiliates September 30, September 30, September 30, Year Ended December 31, 2011 2010 2009 (In millions) Telesat $ 114.5 $ 92.8 $ 213.2 XTAR (6.7 ) (7.0 ) (2.7 ) Other (1.5 ) (0.2 ) (0.2 ) $ 106.3 $ 85.6 $ 210.3 Equity in net income of affiliates for the year ended December 31, 2011, includes a charge of $1.5 million to reduce the carrying value of our investment in an affiliate to zero based on our determination that the investment has been impaired and the impairment is other than temporary.

Loral's equity in net income of Telesat is based on our proportionate share of Telesat's results in accordance with U.S. GAAP and in U.S. dollars. The amortization of Telesat fair value adjustments applicable to the Loral Skynet assets and liabilities acquired by Telesat in 2007 is proportionately eliminated in determining our share of the net income of Telesat. Our equity in net income of Telesat also reflects the elimination of our profit, to the extent of our beneficial interest, on satellites we are constructing for Telesat.

Summary financial information for Telesat in accordance with U.S. GAAP and in Canadian dollars ("CAD") and U.S. dollars ("$") for the years ended December 31, 2011, 2010 and 2009 and as of December 31, 2011 and 2010 follows (in millions): September 30, September 30, September 30, September 30, September 30, September 30, Year Ended December 31 Year Ended December 31 2011 2010 2009 2011 2010 2009 (In Canadian dollars) (In U.S. dollars) Statement of Operations Data: Revenues 808.4 821.4 788.7 817.3 797.3 691.6 Operating expenses (186.0 ) (196.5 ) (232.0 ) (188.1 ) (190.7 ) (203.4 ) Depreciation, amortization and stock-based compensation (245.3 ) (256.8 ) (262.5 ) (248.0 ) (249.3 ) (230.2 ) Gain on insurance proceeds 135.0 - - 136.5 - - Impairment of intangible assets (1.1 ) - - (1.1 ) - - (Loss) gain on disposition of long-lived assets (1.5 ) 3.9 33.4 (1.5 ) 3.7 29.3 Operating income 509.5 371.9 327.6 515.1 361.0 287.3 Interest expense (218.2 ) (241.6 ) (260.0 ) (220.6 ) (234.5 ) (228.0 ) Foreign exchange (losses) gains (80.1 ) 164.0 500.9 (81.0 ) 159.2 439.2 Gains (losses) on financial instruments 50.1 (79.2 ) (169.9 ) 50.7 (76.9 ) (149.0 ) Other income (expense) 2.0 0.6 (0.9 ) 2.0 0.6 (0.7 ) Income tax provision (64.6 ) (42.4 ) (2.5 ) (65.3 ) (41.2 ) (2.2 ) Net income loss 198.7 173.3 395.2 200.9 168.2 346.6 Average exchange rate for translating Canadian dollars to U.S. dollars .9891 1.0302 1.1405 September 30, September 30, September 30, September 30, As of December 31, As of December 31, 2011 2010 2011 2010 (In Canadian dollars) (In U.S. dollars) Balance Sheet Data: Current assets 359.3 290.8 351.8 291.4 Total assets 5,461.1 5,298.8 5,347.2 5,309.4 Current liabilities 295.6 293.9 289.4 294.5 Long-term debt, including current portion 2,877.9 2,923.0 2,817.9 2,928.9 Total liabilities 4,131.8 4,137.1 4,045.6 4,145.3 Redeemable preferred stock 141.4 141.4 138.5 141.7 Shareholders' equity 1,187.9 1,020.4 1,163.1 1,022.4 Period end exchange rate for translating Canadian dollars to U.S. dollars 1.0213 0.9980 Following the May 2011 launch of Telstar 14R/Estrela do Sul 2, an SS/L-built satellite, the satellite's north solar array failed to fully deploy. The north solar array anomaly has diminished the amount of power available for the satellite's transponders and has reduced the life expectancy of the satellite.

As a result, during the third quarter of 2011, Telesat carried out an impairment test for the satellite. Based on Telesat management's best estimates and assumptions, there was no impairment in Telstar 14R/Estrela do Sul 2 and as a result no adjustment to the carrying value of the asset was required. In December 2011, Telesat received insurance proceeds of $132.7 million from its insurers with respect to the claim Telesat filed for the failed solar array deployment.

57 -------------------------------------------------------------------------------- Table of Contents Gain on disposition of long-lived assets in 2009 results from the transfer of Telesat's leasehold interests in the Telstar 10 satellite and related contracts to APT Satellite for a total consideration of approximately $69 million.

Telesat's operating results are subject to fluctuations as a result of exchange rate variations to the extent that transactions are made in currencies other than Canadian dollars. Telesat's main currency exposures as of December 31, 2011, lie in its U.S. dollar denominated cash and cash equivalents, accounts receivable, accounts payable and debt financing. The most significant impact of variations in the exchange rate is on the U.S. dollar denominated debt financing. We estimated that, after considering the impact of hedges, a five percent change in the value of the Canadian dollar against the U.S. dollar at December 31, 2011 would have increased or decreased Telesat's net income for the year 2011 by approximately $155 million. During the period from October 31, 2007 to December 31, 2011, the carrying value of Telesat's U.S. Term Loan Facility, Senior Notes and Senior Subordinated Notes has increased by approximately $192 million due to the stronger U.S. dollar. During that same time period, however, the liability created by the fair value of the currency basis swap, which synthetically converts $1.054 billion of the U.S. Term Loan Facility debt into CAD 1.224 billion of debt, decreased by approximately $158 million.

The equity losses in XTAR, LLC ("XTAR"), our 56% owned joint venture, represent our share of XTAR losses incurred in connection with its operations.

We regularly evaluate our investment in XTAR to determine whether there has been a decline in fair value that is other than temporary. During November 2011 and January 2012, XTAR reduced its revenue forecast for 2012 and subsequent years.

We have performed an impairment test for our investment in XTAR as of December 31, 2011, using the January 2012 forecast, and concluded that our investment in XTAR was not impaired. Any further declines in XTAR's projected revenues may result in a future impairment charge.

Backlog Backlog as of December 31, 2011 and 2010 was as follows (in millions): September 30, September 30, 2011 2010 Satellite Manufacturing $ 1,426 $ 1,625 Satellite Services 5,333 5,477 Total backlog before eliminations 6,759 7,102 Satellite Manufacturing eliminations - (4 ) Satellite Services eliminations (5,333 ) (5,477 ) Total backlog $ 1,426 $ 1,621 It is expected that approximately 62% of satellite manufacturing backlog as of December 31, 2011 will be recognized as revenue during 2012.

It is expected that approximately 11% of satellite services backlog will be recognized as revenue during 2012.

As of December 31, 2011, Telesat had received approximately $399 million of customer prepayments, none of which is related to satellites under construction.

Critical Accounting Matters The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of revenues and expenses reported for the period. Actual results could differ from estimates.

Revenue Recognition Most of our Satellite Manufacturing revenue is associated with long-term fixed-price contracts. Revenue and profit from satellite sales under these long-term contracts are recognized using the cost-to-cost percentage of completion method, which requires significant estimates. We use this method because reasonably dependable estimates can be made based on historical experience and various other assumptions that are believed to be reasonable under the circumstances. These estimates include forecasts of costs and schedules, estimating contract revenue related to contract performance (including estimated amounts for penalties and performance incentives that will be received as the satellite performs on orbit) and the potential for component obsolescence in connection with long-term procurements. Estimated amounts for performance incentives and penalties are included in contract value when and to the extent that it is probable such amounts will be paid or received.

Performance incentives and penalties relate primarily to on-orbit performance of the satellite and early or late delivery of the satellite, although a limited number of contracts include performance incentives and penalties related to mass, payload performance and other items.

58-------------------------------------------------------------------------------- Table of Contents Satellite construction contracts often include provisions for performance incentives pursuant to which a portion of the contract value (typically about 10%) is at risk, over the life of the satellite (typically 15 years), contingent upon the in-orbit performance of the satellite in accordance with contractual specifications. These performance incentives are structured in two forms: (i) under warranty payback, the customer pays the entire amount of the performance incentives during the period of satellite construction and such performance incentive amounts are subject to warranty claims, or (ii) under orbital receivables, the customer makes payments of performance incentives at regular intervals (often monthly) over the in-orbit life of the satellite.

Performance incentives, whether warranty payback or orbital receivables, are included in revenues during the construction period of the satellite. The amount of performance incentives recorded as revenues is net of (i) a factor based on past experience to reflect the risk that a portion of the performance incentives will be lost due to non-performance and (ii) in the case of orbital receivables, a discount for the time value of money because the amounts will be collected over the operating life of the satellite.

Estimates for performance incentives and penalties are assessed continually during the term of the contract and revisions are reflected when the conditions become known. Changes in estimates are typically the result of schedule changes that affect performance incentives and penalties, changes in contract scope, changes in new business forecasts that can affect the level of overhead allocated to a given contract and changes in estimates on contracts as a result of the complex nature of the satellites we manufacture. Changes in estimates are included in sales and cost of sales using the cumulative catch-up method, which recognizes the cumulative effect of changes in estimates on current and prior periods in the current period based on a contract's completion percentage.

Provisions for losses on contracts are recorded when estimates determine that a loss will be incurred on a contract at completion. Under firm fixed-price contracts, work performed and products shipped are paid for at a fixed price without adjustment for actual costs incurred in connection with the contract; accordingly, favorable changes in estimates in a period will result in additional revenue and profit, and unfavorable changes in estimates will result in a reduction of revenue and profit or the recording of a loss that will be borne solely by us. For the years ended December 31, 2011, 2010 and 2009, cumulative catch up adjustments related to prior year activity as a result of changes in contract estimates increased operating income by $48 million, $59 million and $41 million, respectively, and diluted earnings per share by $0.90, $1.15 and $0.62, respectively.

Billed Receivables and Long-Term Receivables We are required to estimate the collectability of our long-term receivables and billed receivables which are included in contracts in process on our consolidated balance sheet. A considerable amount of judgment is required in assessing the collectability of these receivables, including the current creditworthiness of each customer and related aging of the past due balances.

Charges for bad debts recorded to the statements of operations on billed receivables for the years ended December 31, 2011, 2010 and 2009, were nil, nil and $2.8 million, respectively. At December 31, 2011, 2010 and 2009, billed receivables were net of allowances for doubtful accounts of $0.2 million, $0.2 million and $3.7 million, respectively. We evaluate specific accounts when we become aware of a situation where a customer may not be able to meet its financial obligations due to a deterioration of its financial condition, credit ratings or bankruptcy. The reserve requirements are based on the best facts available to us and are re-evaluated periodically. Performance incentives, whether warranty payback or orbital receivables, are recorded as receivables on our balance sheet as we record the revenues on the satellite during the construction period, which is typically two to three years. Performance incentives structured as warranty payback are included in contracts in process, and orbital receivables, which are collected over the in-orbit life of the satellite, are included in long-term receivables.

Inventories Inventories are reviewed for estimated obsolescence or unusable items and, if appropriate, are written down to the net realizable value based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those we project, additional inventory write-downs may be required. These are considered permanent adjustments to the cost basis of the inventory. Charges for inventory obsolescence included in the consolidated statements of operations were nil, $4.3 million and $1.0 million for the years ended December 31, 2011, 2010 and 2009, respectively.

59-------------------------------------------------------------------------------- Table of Contents Fair Value Measurements U.S. GAAP defines fair value as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants.

U.S. GAAP also establishes a fair value hierarchy that gives the highest priority to observable inputs and the lowest priority to unobservable inputs.

The three levels of the fair value hierarchy are described below: Level 1: Inputs represent a fair value that is derived from unadjusted quoted prices for identical assets or liabilities traded in active markets at the measurement date.

Level 2: Inputs represent a fair value that is derived from quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities, and pricing inputs, other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.

Level 3: Inputs are generally unobservable and typically reflect management's estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.

These provisions are applicable to all of our assets and liabilities that are measured and recorded at fair value.

Assets and Liabilities Measured at Fair Value on a Recurring Basis The following table presents our assets and liabilities measured at fair value on a recurring basis at December 31, 2011: September 30, September 30, September 30, Level 1 Level 2 Level 3 (In thousands) Assets Cash equivalents: Money market funds $ 191,482 $ - $ - Available-for-sale securities: Communications industry $ 531 $ - $ - Derivatives: Foreign exchange contracts $ - $ 1 $ - Non-qualified pension plan assets $ 844 $ - $ - Liabilities Derivatives: Foreign exchange contracts $ - $ 4,622 $ - The Company does not have any non-financial assets or non-financial liabilities that are recognized or disclosed at fair value on a recurring basis as of December 31, 2011.

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis We review the carrying values of our equity method investments when events and circumstances warrant and consider all available evidence in evaluating when declines in fair value are other than temporary. The fair values of our investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables and discounted cash flow projections. An impairment charge would be recorded when the carrying amount of the investment exceeds its current fair value and is determined to be other than temporary.

60-------------------------------------------------------------------------------- Table of Contents Taxation Loral is subject to U.S. federal, state and local income taxation on its worldwide income and foreign taxes on certain income from sources outside the United States. Our foreign subsidiaries are subject to taxation in local jurisdictions. Telesat is subject to tax in Canada and other jurisdictions and Loral will provide in operating earnings any additional U.S. current and deferred tax required on distributions received or deemed to be received from Telesat.

We use the liability method in accounting for taxes whereby income taxes are recognized during the year in which transactions are recorded in the financial statements. Deferred taxes reflect the future tax effect of temporary differences between the carrying amount of assets and liabilities for financial and income tax reporting and are measured by applying anticipated statutory tax rates in effect for the year during which the differences are expected to reverse. We assess the recoverability of our deferred tax assets and, based upon this analysis, record a valuation allowance against the deferred tax assets to the extent recoverability does not satisfy the "more likely than not" recognition criteria.

The tax effects of an uncertain tax position ("UTP") taken or expected to be taken in income tax returns are recognized only if it is "more likely-than-not" to be sustained on examination by the taxing authorities, based on its technical merits as of the reporting date. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. We recognize potential accrued interest and penalties related to UTPs in income tax expense on a quarterly basis.

We recognize the benefit of a UTP in the period when it is effectively settled.

Previously recognized tax positions are derecognized in the first period in which it is no longer more likely than not that the tax position would be sustained upon examination. Evaluating the technical merits of a tax position and determining the benefit to be recognized involves a significant level of judgment in the assumptions underlying such evaluation.

Pension and Other Employee Benefits We maintain qualified pension and supplemental retirement plans. These plans are defined benefit pension plans. In addition to providing pension benefits, we provide certain health care and life insurance benefits for retired employees and dependents. These pension and other employee benefit costs are developed from actuarial valuations. Inherent in these valuations are key assumptions, including the discount rate and expected long-term rate of return on plan assets. Material changes in these pension and other employee postretirement benefit costs may occur in the future due to changes in these assumptions, as well as our actual experience.

The discount rate is subject to change each year, based on a hypothetical yield curve developed from a portfolio of high quality, corporate, non-callable bonds with maturities that match our projected benefit payment stream. The resulting discount rate reflects the matching of the plan liability cash flows to the yield curve. Changes in applicable high-quality long-term corporate bond indices are also considered. The discount rate determined on this basis was 4.75% as of December 31, 2011, a decrease of 75 basis points from December 31, 2010.

The expected long-term rate of return on pension plan assets is selected by taking into account the expected duration of the plan's projected benefit obligation, asset mix and the fact that its assets are actively managed to mitigate risk. Allowable investment types include equity investments and fixed income investments. Both investment types may include alternative investments which are permitted to be up to 40% of total plan assets. Pension plan assets are primarily managed by Russell Investment Corp. ("Russell"), which allocates the assets into specified Russell-designed funds as we direct. Each specified Russell fund is then managed by investment managers chosen by Russell. We also engage non-Russell related investment managers through Russell, in its role as trustee, to invest pension plan assets. The targeted long-term allocation of our pension plan assets is 60% in equity investments and 40% in fixed income investments. The expected long-term rate of return on plan assets determined on this basis was 8.0% for 2011, 2010 and 2009. For 2012, we are continuing to use an expected long-term rate of return of 8.0%.

These pension and other employee postretirement benefit costs are expected to increase to approximately $26.8 million in 2012 from $18.8 million in 2011, primarily due to the lower discount rate. Lowering the discount rate and the expected long-term rate of return each by 0.5% would have increased these pension and other employee postretirement benefits costs by approximately $2.9 million and $1.5 million, respectively, in 2011.

61-------------------------------------------------------------------------------- Table of Contents The benefit obligations for pensions and other employee benefits exceeded the fair value of plan assets by $315.7 million at December 31, 2011. We are required to recognize the funded status of a benefit plan on our balance sheet.

Market conditions and interest rates significantly affect future assets and liabilities of Loral's pension and other employee benefits plans.

Stock-Based Compensation Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period. In addition, share-based payment transactions with nonemployees are measured at the fair value of the equity instrument issued. We use the Black-Scholes-Merton option-pricing model and other models as applicable to estimate the fair value of these stock-based awards. These models require us to make significant judgments regarding the assumptions used within the models, the most significant of which are the stock price volatility assumption, the expected life of the option award, the risk-free rate of return and dividends during the expected term. Changes in these assumptions could have a material impact on the amount of stock-based compensation we recognize.

The Company estimates expected forfeitures of stock-based awards at the grant date and recognizes compensation cost only for those awards expected to vest.

The forfeiture assumption is ultimately adjusted to the actual forfeiture rate.

Therefore, changes in the forfeiture assumptions may impact the timing of the total amount of expense recognized over the vesting period. Estimated forfeitures are reassessed in each reporting period and may change based on new facts and circumstances. We emerged from bankruptcy on November 21, 2005, and as a result, we did not have sufficient stock price history upon which to base our volatility assumption for measuring our stock-based awards. In determining the volatility used in our models, we considered the volatility of the stock prices of selected companies in the satellite industry, the nature of those companies, our emergence from bankruptcy and other factors. We based our estimate of the average life of a stock-based award using the midpoint between the vesting and expiration dates. Our risk-free rate of return assumption for awards was based on term-matching, nominal, monthly U.S. Treasury constant maturity rates as of the date of grant. We assumed no dividends during the expected term.

The SS/L phantom stock appreciation rights program has been designed to incentivize and reward our employees based on the increase in a synthetically determined value of SS/L's equity. As SS/L's common stock has not historically been publicly traded and thus does not have a readily ascertainable market value, its equity value under the program is derived from a formula that calculates equity value based on a multiple of Adjusted EBITDA plus cash on hand less debt at the end of the relevant year. Each phantom stock appreciation right provides the recipient with the right to receive an amount equal to the increase in our notional stock price over the base price at the date of grant multiplied by the number of phantom stock appreciation rights vested on the applicable vesting date. The baseline price at each grant date is updated accordingly.

The phantom stock appreciation rights have fixed exercise dates. As such, the phantom stock appreciation rights are automatically exercised and the value (if any) is paid out on each vesting date. The phantom stock appreciation rights may be settled in Loral stock or cash at our option. The number of shares of Loral stock to be issued on the vesting date is determined by dividing the value of the phantom stock appreciation rights by the price per share of Loral stock on the vesting date. Accordingly, the phantom stock appreciation rights are accounted for as liability awards and the value of the awards is adjusted quarterly for changes in the value of the award resulting from increases or decreases in actual or forecasted Adjusted EBITDA for the relevant year.

Compensation expense is recognized ratably over the requisite vesting period.

Contingencies Contingencies by their nature relate to uncertainties that require management to exercise judgment both in assessing the likelihood that a liability has been incurred as well as in estimating the amount of potential loss, if any. We accrue for costs relating to litigation, claims and other contingent matters when, in management's opinion, such liabilities become probable and reasonably estimable. Such estimates may be based on advice from third parties or on management's judgment, as appropriate. Actual amounts paid may differ from amounts estimated, and such differences will be charged to operations in the period in which the final determination of the liability is made. Management considers the assessment of loss contingencies as a critical accounting policy because of the significant uncertainty relating to the outcome of any potential legal actions and other claims and the difficulty of predicting the likelihood and range of the potential liability involved, coupled with the material impact on our results of operations that could result from legal actions or other claims and assessments.

62 -------------------------------------------------------------------------------- Table of Contents Accounting Standards Issued and Not Yet Implemented For discussion of accounting standards issued and not yet implemented that could have an impact on us, see Note 2 to the financial statements.

Liquidity and Capital Resources Loral As described above, the Company's principal assets are 100% of the capital stock of SS/L and a 64% economic interest in Telesat. In addition, the Company has a 56% economic interest in XTAR. SS/L's operations are consolidated in the Company's financial statements, while the operations of Telesat and XTAR are not consolidated but are presented using the equity method of accounting.

The Parent Company has no debt. SS/L amended and restated its revolving credit facility on December 20, 2010, increasing the facility amount to $150 million, extending the maturity to January 24, 2014 and removing the Parent Company guarantee. At December 31, 2011, there were no outstanding borrowings under the SS/L Credit Agreement and $5 million of letters of credit outstanding. Telesat has third party debt with financial institutions. The Parent Company has not provided a guarantee for the debt of Telesat. XTAR has no external debt other than to its LLC member, Hisdesat, for restructured lease payments on the Spainsat satellite. XTAR makes payments of $5 million per year to pay down the outstanding restructured lease balance. A convertible note to Hisdesat was paid off on November 30, 2011 through capital contributions from the partners.

Loral's capital contribution to XTAR was $10 million.

Cash is maintained at the Parent Company, SS/L, Telesat and XTAR to support the operating needs of each respective entity. The ability of SS/L and Telesat to pay dividends and management fees in cash to the Parent Company is governed by applicable covenants relating to the debt at each of those entities and, in the case of Telesat and XTAR, by their respective shareholder agreements.

The Parent Company's cash flow is fairly predictable. SS/L's cash flow, however, is subject to substantial timing fluctuation of receipts and expenditures and is difficult to forecast on a quarter to quarter basis. A typical satellite production contract takes two to three years to complete. SS/L's cash receipts are tied to the achievement of contract milestones which are negotiated for each contract, and the timing of milestone receipts does not necessarily match the timing of cash expenditures. Revenues and profits under these long-term contracts are recognized using the cost-to-cost percentage of completion method, so the timing of revenue recognition and cash receipts do not match, creating fluctuations in certain balance sheet accounts including contracts-in-process, long-term receivables and customer advances. In addition, the timing of satellite awards is difficult to predict, contributing to the unevenness of revenues and cash flow.

Cash and Available Credit At December 31, 2011, the Company had $197 million of cash and cash equivalents, $24 million of restricted cash and no debt. The Company's cash and cash equivalents increased by $31 million from December 31, 2010, while restricted cash increased by $18 million. SS/L entered into a satellite manufacturing contract during the first quarter of 2011 that requires certain customer payments to be placed into escrow until the satellite is delivered. The escrow amount of $24 million at December 31, 2011 for this contract will grow by an additional $12 million in 2012. The escrow funds with interest earned will be released to SS/L upon delivery of the satellite in 2013. During 2011, SS/L did not borrow any funds under its revolving credit agreement. The cash increase during 2011 consisted of $58 million provided by operating activities, partially offset by $23 million used in financing activities and $4 million used in investing activities. A more detailed discussion of these cash changes by activity is set forth in the sections, "Net Cash Provided by Operating Activities", "Net Cash Used in Investing Activities", and "Net Cash (Used In) Provided by Financing Activities." Changes in cash at the Parent Company and SS/L during 2011 are discussed below.

63-------------------------------------------------------------------------------- Table of Contents As discussed above, the SS/L Credit Agreement was amended and restated on December 20, 2010 to increase the facility from $100 million to $150 million, extend the maturity to January 24, 2014 and eliminate the Parent Company guarantee. On December 8, 2011, the SS/L Credit Agreement was amended, increasing the $50 million letter of credit sub-limit to $100 million. As of December 31, 2011, SS/L had borrowing availability of approximately $145 million under the facility after giving effect to approximately $5 million of outstanding letters of credit. SS/L anticipates that over the next 12 months it will be in compliance with all the covenants of the SS/L Credit Agreement and have full availability of the facility. The amended and restated SS/L Credit Agreement allows for a spin-off of SS/L from Loral or an initial public offering of SS/L.

Cash Management We have a cash management investment program that seeks a competitive return while maintaining a conservative risk profile. Our cash management investment policy establishes what we believe to be conservative guidelines relating to the investment of surplus cash. The policy allows us to invest in commercial paper, money market funds and other similar short term investments but does not permit us to engage in speculative or leveraged transactions, nor does it permit us to hold or issue financial instruments for trading purposes. The cash management investment policy was designed to preserve capital and safeguard principal, to meet all of our liquidity requirements and to provide a competitive rate of return for similar risk categories of investment. The policy addresses dealer qualifications, lists approved securities, establishes minimum acceptable credit ratings, sets concentration limits, defines a maturity structure, requires all firms to safe keep securities on our behalf, requires certain mandatory reporting activity and discusses review of the portfolio. We operate the cash management investment program under the guidelines of our investment policy and continuously monitor the investments to avoid risks.

We currently invest our cash in several liquid Prime AAA money market funds. The dispersion across funds reduces the exposure of a default at one fund.

Orbital Receivables As of December 31, 2011, SS/L had orbital receivables of approximately $355 million, net of fresh-start fair value adjustments of $16 million. Of the gross orbital receivables as of December 31, 2011, approximately $230 million are related to satellites launched and $141 million are related to satellites that are under construction. This represents an increase in gross orbital receivables of approximately $41 million from December 31, 2010. During 2011, our orbital receivables decreased by approximately $7 million related to the Telstar 14R/Estrela do Sul 2 anomaly and increased by approximately $4 million related to the sale of our Canadian broadband business to Telesat. The growth in the orbital receivable balance as a percentage of sales in 2011 was less than in 2010 because more contracts-in-process during 2011 included performance incentives structured as warranty payback rather than orbital receivables.

We anticipate that this orbital receivable asset will continue to grow, deferring the receipt of cash. We will generate positive cash flow from orbital receivables once principal and interest payments received for the in-orbit satellites become greater than the amount being deferred for satellites under construction. During 2011, SS/L received $25 million of orbital receivable payments, representing principal and interest. The timing of when we will have positive cash flow from orbital receivables is dependent on a number of factors including the number of new satellite awards with the requirement for orbital incentive payments, the timing of the completion of contracts under construction, interest rates associated with orbital incentive payments, the performance of on-orbit satellites and the number of satellites in operation as compared to the number of satellites under construction.

Liquidity The $31 million increase in cash and cash equivalents for the Company from December 31, 2010 to December 31, 2011 consisted of a $74 million increase for the Parent Company and a $43 million decrease for SS/L. The $18 million increase in restricted cash was the result of a $24 million increase at SS/L for two contract receipts required to go into escrow as discussed above, partially offset by a $1 million reduction in restricted cash for the Parent Company and a $5 million reduction in other restricted cash for SS/L.

64-------------------------------------------------------------------------------- Table of Contents During 2011, the Parent Company's unrestricted cash position increased approximately $74 million to $101 million. In January 2011, as permitted by the SS/L revolving credit facility, the Parent Company received a $50 million dividend from SS/L and paid SS/L $1 million in settlement of net intercompany account balances. On March 1, 2011, Loral entered into agreements to sell its investment in the Canadian broadband business, including the Canadian coverage portion of the ViaSat-1 satellite, to Telesat for $13 million plus reimbursement of approximately $48 million, representing Loral's net costs incurred through the closing date. This transaction closed on April 11, 2011 with the Parent Company receiving the cash proceeds. In addition, in connection with this transaction, Telesat agreed that, if it obtains certain supplemental capacity on the payload, Loral will be entitled to receive, for four years, one-half of any net revenue actually earned by Telesat on such supplemental capacity. The Parent Company also received approximately $16 million in cash from the 2010 settlement of directors' and officers' liability insurance claims and received two quarterly management fee payments from Telesat totaling $3 million. Partially offsetting these cash receipts, the Parent Company used $11 million to fund operating expenses and changes in working capital, paid $17 million to fund withholding taxes on employee cashless stock option exercises, made a $10 million capital contribution to XTAR and made approximately $6 million in tax payments. In addition, on November 14, 2011, we announced a stock repurchase program under which the Company may repurchase up to 800,000 shares. As of December 31, 2011, the Company repurchased 136,494 shares for cash of $8 million. At December 31, 2011, SS/L owed the Parent Company approximately $3 million that was reimbursed by SS/L in January 2012.

At the Parent Company, we expect that our cash and cash equivalents will be sufficient to fund projected expenditures for the next 12 months, including the stock repurchase program. In addition to our cash on hand, we believe that, given the substantial value of our assets, which include our 64% economic interest in Telesat and our 56% equity interest in XTAR, we have the ability, if appropriate, to access the financial markets for debt or equity at the Parent Company. Given the continuously changing financial environment, however, there can be no assurance that the Parent Company would be able to obtain such financing on acceptable terms.

During 2011, SS/L generated cash of $26 million before payment of a $50 million dividend to the Parent Company and a $19 million increase in restricted cash, resulting in an unrestricted cash position of $96 million as of December 31, 2011. The primary source for this increase in cash was Adjusted EBITDA of $137 million which was partially offset by an increase in net program assets (contracts-in-process, long-term receivables and customer advances) of $46 million, $37 million of capital expenditures, a $17 million decrease in pension and postretirement liabilities and a $6 million increase in inventories. In addition, other changes in balance sheet accounts used cash of approximately $5 million. SS/L's restricted cash balance at December 31, 2011 was $24 million.

SS/L's projected use of cash for the next 12 months includes capital expenditures and continued growth in its orbital receivables balance. With regard to capital expenditures, SS/L expects to spend approximately $200 million over the three-year period ending December 31, 2013, including $37 million of expenditures in 2011, related to an infrastructure campaign that includes the building of a second thermal vacuum chamber, completing certain building and systems modifications and purchasing additional test and satellite handling equipment to meet its contractual obligations more efficiently. Upon completion of this infrastructure campaign, SS/L anticipates returning to a more customary level of annual capital expenditures of $30 million to $40 million, excluding major system upgrades caused by additional expansion or technology insertion.

The orbital receivable asset will continue to grow in 2012. We anticipate that an additional $12 million of cash received in 2012 will be added to the restricted escrow account as required by the contract that was signed in the first quarter of 2011. In addition, in relation to a new contract award entered into in 2012 that required a $60 million performance bond representing approximately 10% of the contract value, SS/L has deposited $50 million in an escrow account with the surety supplying the bond. The uncertainty as to the timing and nature of new construction contract awards, milestone receipts and cash flow related to contract assets can change our cash requirements. SS/L believes that, absent unforeseen circumstances, with its cash on hand and cash flow from operations, it has sufficient liquidity to fulfill its obligations for the next 12 months. The borrowing capacity under the revolving credit facility also enhances SS/L's liquidity position.

65-------------------------------------------------------------------------------- Table of Contents Risks to Cash Flow Economic and credit market conditions could adversely affect the ability of customers to make payments to us, including orbital receivable payments under satellite construction contracts with SS/L. Though most of our customers are substantial corporations for which creditworthiness is generally high, there are certain customers which are either highly leveraged or are in the developmental stage and are not fully funded. There can be no assurance that these customers will not delay contract payments to, or seek financial relief from, us if such customers have financial difficulties. If customers fall behind or default on their payment obligations, our liquidity will be adversely affected.

There can be no assurance that SS/L's customers will not default on their obligations to SS/L in the future and that such defaults will not materially and adversely affect SS/L and Loral. In the event of an uncured payment default by a customer during the pre-launch construction phase of the satellite, SS/L's construction contracts generally provide SS/L with significant rights even if its customers (or their successors) have paid significant amounts under the contract. These rights typically include the right to stop work on the satellite and the right to terminate the contract for default. In the latter case, SS/L would generally have the right to retain, and sell to other customers, the satellite or satellite components that are under construction. The exercise of such rights, however, could be impeded by the assertion by customers of defenses and counterclaims, including claims of breach of performance obligations on the part of SS/L, and our recovery could be reduced by the lack of a ready resale market for the affected satellites or their components. In either case, our liquidity could be adversely affected pending resolution of such customer disputes.

In the event of an uncured payment default by a customer after satellite delivery and launch when title has passed to the customer, SS/L's remedies are more limited. Typically, amounts due post-launch and delivery are final milestone payments and, in certain cases, orbital incentive payments. To recover such amounts, SS/L generally would have to commence litigation to enforce its rights. We believe, however, that, as customers generally rely on SS/L to provide orbital anomaly and troubleshooting support for the life of the satellite, which support is generally perceived to be critical to maximize the life and performance of the satellite, it is likely that customers (or their successors) will cure any payment defaults and fulfill their payment obligations or make other satisfactory arrangements to obtain SS/L's support, and our liquidity would not be adversely affected.

SS/L's contracts contain detailed and complex technical specifications to which the satellite must be built. SS/L's contracts also impose a variety of other contractual obligations on SS/L, including the requirement to deliver the satellite by an agreed upon date, subject to negotiated allowances. If SS/L is unable to meet its contract obligations, including significant deviations from technical specifications or delivering the satellite beyond the agreed upon date in a contract, the customer would have the right to terminate the contract for contractor default. If a contract is terminated for contractor default, SS/L would be required to refund the payments made to SS/L to the date of termination, which could be significant. In such circumstances, SS/L would, however, keep the satellite under construction and be able to recoup some of its losses through the resale of the satellite or its components to another customer. It has been SS/L's experience that, because the satellite is generally critical to the execution of a customer's operations and business plan, customers will usually accept a satellite with minor deviations from specifications or renegotiate a revised delivery date with SS/L as opposed to terminating the contract for contractor default and losing the satellite.

Nonetheless, the obligation to return all funds paid to SS/L in the later stages of a contract, due to termination for contractor default, would have a material adverse effect on our liquidity.

SS/L currently has a contract-in-process with an estimated delivery date later than the contractually specified date after which the customer may terminate the contract for default. The customer is an established operator which will utilize the satellite in the operation of its existing business. SS/L and the customer are continuing to perform their obligations under the contract, and the customer continues to make milestone payments to SS/L. Although there can be no assurance, the Company believes that the customer will take delivery of this satellite and will not seek to terminate the contract for default. If the customer should successfully terminate the contract for default, the customer would be entitled to a full refund of its payments, liquidated damages, and interest which through December 31, 2011 totaled approximately $204 million, plus re-procurement costs. In the event of termination for default, SS/L would own the satellite and would attempt to recoup any losses through resale to another customer.

66 -------------------------------------------------------------------------------- Table of Contents Many of SS/L's customer contracts include performance incentives, structured as warranty payback or orbital receivables. If a satellite sold under a contract with performance incentives experiences an anomaly that leads to a degradation in performance as defined in each particular contract, then in the case of warranty payback, SS/L would be obligated to return to the customer a portion of the performance incentive payments received and, in the case of orbital receivables, SS/L would no longer be entitled to a portion of the future orbital receivable payments owed. The amount SS/L would either need to return to the customer in case of warranty payback, or would no longer be entitled to receive from the customer in the case of orbital receivables, would depend on various factors including, among others, the specific contractual specifications, the satellite performance and life remaining. Our liquidity could be adversely affected by failure to achieve contractual performance incentives. For example, in May 2011, following the launch of Telstar 14R/Estrela do Sul 2, the satellite's north solar array failed to fully deploy resulting in a loss of power and reduced mission life. As a result of the failure, SS/L recorded a charge of approximately $8.5 million for lost orbital incentives that would otherwise have been payable with respect to Telstar 14R/Estrela do Sul 2.

On October 19, 2010, TerreStar Networks Inc. ("TerreStar"), an SS/L customer, filed for bankruptcy under chapter 11 of the Bankruptcy Code. As of December 31, 2011, SS/L had $19 million of past due receivables from TerreStar related to an in-orbit SS/L built satellite and other related ground system deliverables and $16 million of past due receivables from TerreStar related to a second satellite under construction. SS/L had previously exercised its contractual right to stop work on the satellite under construction as a result of TerreStar's payment default. The in-orbit satellite long-term orbital receivable balance, net of fair value adjustment, reflected on the balance sheet at December 31, 2011 is $16 million. The long-term orbital receivable balance reflected on the balance sheet for the satellite under construction is $13 million.

In July 2011, the TerreStar Bankruptcy Court approved an agreement between TerreStar and a subsidiary of DISH Network Corporation ("DISH Subsidiary") pursuant to which DISH Subsidiary agreed to purchase substantially all of TerreStar's assets. In connection with the sale, pursuant to a Stipulation and Order entered into between TerreStar and SS/L and approved by the TerreStar Bankruptcy Court in July 2011, the parties agreed to amend the satellite construction contract for the in-orbit satellite, the contract for related ground system deliverables and the contract for the satellite under construction, and TerreStar agreed to assume and assign to DISH Subsidiary, and DISH Subsidiary will take assignment of, such contracts as amended. The contract amendments provide for restructuring of certain past due payments and payments to become due as a result of which SS/L will maintain the collective profit position of the contracts and will not realize any impairment to its receivables. In addition, SS/L will be entitled to an allowed unsecured claim against TerreStar in the amount of approximately $5 million. The assumption will be effective as of the earlier of the closing of the asset sale to DISH Subsidiary or the effective date of confirmation of a plan of reorganization for TerreStar. The assignment will be effective as of the closing of the asset sale to DISH Subsidiary. On February 15, 2012, the TerreStar Bankruptcy Court entered an order confirming TerreStar's plan of reorganization. The effective date of the plan of reorganization and the closing of the asset sale are each subject to a number of conditions, including, among others, FCC and other regulatory approvals. Pending assumption and assignment of the contracts, TerreStar is required to make payments that fall due in the ordinary course of business under the contracts as amended. Assuming closing of the asset sale to DISH Subsidiary and assumption and assignment of the contracts as amended, SS/L believes that it will not incur a loss with respect to the receivables due from TerreStar.

As of December 31, 2011, SS/L had receivables included in contracts in process from DBSD Satellite Services G.P. (formerly known as ICO Satellite Services G.P.

and referred to herein as "ICO"), a customer with an SS/L-built satellite in orbit, in the aggregate amount of approximately $1 million. In addition, under its contract, ICO has future payment obligations to SS/L that total approximately $23 million, of which approximately $11 million (including $9 million of orbital incentives) is included in long-term receivables. After receiving Bankruptcy Court approval, ICO, which sought to reorganize under chapter 11 of the Bankruptcy Code in May 2009, assumed its contract with SS/L, with certain modifications. The contract modifications do not have a material adverse effect on SS/L, and, although the timing of certain payments to be received from ICO has changed (for example, certain significant payments become due only on or after the effective date of a chapter 11 plan of reorganization for ICO), SS/L will receive substantially the same net present value from ICO as SS/L was entitled to receive under the original contract. In March 2011, the ICO Bankruptcy Court approved an investment agreement pursuant to which DISH Network Corporation ("DISH") agreed to acquire ICO. In connection with this investment agreement, in April 2011, DISH purchased certain claims against ICO for cash, including SS/L claims aggregating approximately $7.0 million plus approximately $1.4 million of accrued interest. SS/L believes that, based upon completion of the tender offer and other payments by ICO to SS/L under the modified contract, it is not probable that SS/L will incur a material loss with respect to the receivables from ICO. Although, in July 2011, the ICO Bankruptcy Court confirmed a plan of reorganization for ICO, closing of DISH's acquisition of ICO and ICO's emergence from chapter 11 is still subject to certain other conditions, including, FCC regulatory approval.

67-------------------------------------------------------------------------------- Table of Contents SS/L was awarded seven satellite contracts in each of 2008 and 2009 and was awarded six satellite contracts in each of 2010 and 2011. SS/L had backlog of $1.4 billion at December 31, 2011. From January 1, 2012 to February 15, 2012, SS/L was awarded three satellite contracts. SS/L has high fixed costs relating primarily to labor and overhead. Based on SS/L's current cost structure which has been sized to accommodate six to eight satellite contract awards per year, SS/L estimates that it covers its fixed costs, including depreciation and amortization, with an average of four to five satellite awards a year depending on the size, power, pricing and complexity of the satellite. If SS/L's satellite awards fall below four to five awards per year, SS/L would be required to phase in a reduction of costs to accommodate this lower level of activity. The timing of any reduced demand for satellites, if it were to occur, is difficult to predict. It is, therefore, difficult to anticipate the need to reduce costs to match any such slowdown in business, especially when SS/L has significant backlog business to perform. A delay in matching the timing of a reduction in business with a reduction in expenditures could adversely affect our liquidity.

We believe that SS/L's current backlog, existing liquidity and availability under SS/L's revolving credit facility are sufficient to finance SS/L, even if SS/L receives fewer than four awards over the next 12 months. If SS/L were to experience a shortage of orders below four awards per year for multiple years, SS/L could require additional financing, the amount and timing of which would depend on the magnitude of the order shortfall coupled with the timing of a reduction in costs. There can be no assurance that SS/L could obtain such financing on favorable terms, if at all.

Telesat Cash and Available Credit As of December 31, 2011, Telesat had CAD 278 million of cash and short-term investments as well as approximately CAD 153 million of borrowing availability under its Revolving Facility (as defined below). Included in cash and cash equivalents is CAD 125 million of restricted cash received from insurance proceeds in connection with the solar array failure on Telstar 14R/Estrela do Sul 2. The restricted cash can be used for capital expenditures of satellite projects in accordance with the Credit Agreement. Telesat believes the unrestricted cash and short-term investments as of December 31, 2011, cash flow from operating activities, including amounts from customer prepayments, and drawings on the available lines of credit under the Credit Facility (as defined below) will be adequate to meet its expected cash requirements for the next 12 months for activities in the normal course of business, including interest and required principal payments on debt.

For fiscal 2012, Telesat expects its major cash requirements to include capital expenditures of approximately CAD 240 million, payment of CAD 315 million in principal and interest on long-term debt (including the swaps) and payment of CAD 7 million on operating leases. Telesat expects to meet its cash needs for fiscal 2012 through a combination of operating cash and short-term investments, restricted cash received from insurance proceeds, cash flow from operations, cash flow from customer prepayments or through borrowings on available lines of credit under the Credit Facility. To the extent market conditions are receptive, Telesat may refinance its existing credit facilities and use a portion of the proceeds to pay a dividend to its shareholders. See "Business - Strategic Developments." Liquidity A large portion of Telesat's annual cash receipts are reasonably predictable because they are primarily derived from an existing backlog of long-term customer contracts and high contract renewal rates. Telesat believes its cash flow from operations, in addition to cash on hand and available credit facilities will be sufficient to provide for its capital requirements and to fund its interest and debt payment obligations for the next 12 months.

The construction of Nimiq 6 and Anik G1, as well as any other satellite replacement or expansion program will require significant capital expenditures.

Telesat may choose to invest in new satellites to further grow its business.

Cash required for current and future satellite construction programs will be funded from some or all of the following: cash and short-term investments, restricted cash received from insurance proceeds, cash flow from operating activities, cash flow from customer prepayments or through borrowings on available lines of credit under the Credit Facility. In addition, Telesat may sell certain satellite assets, and in accordance with the terms and conditions of the Credit Facility, reinvest the proceeds in replacement satellites or pay down indebtedness under the Credit Facility. Subject to market conditions and subject to compliance with the terms and conditions of its Credit Facility and the financial leverage covenant tests therein, Telesat may also obtain additional secured or unsecured financing to fund current or future satellite construction or to distribute to its equity holders. However, Telesat's ability to access these sources of funding is not guaranteed and, therefore, Telesat may not be able to fully fund additional replacement and new satellite construction programs.

68 -------------------------------------------------------------------------------- Table of Contents Debt Telesat has entered into agreements with a syndicate of banks to provide Telesat with a series of term loan facilities denominated in Canadian dollars and U.S.

dollars, and a revolving facility (collectively, the "Senior Secured Credit Facilities") as outlined below. In addition, Telesat has issued two tranches of notes.

September 30, September 30, September 30, September 30, December 31, December 31, Maturity Currency 2011 2010 (In CAD millions) Senior Secured Credit Facilities: Revolving facility October 31, 2012 CAD or USD equivalent - - Canadian term loan facility October 31, 2012 CAD 80 170 U.S. term loan facility October 31, 2014 USD 1,721 1,699 U.S. term loan II facility October 31, 2014 USD 148 146 Senior notes November 1, 2015 USD 707 691 Senior subordinated notes November 1, 2017 USD 222 217 CAD 2,878 2,923 Less: deferred financing costs and repayment options (43 ) (54 ) 2,835 2,869 Current portion CAD (87 ) (97 ) Long term portion CAD 2,748 2,772 The Senior Secured Credit Facilities are secured by substantially all of Telesat's assets. Each tranche of the Senior Secured Credit Facilities is subject to mandatory principal repayment requirements. Borrowings under the Senior Secured Credit Facilities bear interest at a base interest rate plus margins of 275 - 300 basis points. The required repayments on the Canadian term loan facility will be CAD 80 million for the year ended December 31, 2012. For the U.S. term loan facilities, required repayments in 2012 are 1/4 of 1% of the initial aggregate principal amount which is approximately $5 million per quarter. Telesat is required to comply with certain covenants which are usual and customary for highly leveraged transactions, including financial reporting, maintenance of certain financial covenant ratios for leverage and interest coverage, a requirement to maintain minimum levels of satellite insurance, restrictions on capital expenditures, a restriction on fundamental business changes or the creation of subsidiaries, restrictions on investments, restrictions on dividend payments, restrictions on the incurrence of additional debt, restrictions on asset dispositions and restrictions on transactions with affiliates.

The senior notes bear interest at an annual rate of 11.0% and are due November 1, 2015. The senior notes include covenants or terms that restrict Telesat's ability to, among other things, (i) incur additional indebtedness, (ii) incur liens, (iii) pay dividends or make certain other restricted payments, investments or acquisitions, (iv) enter into certain transactions with affiliates, (v) modify or cancel the Company's satellite insurance, (vi) effect mergers with another entity and (vii) redeem the Senior notes prior to May 1, 2012, in each case subject to exceptions provided in the Senior notes indenture.

The senior subordinated notes bear interest at a rate of 12.5% and are due November 1, 2017. The senior subordinated notes include covenants or terms that restrict Telesat's ability to, among other things, (i) incur additional indebtedness, (ii) incur liens, (iii) pay dividends or make certain other restricted payments, investments or acquisitions, (iv) enter into certain transactions with affiliates, (v) modify or cancel the Company's satellite insurance, (vi) effect mergers with another entity and (vii) redeem the senior subordinated notes prior to May 1, 2013, in each case subject to exceptions provided in the senior subordinated notes indenture.

69-------------------------------------------------------------------------------- Table of Contents Interest Expense An estimate of the interest expense on the Facilities is based upon assumptions of LIBOR and Bankers Acceptance rates and the applicable margin for the Senior Secured Credit Facilities. Telesat's estimated interest expense for 2012 is approximately CAD 212 million, assuming Telesat does not refinance its facilities. Depending on market conditions, Telesat may refinance a portion of its facilities and incur additional secured debt.

Derivatives Telesat has used interest rate and currency derivatives to hedge its exposure to changes in interest rates and changes in foreign exchange rates.

As required, Telesat uses forward contracts to hedge foreign currency risk on anticipated transactions, mainly related to the construction of satellites and interest payments. At December 31, 2011, Telesat did not have any outstanding foreign exchange contracts. At December 31, 2010, the fair value of the outstanding foreign exchange contracts was a liability of CAD 2.6 million.

Telesat has entered into a cross currency basis swap to hedge the foreign currency risk on a portion of its U.S. dollar denominated debt. Telesat uses mostly natural hedges to manage the foreign exchange risk on operating cash flows. At December 31, 2011, the Company had a cross currency basis swap of CAD 1,175.3 million which requires the Company to pay Canadian dollars to receive $1,011.8 million. At December 31, 2011, the fair value of this derivative contract was a liability of CAD 160.4 million. Most of this non-cash loss will remain unrealized until the contract is settled. This contract is due on October 31, 2014. At December 31, 2010, there was a liability of CAD 192.5 million.

Interest rate risk Telesat is exposed to interest rate risk on its cash and cash equivalents and its long term debt which is primarily variable rate financing. Changes in the interest rates could impact the amount of interest Telesat is required to pay.

Telesat uses interest rate swaps to hedge the interest rate risk related to variable rate debt financing. At December 31, 2011, the fair value of these derivative contract liabilities was CAD 53.1 million, and at December 31, 2010, there was a liability of CAD 49.4 million. These contracts mature on October 31, 2014.

Capital Expenditures Telesat has entered into contracts with SS/L for the construction of Nimiq 6, a direct broadcast satellite to be used by Telesat's customer, Bell TV, and Anik G1. These expenditures will be funded from some or all of the following: cash and short-term investments, restricted cash from insurance proceeds, cash flow from operations, proceeds from the sale of assets, cash flow from customer prepayments or through borrowings on available lines of credit under the Credit Facility.

XTAR In January 2009, XTAR reached an agreement with Arianespace, S.A. to settle its revenue-based fee that was to be paid over time. To enable XTAR to be able to make these settlement payments, XTAR issued a capital call to its LLC members for $8 million in 2009. The capital call required Loral to increase its investment in XTAR by approximately $4.5 million, representing its 56% share of $8 million. This settlement benefited XTAR by providing a significant reduction to amounts that it would have been required to pay in the future and satisfied XTAR's obligations to Arianespace.

In November 2011, Loral and Hisdesat made capital contributions to XTAR in proportion to their respective equity interests in XTAR, which used the proceeds to repay the convertible loan to Hisdesat of $18.5 million which included the principal amount and accrued interest. Loral's capital contribution was $10.4 million.

70 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations and Other Commercial Commitments The following tables aggregate our contractual obligations and other commercial commitments as of December 31, 2011 (in thousands).

Contractual Obligations: September 30, September 30, September 30, September 30, September 30, Payments Due by Period Less than More than Total 1 Year 1-3 Years 4-5 Years 5 Years Lease payments(1) $ 41,527 $ 11,356 $ 15,860 $ 9,417 $ 4,894 Unconditional purchase obligations(2) 441,841 265,957 175,884 - - Revolving credit agreement(3) - - - - - Total contractual cash obligations(4) $ 483,368 $ 277,313 $ 191,744 $ 9,417 $ 4,894 Other Commercial Commitments: September 30, September 30, September 30, September 30, September 30, Total Amount of Commitment Expiration Per Period Amounts Less than More than Committed 1 Year 1-3 Years 4-5 Years 5 Years Standby letters of credit $ 4,785 $ 4,785 $ - $ - $ - (1) Represents future minimum payments under operating and capital leases with initial or remaining terms of one year or more.

(2) SS/L has entered into various purchase commitments with suppliers due to the long lead times required to produce purchased parts.

(3) On December 20, 2010, SS/L amended and restated its revolving credit agreement with several banks and other financial institutions. The credit agreement provides for a $150 million senior secured revolving credit facility. The credit agreement matures on January 24, 2014 (see Note 9 to the financial statements). No amounts were outstanding under the credit agreement at December 31, 2011.

(4) Does not include our liabilities for uncertain tax positions of $139.9 million. Because the timing of future cash outflows associated with our liabilities for uncertain tax positions is highly uncertain, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities (see Note 10 to the financial statements).

Does not include obligations for pensions and other postretirement benefits, for which we expect to make employer contributions of $45.7 million in 2012.

We also expect to make significant employer contributions to our plans in future years.

Net Cash Provided by Operating Activities Net cash provided by operating activities was $58 million for the year ended December 31, 2011.

The major driver of cash provided by operating activities was net income adjusted for non-cash items of $125 million which was partially offset by cash used in net program related assets (contracts-in-process and customer advances) of $44 million. Cash flow from operating activities was reduced by $25 million in 2011 due to an increase in contracts-in-process caused by advance spending on programs that customers are obligated to pay us for in the future. Customer advances reduced cash flow from operating activities by $19 million due to the timing of awards and progress on new satellite programs.

Significant cash uses in 2011 also included a decrease in pension and other postretirement liabilities of $19 million and an increase in inventories of $6 million.

Net cash provided by operating activities was $42 million for the year ended December 31, 2010.

71 -------------------------------------------------------------------------------- Table of Contents The major driver of cash provided by operating activities was net income adjusted for non-cash items of $108 million which was partially offset by cash used in program related assets (contracts-in-process and customer advances) of $87 million. Cash flow from operating activities was reduced by $44 million in 2010 due to an increase in contracts-in-process caused by advance spending on programs that customers are obligated to pay us for in the future. Customer advances reduced cash flow from operating activities by $43 million due to the timing of awards and progress on new satellite programs.

Other factors affecting cash from operating activities in 2010 were: increases in accounts payable, accrued expenses and other current liabilities increased cash by $20 million; a decrease in inventories increased cash by $14 million; increases in other current assets and other assets decreased cash by $9 million; and decreases in pension and other post retirement liabilities reduced cash by $9 million.

Net cash provided by operating activities for 2009 was $155 million. This was primarily due to net cash provided from program related assets (contracts-in-process and customer advances) of $72 million and net income adjusted for non-cash items of $67 million. Changes in program related assets resulted mainly from progress on new and existing satellite programs. In addition, a decrease in inventories increased cash by $17 million.

Net Cash Used in Investing Activities Net cash used in investing activities for 2011 was $4 million, which included capital expenditures of $37 million for satellite manufacturing, an $18 million increase in restricted cash and an additional investment of $10 million in XTAR, representing our 56% share of an $18 million capital call, partially offset by proceeds of $61 million from the sale of our interest in the ViaSat-1 satellite and related net assets.

Net cash used in investing activities for 2010 was $54 million, which included capital expenditures of $35 million for satellite manufacturing and $19 million for the Canadian broadband business.

Net cash used in investing activities for 2009 was $49 million, primarily resulting from capital expenditures of $44 million and an additional investment of $4.5 million in XTAR, representing our 56% share of an $8 million capital call.

Net Cash (Used in) Provided by Financing Activities Net cash used in financing activities for 2011 was $23 million, which included $8 million for the repurchase of the Company's voting common stock and $15 million for withholding taxes on cashless exercise of employee stock options, net of proceeds from and excess tax benefit associated with exercise of employee stock options.

Net cash provided by financing activities for 2010 was $10 million, which included $12 million from the exercise of stock options, net of withholding taxes, partially offset by $2 million of issuance costs related to the amendment and extension of SS/L's revolving credit facility.

Net cash used in financing activities for 2009 was $55 million, primarily resulting from the repayment of borrowings under the SS/L Credit Agreement.

Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements, as defined by the rules and regulations of the SEC, that have or are reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. As a result, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these arrangements.

72 -------------------------------------------------------------------------------- Table of Contents Other Operating cash flows for 2011 included contributions of approximately $34 million to the qualified pension plan and approximately $2 million for other employee post-retirement benefit plans. Operating cash flows for 2010 included contributions of approximately $25 million to the qualified pension plan and approximately $3 million for other employee post-retirement benefit plans.

During 2009, we contributed approximately $23 million to the qualified pension plan and funded approximately $3 million for other employee post-retirement benefit plans. During 2012, based on current estimates, we expect to contribute approximately $41 million to the qualified pension plan and expect to fund approximately $3 million for other employee post-retirement benefit plans.

Affiliate Matters Loral has made certain investments in joint ventures in the satellite services business that are accounted for under the equity method of accounting (see Note 7 to the financial statements for further information on affiliate matters).

Our consolidated statements of operations reflect the effects of the following amounts related to transactions with or investments in affiliates (in millions): September 30, September 30, September 30, Year Ended December 31, 2011 2010 2009 (In millions) Revenues $ 140.0 $ 137.2 $ 92.1 Elimination of Loral's proportionate share of profits relating to affiliate transactions (18.5 ) (14.7 ) (10.1 ) Profits relating to affiliate transactions not eliminated 10.4 8.3 5.7 Commitments and Contingencies Our business and operations are subject to a number of significant risks, the most significant of which are summarized in Item 1A - Risk Factors and also in Note 15 to the financial statements.

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