Financial Instruments, Derivative Instruments and Hedging

9 Months Ended

Sep. 30, 2012

Financial Instruments, Derivative Instruments and Hedging

8. Financial Instruments, Derivative Instruments and Hedging

Financial Instruments

The carrying amount of cash equivalents and restricted cash approximates fair value because of the short maturity of those instruments. The fair value of short term investments, investments in available-for-sale securities and supplemental retirement plan assets is based on market quotations. The fair value of derivatives is based on the income approach using observable Level II market expectations at the measurement date and standard valuation techniques to discount future amounts to a single present value.

Foreign Currency

In the normal course of business, we are subject to the risks associated with fluctuations in foreign currency exchange rates. To limit this foreign exchange rate exposure, the Company seeks to denominate its contracts in U.S. dollars. If we are unable to enter into a contract in U.S. dollars, we review our foreign exchange exposure and, where appropriate, derivatives are used to minimize the risk of foreign exchange rate fluctuations to operating results and cash flows. We do not use derivative instruments for trading or speculative purposes.

As of September 30, 2012, SS/L had the following amounts denominated in Japanese yen and euros (which have been translated into U.S. dollars based on the September 30, 2012 exchange rates) that were unhedged (in thousands):

	Foreign Currency		U.S.$
Future revenues — Japanese yen	¥	67,023	$	860
Future expenditures — Japanese yen	¥	2,887,087	$	37,040
Future revenues — euros	€	17,113	$	22,007
Future expenditures — euros	€	1,717	$	2,208

Derivatives and Hedging Transactions

All derivative instruments are recorded at fair value as either assets or liabilities in our condensed consolidated balance sheets. Each derivative instrument is generally designated and accounted for as either a hedge of a recognized asset or a liability (“fair value hedge”) or a hedge of a forecasted transaction (“cash flow hedge”). Certain of these derivatives are not designated as hedging instruments and are used as “economic hedges” to manage certain risks in our business.

As a result of the use of derivative instruments, the Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. The Company does not hold collateral or other security from its counterparties supporting its derivative instruments. In addition, there are no netting arrangements in place with the counterparties. To mitigate the counterparty credit risk, the Company has a policy of entering into contracts only with carefully selected major financial institutions based upon their credit ratings and other factors.

There were no derivative instruments in an asset position as of September 30, 2012. Therefore, there was no exposure to loss at such date as a result of the potential failure of the counterparties to perform as contracted.

SS/L enters into long-term construction contracts with customers and vendors, some of which are denominated in foreign currencies. Hedges of expected foreign currency denominated contract revenues and related purchases are designated as cash flow hedges and evaluated for effectiveness at least quarterly. Effectiveness is tested using regression analysis. The effective portion of the gain or loss on a cash flow hedge is recorded as a component of other comprehensive income (“OCI”) and reclassified to income in the same period or periods in which the hedged transaction affects income. The ineffective portion of a cash flow hedge gain or loss is included in income.

In June 2010, SS/L was awarded a satellite contract denominated in euros and entered into a series of foreign exchange forward contracts with maturities through 2013, to hedge associated foreign currency exchange risk because our costs are denominated principally in U.S. dollars. These foreign exchange forward contracts have been designated as cash flow hedges of future euro denominated receivables.

In March 2012, Telesat declared a special cash distribution denominated in Canadian dollars to be paid in two tranches (see Note 10). Loral entered into a foreign exchange forward contract to hedge foreign exchange risk associated with the payment of the second tranche in July 2012. This foreign exchange forward contract was not designated as a hedging instrument.

The maturity of foreign currency exchange contracts held as of September 30, 2012 is consistent with the contractual or expected timing of the transactions being hedged, principally receipt of customer payments under long-term contracts. These foreign exchange contracts mature as follows (in thousands):

	To Buy
Maturity	Euro Amount			Hedge Contract Rate			At Market Rate
2012	€	431		$	553		$	552
		431			553			552
Discontinued operations		(431	)		(553	)		(552	)
Continuing operations	€	—		$	—		$	—
	To Sell
Maturity	Euro Amount			Hedge Contract Rate			At Market Rate
2012	€	4,219		$	5,239		$	5,425
2013		27,000			32,894			34,751
		31,219			38,133			40,176
Discontinued operations		(31,219	)		(38,133	)		(40,176	)
Continuing operations	€	—		$	—		$	—

Balance Sheet Classification

The following summarizes the fair values and location in our condensed consolidated balance sheet of all derivatives held by the Company as of September 30, 2012 (in thousands):

	Asset Derivatives					Liability Derivatives
	Balance Sheet Location		Fair Value			Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Foreign exchange contracts
						Other current liabilities	$	1,992
								1,992
Derivatives not designated as hedging instruments
Foreign exchange contracts
		Other current assets	$	1		Other current liabilities		51
Total derivatives				1				2,043
Derivatives classified as held for sale				(1	)			(2,043	)
Derivatives, as reported			$	—			$	—

The following summarizes the fair values and location in our consolidated balance sheet of all derivatives held by the Company as of December 31, 2011 (in thousands):

	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Foreign exchange contracts
				Other current liabilities	$	2,381
				Other liabilities		2,185
						4,566
Derivatives not designated as hedging instruments
Foreign exchange contracts
	Other current assets	$	1
				Other liabilities		56
Total derivatives		$	1		$	4,622

Cash Flow Hedge Gains (Losses) Recognition

The following summarizes the gains (losses) recognized in the consolidated statements of operations as income from discontinued operations and in accumulated other comprehensive loss for all derivatives in cash flow hedging relationships for the three and nine months ended September 30, 2012 (in thousands):

Derivatives in Cash Flow Hedging Relationships	Loss Recognized in  OCI on Derivatives (Effective Portion)			Loss Reclassified from Accumulated OCI into Income (Effective Portion)				Gain on Derivative Ineffectiveness and Amounts Excluded from Effectiveness Testing
				Location	Amount			Location	Amount
Three months ended September 30, 2012:
Foreign exchange contracts	$	(213	)	Revenue	$	(1,134	)	Revenue	$	28
								Interest income	$	—
Nine months ended September 30, 2012:
Foreign exchange contracts	$	(498	)	Revenue	$	(6,290	)	Revenue	$	208
								Interest income	$	—

          The following summarizes the gains (losses) recognized in the consolidated statements of operations for all cash flow derivatives not designated as hedging instruments for the three and nine months ended September 30, 2012 (in thousands): 

Cash Flow Derivatives Not Designated as Hedging Instruments	Gain (Loss) Recognized in Income on Derivatives
	Location	Amount
Three months ended September 30, 2012:
Foreign exchange contracts	Revenue	$	(15	)
	Other income		(141	)
Total gain			(156	)
Loss included in discontinued operations			15
Gain as reported		$	(141	)
Nine months ended September 30, 2012:
Foreign exchange contracts	Revenue	$	(3	)
	Other income		1,316
Total gain			1,313
Loss included in discontinued operations			3
Gain as reported		$	1,316

The following summarizes the gains (losses) recognized in the consolidated statements of operations as income from discontinued operations and in accumulated other comprehensive loss for all derivatives for the three and nine months ended September 30, 2011 (in thousands):

Derivatives in Cash Flow Hedging Relationships	Gain (Loss)  Recognized in OCI on Derivatives (Effective Portion)			Loss Reclassified from Accumulated OCI into Income (Effective Portion)				Loss on Derivative Ineffectiveness and Amounts Excluded from Effectiveness Testing
				Location	Amount			Location	Amount
Three months ended September 30, 2011
Foreign exchange contracts	$	4,988		Revenue	$	(6,785	)	Revenue	$	(1,140	)
								Interest income	$	0
Nine months ended September 30, 2011
Foreign exchange contracts	$	(10,553	)	Revenue	$	(12,966	)	Revenue	$	(66	)
								Interest income	$	(1	)

Cash Flow Derivatives Not Designated as Hedging Instruments	Loss Recognized in  Income on Derivatives
	Location		Amount
Three months ended September 30, 2011
Foreign exchange contracts		Revenue	$	2,592
Nine months ended September 30, 2011
Foreign exchange contracts		Revenue	$	1,397

The gain (loss) from cash flow derivatives not designated as hedging instruments as reported for the three and nine months ended September 30, 2012 represent hedges of the second tranche of the special cash distribution declared by Telesat in March 2012 and received by Loral in July 2012.