Note 8. Property and Equipment

Property and equipment consisted of the following:

	Depreciable	As of
	Life	March 31,			December 31,
	(In Years)	2013			2012
		(In thousands)
Land	—	$	42,579		$	42,312
Buildings and improvements	1-40	365,548			363,338
Furniture, fixtures, equipment and other	1-12	1,088,092			1,064,071
Customer rental equipment	1-5	278,461			251,708
Satellites - owned (1)	10-15	2,127,826			1,762,264
Satellites acquired under capital leases	10-15	935,104			935,104
Construction in progress	—	109,821			455,186
Total property and equipment		4,947,431			4,873,983
Accumulated depreciation (1)		(2,361,258		)	(2,261,699		)
Property and equipment, net		$	2,586,173		$	2,612,284

(1) Balances reclassified for reduction of a satellite previously retired from commercial service.

“Construction in progress” consisted of the following:

	As of
	March 31,		December 31,
	2013		2012
	(In thousands)
Progress amounts for satellite construction, including certain amounts prepaid under satellite service agreements and launch costs:
EchoStar XIX	$	11,886	$	9,325
EchoStar XVI	—		345,090
Other	37,353		25,710
Uplinking equipment	35,046		37,264
Other	25,536		37,797
Construction in progress	$	109,821	$	455,186

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

	For the Three Months
	Ended March 31,
	2013		2012
	(In thousands)
Satellites	$	46,544	$	37,059
Furniture, fixtures, equipment and other	31,965		31,808
Customer rental equipment	23,287		18,765
Buildings and improvements	3,316		3,195
Total depreciation expense	$	105,112	$	90,827

Satellites

As of March 31, 2013, we utilized 12 of our 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.

Recent Developments

EchoStar VI and VIII. DISH Network leases satellite capacity from us on certain of our satellites. Beginning in the first quarter of 2013, the leases for the EchoStar VI and VIII satellites expired in accordance with their terms and DISH Network no longer leases capacity from us on these satellites.

EchoStar XVI. In November 2012, we launched our EchoStar XVI satellite, a direct broadcast satellite (“DBS”). EchoStar XVI is fully leased to DISH Network for the delivery of direct-to-home (“DTH”) broadcast services to DISH Network customers in the United States. We began to lease capacity on EchoStar XVI to DISH Network in January 2013.

EchoStar XIX. In March 2013, we entered into a contract for the design and construction of EchoStar XIX, which is expected to be launched in mid-2016. EchoStar XIX is our next-generation, high throughput geostationary satellite that will employ a multi-spot beam, bent pipe Ka-band architecture and will provide additional capacity for our HughesNet service to the consumer market in North America.

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; 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. The recent satellite anomalies that affected 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”). As a result of traveling wave tube amplifiers (“TWTAs”) failures in previous years, including the most recent failures in February 2013 and April 2013, only six transponders are currently available for use. 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 III was fully depreciated in 2009.

EchoStar XII. EchoStar XII was designed to operate using 13 Ku Band broadcasting satellite service frequencies. Prior to 2010, EchoStar XII experienced anomalies resulting in the loss of electrical power available from its solar arrays, which reduced the number of transponders that could be operated. In September 2012, November 2012, and January 2013, EchoStar XII experienced additional solar array anomalies, which further reduced electrical power available. It is likely that EchoStar XII will experience additional solar array anomalies and there can be no assurance that the existing anomalies or any future anomalies will not further impact operational capability of EchoStar XII. The satellite is currently leased to DISH Network.

Leased Satellites

Pursuant to our satellite lease agreements, we are entitled to a reduction in our monthly recurring lease payments in the event of a partial loss of satellite capacity, which ordinarily results in a corresponding reduction in the related capital lease obligation and the carrying amount of the respective satellite.

AMC-16. As a result of prior period depreciation and adjustments associated with satellite anomalies, the net carrying amount of AMC-16 was reduced to zero as of December 31, 2010. Therefore, subsequent reductions in our recurring lease payments are recognized as gains in “Other, net” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). In November 2012, AMC-16 experienced a solar-power anomaly, which caused a partial loss of the satellite capacity. Accordingly, we reduced our capital lease obligation and recognized a corresponding gain of $7 million for the three months ended March 31, 2013. There can be no assurance that the existing 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.