Note 8. Property and Equipment

Property and equipment consisted of the following:

	Depreciable
	Life	As of December 31,
	(In Years)	2012			2011
		(In thousands)
Land	—	$	42,312		$	41,516
Buildings and improvements	1-40	363,338			350,041
Furniture, fixtures, equipment and other	1-12	1,064,071			947,647
Customer rental equipment	1-5	251,708			158,371
Satellites:
EchoStar III - fully depreciated	N/A	234,083			234,083
EchoStar IV - fully depreciated	N/A	78,511			78,511
EchoStar VI - fully depreciated	N/A	244,305			244,305
EchoStar VIII	12	175,801			175,801
EchoStar IX	12	127,376			127,376
EchoStar XII	10	190,051			190,051
EchoStar XVII	15	503,941			—
SPACEWAY 3	12	286,707			286,707
Satellites acquired under capital leases	10-15	935,104			906,526
Construction in progress	—	455,186			716,486
Total property and equipment		4,952,494			4,457,421
Accumulated depreciation		(2,340,210		)	(2,003,875		)
Property and equipment, net		$	2,612,284		$	2,453,546

As of December 31, 2012 and 2011, accumulated depreciation included accumulated depreciation of satellites acquired under capital leases of $362 million and $302 million, respectively.

“Construction in progress” consisted of the following:

	As of December 31,
	2012		2011
	(In thousands)
Progress amounts for satellite construction, including certain amounts prepaid under satellite service agreements and launch costs:
EchoStar XVI	$	345,090	$	232,364
EchoStar XVII	—		365,721
Other	35,035		39,501
Uplinking equipment	37,264		60,233
Other	37,797		18,667
Construction in progress	$	455,186	$	716,486

For the years ended December 31, 2012, 2011 and 2010, we recorded $45 million, $43 million and $26 million, respectively, of capitalized interest related to our satellites under construction.

Depreciation expense of our property and equipment consisted of the following:

	For the Years Ended December 31,
	2012		2011		2010
	(In thousands)
Satellites	$	150,034	$	112,182	$	92,750
Furniture, fixtures, equipment and other	202,628		157,274		98,481
Buildings and improvements	12,929		9,416		6,585
Total depreciation expense	$	365,591	$	278,872	$	197,816

Satellites depreciation expense includes amortization of satellites under capital lease agreements of $60 million, $34 million and $28 million for the years ended December 31, 2012, 2011 and 2010, respectively. Our depreciation expense increased in 2011 and 2012 as a result of the Hughes Acquisition. See Note 15 for further discussion.

Satellites

As of December 31, 2012, we utilized 11 of our 12 owned and leased satellites in geostationary orbit approximately 22,300 miles above the equator. Four of our satellites are accounted for as capital leases and are depreciated on a straight-line basis over the terms of the satellite service agreements. We depreciate our owned satellites on a straight-line basis over the estimated useful life of each satellite. Information for our satellite fleet is presented below.

			Nominal Degree	Depreciable
		Launch	Orbital Location	Life
Satellites	Segment	Date	(West Longitude)	(In Years)
Owned:
SPACEWAY 3 (4)	Hughes	August 2007	95	12
EchoStar XVII	Hughes	July 2012	107	15
EchoStar III (1) (2)	ESS	October 1997	61.5	12
EchoStar VI (1)	ESS	July 2000	77	12
EchoStar VIII (1)	ESS	August 2002	77	12
EchoStar IX (1)	ESS	August 2003	121	12
EchoStar XII (1)(5)	ESS	July 2003	61.5	10
EchoStar XVI (1)	ESS	November 2012	61.5	15

Leased from Other Third Parties (3):
AMC-15	ESS	January 2005	105	10
AMC-16	ESS	February 2005	85	10
Nimiq 5 (1)	ESS	October 2009	72.7	15
QuetzSat-1 (1)	ESS	November 2011	77	10

Under Construction (owned) :
CMBStar	Other	Construction Suspended

(1)	See Note 19 for further discussion of our transactions with DISH Network.
(2)	Fully depreciated and currently an in-orbit spare.
(3)	These satellites are accounted for as capital leases and their launch dates represent dates that the satellites were placed into service.
(4)	Depreciable life represents the remaining useful life as of the date of the Hughes Acquisition.
(5)	Depreciable life represents the remaining useful life as of the date EchoStar XII was acquired from a third-party in 2005.

Recent Developments

In July 2012, we successfully launched EchoStar XVII, our next-generation, geostationary high throughput satellite that employs a multi-spot beam and “bent pipe” Ka-band architecture. We introduced HughesNet Gen4 broadband Internet services to our customers in North America in October 2012 utilizing EchoStar XVII.

In November 2012, we successfully launched our EchoStar XVI satellite, a direct broadcast satellite. EchoStar XVI is fully leased to DISH Network for the delivery of DTH broadcast services to DISH customers in the United States. We expect to provide service on EchoStar XVI in the first quarter of 2013.

In November 2012, we entered into an agreement with Arianespace, SA to launch multiple new satellites over a multi-year period, which will provide us with launch capacity and flexibility for our satellite program.

In 2008, we entered into a transponder service agreement with SES Latin America S.A. (“SES”) to lease all of the capacity on QuetzSat-1. Concurrently, in 2008, we entered into a transponder service agreement with DISH Network, pursuant to which, DISH Network agreed to lease certain transponders on QuetzSat-1 when it is placed into commercial operation at the 77 degree west longitude orbital location. In January 2013, QuetzSat-1 was moved to the 77 degree west longitude orbital location and commenced commercial operations in February 2013. See Note 19 for further discussion of our agreement with DISH Network relating to QuetzSat-1.

Satellite Anomalies

Certain of our satellites have experienced anomalies, some of which have had a significant adverse impact on their remaining useful life and/or commercial operation. There can be no assurance that future anomalies will not further impact the remaining useful life and commercial operation of any of the satellites in our fleet. In addition, there can be no assurance that we can recover critical transmission capacity in the event one or more of our in-orbit satellites were to fail. We generally do not carry in-orbit insurance on our satellites; and therefore, we generally bear the risk of any uninsured in-orbit failures. Pursuant to the terms of the agreements governing certain portions of our indebtedness, we are required, subject to certain limitations on coverage, to maintain launch and in-orbit insurance for SPACEWAY 3, EchoStar XVI, and EchoStar XVII. Satellite anomalies with respect to certain of our satellites are discussed below.

Owned Satellites

EchoStar III. EchoStar III was originally designed to operate a maximum of 32 DBS transponders in a mode that provides service to the entire continental United States (“CONUS”) at approximately 120 watts per channel, switchable to 16 transponders operating at over 230 watts per channel, and was equipped with a total of 44 traveling wave tube amplifiers (“TWTAs”) to provide redundancy. As a result of TWTA failures in previous years, including the most recent failures in February 2013, only 8 transponders are currently available for use. Although these failures have impacted the commercial operation of the satellite, EchoStar III was fully depreciated in 2009. It is likely that additional TWTA failures will occur from time to time in the future and such failures could further impact commercial operation of the satellite.

EchoStar VI. EchoStar VI was designed to meet a minimum 12-year useful life. Prior to 2012, EchoStar VI experienced solar array anomalies and the loss of TWTAs that did not reduce its useful life; however, the solar array anomalies in 2010 impacted the commercial operation of the satellite. EchoStar VI lost (i) two additional TWTAs in March 2012, increasing the total number of TWTAs lost on the satellite to five out of 48 TWTAs and (ii) an additional solar array string during the second quarter of 2012, reducing the total power available for use by the spacecraft. The anomalies in 2012 did not impact current commercial operation or the estimated useful life of the satellite. However, there can be no assurance that these anomalies or any future anomalies will not reduce its useful life or impact its commercial operation. EchoStar VI was fully depreciated in August 2012.

EchoStar VIII. EchoStar VIII was designed to operate 32 DBS transponders in the continental U.S. at approximately 120 watts per channel, switchable to 16 DBS transponders operating at approximately 240 watts per channel. EchoStar VIII was also designed with spot-beam technology. Prior to 2012, EchoStar VIII experienced several anomalies. In January 2011, EchoStar VIII experienced an anomaly which temporarily disrupted electrical power to some components, causing an interruption of broadcast service and one of the two on-board computers used to control the satellite to fail. None of these anomalies has impacted the commercial operation or estimated useful life of the satellite. However, if the remaining on-board computer fails, the commercial operation of the satellite would cease and result in a complete loss of the satellite.

EchoStar XII. EchoStar XII was designed to operate 13 DBS transponders at 270 watts per channel in CONUS mode, 22 spot beams using a combination of 135 and 65 watt TWTAs or hybrid CONUS/spot beam mode. We currently operate EchoStar XII in spot beam mode. Prior to 2010, EchoStar XII experienced anomalies resulting in the loss of electrical power available from its solar arrays. In September 2012, November 2012, and January 2013, EchoStar XII experienced additional solar array anomalies, which further reduced the electrical power available to operate EchoStar XII. An investigation of the anomalies is continuing. Additional solar array anomalies are likely and, if they occur, they will continue to degrade the operational capability of EchoStar XII.

Leased Satellites

EchoStar I. Prior to 2012, we leased EchoStar I from DISH Network. During the first quarter of 2012, EchoStar I experienced a communications receiver anomaly, which had no impact on the commercial operation of the satellite. Effective July 1, 2012, we and DISH Network mutually agreed to terminate this satellite capacity agreement.

AMC-15. AMC-15, a fixed satellite services (“FSS”) satellite, commenced commercial operation during January 2005. AMC-15 is equipped with 24 Ku FSS transponders that operate at approximately 120 watts per channel and a Ka FSS payload consisting of 12 spot beams. Pursuant to the satellite services agreement, we are entitled to a reduction of our monthly recurring payment in the event of a partial loss of satellite capacity, which results in corresponding reductions in the related capital lease obligation and the carrying amount of the satellite. During 2011, AMC-15 experienced solar-power anomalies, which caused a partial power loss that reduced its capacity. As a result, the monthly recurring payment was reduced and the capital lease obligation and carrying amount of the satellite were each decreased by $20 million. There can be no assurance that these anomalies or any future anomalies will not reduce AMC-15’s useful life or further impact its commercial operations.

AMC-16. AMC-16, an FSS satellite, commenced commercial operation during February 2005. AMC-16 is equipped with 24 Ku-band FSS transponders that operate at approximately 120 watts per channel and a Ka-band payload consisting of 12 spot beams. Pursuant to the satellite services agreement, we are entitled to a reduction of our monthly recurring payment in the event of a partial loss of satellite capacity. During 2010, AMC-16 experienced a solar-power anomaly, which caused a partial power loss that reduced its capacity. As a result, the capital lease obligation and the carrying amount of the satellite were each decreased by $39 million. As a result of prior period adjustments associated with satellite anomalies and depreciation expense recognized on the satellite, the net carrying amount of AMC-16 had been reduced to zero as of December 31, 2010. In 2011 and in 2012, the monthly recurring payment for AMC-16 was further reduced due to the 2010 anomaly and additional solar power anomalies in 2012, resulting in reductions in the capital lease obligation of $7 million and $13 million, respectively. Because the carrying amount of AMC-16 had been reduced to zero in 2010, these 2011 and 2012 adjustments to the capital lease obligation were recognized as gains in “Other, net” on our Consolidated Statements of Operations and Comprehensive Income (Loss). There can be no assurance that these anomalies or any future anomalies will not reduce AMC-16’s useful life or further impact its commercial operations.

Satellite Impairments

We evaluate our satellites for impairment and test for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Certain of the anomalies discussed above, and previously disclosed, may be considered to represent a significant adverse change in the physical condition of a particular satellite. However, based on the redundancy designed within each satellite, these anomalies are not necessarily considered to be significant events that would require a test of recoverability.

In 2008, we suspended construction of the CMBStar satellite. In 2011, we determined that the carrying amount of the satellite was not recoverable and recognized a $33 million impairment to reduce the carrying amount of the satellite to its estimated fair value of $19 million. We estimated fair value by evaluating the probable cash flows that we may receive from potential uses including what other purchasers in the market may have paid for a reasonably similar asset and the amount we could realize should we deploy the satellite in a manner different from its original intended use. The valuation model used Level 3 inputs. We continue to explore alternative uses for this satellite, including potentially reconfiguring the satellite and changing its proposed orbital location in a manner that would be more cost-effective than designing and constructing a new satellite. There can be no assurance that this satellite will not be further impaired in the future.