Note 8. Property and Equipment

Property and equipment consisted of the following:

		As of December 31,

	Depreciable Life (In Years)	As of December 31,
	Depreciable Life (In Years)	2013			2012
		(In thousands)
Land	—	$	42,850		$	42,312
Buildings and improvements	3-40		377,208			363,338
Furniture, fixtures, equipment and other	1-12		1,157,325			1,064,071
Customer rental equipment	2-4		374,688			251,708
Satellites—owned(1)	1.5-15		1,949,040			1,762,264
Satellites acquired under capital leases	10-15		935,104			935,104
Construction in progress	—		210,051			455,186


Total property and equipment			5,046,266			4,873,983
Accumulated depreciation(1)			(2,499,889	)		(2,261,699	)


Property and equipment, net		$	2,546,377		$	2,612,284

(1): Balances previously reported as of December 31, 2012 have been reduced to exclude a fully-depreciated satellite that was retired from commercial service prior to December 31, 2012.

As of December 31, 2013 and 2012, accumulated depreciation included accumulated depreciation of satellites acquired under capital leases of $421.8 million and $362.1 million, respectively.

"Construction in progress" consisted of the following:

		As of December 31,

	Segment	2013		2012
		(In thousands)
Progress amounts for satellite construction, including certain amounts prepaid under satellite service agreements and launch costs:
EchoStar XIX	Other	$	122,070	$	9,325
TerreStar-2	Other		16,433		—
EchoStar XVI	ESS		—		345,090
Other	ETC/ESS		24,160		25,710
Uplinking equipment	ETC/Hughes		20,793		37,264
Other	ETC/Hughes/ESS		26,595		37,797


Construction in progress		$	210,051	$	455,186

For the years ended December 31, 2013, 2012 and 2011, we recorded $4.0 million, $45.5 million and $42.7 million, respectively, of capitalized interest related to our satellites under construction.

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

	For the Years Ended December 31,

	2013		2012		2011
Satellites	$	180,517	$	150,034	$	112,182
Furniture, fixtures, equipment and other		126,625		121,919		116,397
Customer rental equipment		98,076		80,709		40,877
Buildings and improvements		13,449		12,929		9,416


Total depreciation expense	$	418,667	$	365,591	$	278,872

Satellites depreciation expense includes amortization of satellites under capital lease agreements of $59.7 million, $59.7 million and $33.9 million for the years ended December 31, 2013, 2012 and 2011, respectively. Our depreciation expense increased in 2012 and 2011 as a result of the Hughes Acquisition. See Note 15 for further discussion.

Satellites

As of December 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. Information for our satellite fleet is presented below.

Satellites	Segment	Launch Date

Owned:
SPACEWAY3(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	ESS	July 2000	96.2	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	1.5
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

(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 June 30, 2013, the date EchoStar XII was impaired.

Recent Developments

EchoStar I, EchoStar VII, EchoStar X, EchoStar XI, EchoStar XIV. On February 20, 2014, we entered into agreements with DISH Network to implement a transaction pursuant to which, among other things: (i) on March 1, 2014, EchoStar and HSS will issue shares of preferred tracking stock to DISH Network in exchange for five satellites owned by DISH Network (EchoStar I, EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV) (including related in-orbit incentive obligations and interest payments of approximately $58.9 million) and approximately $11.4 million in cash; and (ii) beginning on March 1, 2014, DISH Network will lease certain satellite capacity on these five satellites (collectively, the "Satellite and Tracking Stock Transaction"). See Note 20 for a discussion of our subsequent events.

EchoStar VI and VIII. DISH Network leases satellite capacity from us on certain of our satellites. The leases for the EchoStar VI and VIII satellites expired in accordance with their terms in the first quarter of 2013. EchoStar VI was fully depreciated in August 2012. In May 2013, DISH Network began leasing capacity from us on EchoStar VIII as an in-orbit spare. Effective March 1, 2014, this lease will be converted to a month-to-month lease. Both parties have the right to terminate this lease with 30 days notice.

EchoStar XVI. In November 2012, we launched the EchoStar XVI satellite, a direct broadcast satellite ("DBS"). EchoStar XVI is leased to DISH Network for the delivery of direct-to-home ("DTH") broadcast services to DISH Network customers in the United States. We began leasing 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 the EchoStar XIX satellite, 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 broadband services to the consumer market in North America in our Hughes segment.

TerreStar-2. In August 2013, we and DISH Network entered into a development agreement ("T2 Development Agreement") with respect to the TerreStar-2 ("T2") satellite under which we reimburse DISH Network for amounts it pays to Space Systems/Loral, LLC ("SS/L") in connection with the construction of the T2 satellite. As amended in December 2013, the T2 Development Agreement provides for the ability to purchase DISH Network's rights and obligations under the T2 satellite construction agreements with SS/L. The T2 satellite is designed to provide mobile satellite services using S-band frequencies and we may use this satellite in conjunction with our recently acquired S-band spectrum in Europe.

EchoStar XV. In May 2013, we began leasing satellite capacity from DISH Network on EchoStar XV as an operating lease and relocated the satellite to the 45 degree west longitude orbital location for testing pursuant to our Brazilian Authorization. Effective March 1, 2014, this lease will be converted to a month-to-month lease. Both parties have the right to terminate this lease with 30 days notice.

QuetzSat-1. In 2008, we entered into a transponder service agreement with 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 24 of the DBS 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 in the Notes to our Consolidated Financial Statements in Item 15 of this report 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 lives and/or commercial operations. 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 have 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 the failure of traveling wave tube amplifiers ("TWTAs") 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 and is currently used as an in-orbit spare.

EchoStar VI. EchoStar VI was designed to operate 32 DBS transponders with 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 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 the satellite's 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 CONUS at approximately 120 watts per channel, switchable to 16 DBS transponders operating at approximately 240 watts per channel. Prior to and during 2011, 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 causing one of the two on-board computers used to control the satellite to fail. These anomalies have not 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, or 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 engineering analysis completed in the second quarter of 2013 indicated further loss of available electrical power and resulting capacity loss was likely. As a result, we recognized a $34.7 million impairment loss in the second quarter of 2013. Additional solar array anomalies are likely, and if they occur, they will continue to degrade the operational capability of EchoStar XII and could lead to additional impairment charges in the future.

Leased Satellites

AMC-16. AMC-16, a FSS satellite, commenced commercial operation during February 2005. AMC-16 was designed to operate 24 Ku-band FSS transponders that operate at approximately 120 watts per channel and a Ka-band payload consisting of 12 spot beams. In each of February 2012, April 2012, and November 2012, AMC-16 experienced a solar-power anomaly, which caused additional partial loss of satellite capacity. 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. Thereafter, subsequent reductions in our capital lease obligation resulting from reductions in our recurring lease payments are recognized as gains in "Other, net" on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Upon determination of related reductions in our monthly recurring payments, we reduced our capital lease obligation for AMC-16 and recognized corresponding gains of $12.6 million in 2012 and $6.7 million in 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, certain of these anomalies are not necessarily considered to be significant events that would require a test of recoverability.

EchoStar XII. Prior to 2012, 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. Our ongoing engineering analysis, completed in consultation with the satellite manufacturer, has indicated that further loss of available electrical power and resulting capacity loss is likely. The satellite is currently leased to DISH Network pursuant to an agreement that entitles DISH Network to a reduction in its monthly recurring lease payments in the event of a partial loss of satellite capacity or complete failure of the satellite. In the second quarter of 2013, we determined that the undiscounted cash flows from DISH Network were not likely to be sufficient to recover the carrying amount of the satellite as a result of expected reductions in the monthly recurring lease payments due to future capacity loss. Consequently, in the second quarter of 2013, we recognized a $34.7 million impairment loss within our EchoStar Satellite Services segment to reduce the carrying amount of the satellite to its estimated fair value of $11.3 million as of June 30, 2013. Our fair value estimate was determined using probability weighted discounted cash flow techniques and is categorized within Level 3 of the fair value hierarchy. Our estimate included significant unobservable inputs related to predicted electrical power levels and the number of billable transponders that can be supported by predicted available power. In connection with our impairment analysis, we revised our estimate of the useful life of the satellite. Effective July 2013, the $11.3 million adjusted carrying amount of EchoStar XII is depreciated on a straight-line basis over its then remaining estimated useful life of 18 months. The carrying amount of EchoStar XII, net of accumulated depreciation, as of December 31, 2013 was $7.5 million.

CMBStar. In 2008, we suspended construction of the CMBStar satellite. In 2011, we determined that the carrying amount of the incomplete satellite was not recoverable and recognized a $33.0 million impairment to reduce the carrying amount of the satellite to its estimated fair value of $19.2 million. We estimated the fair value by evaluating the probable cash flows that we may receive from potential uses including what market participants 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.