7. Investments in Affiliates

Investments in affiliates consist of (in thousands):


	March 31, 2013		December 31, 2012
Telesat Holdings Inc.	$	—	$	—
XTAR, LLC		60,754		62,517
	$	60,754	$	62,517

Our investment in Telesat Holdco was reduced to zero as of March 31, 2013 and December 31, 2012, as discussed below.

Equity in net (loss) income of affiliates consists of (in thousands):


	Three Months Ended March 31,
	2013		2012
Telesat Holdings Inc.	$	(718)	$	7,380
XTAR, LLC		(1,763)		(511)
Other		(4,800)		—
	$	(7,281)	$	6,869

The condensed consolidated statement of operations for the three months ended March 31, 2012 reflects the effects of the following amounts related to SS/L’s transactions with our affiliates (in thousands):


	Three Months Ended March 31, 2012
Revenues included in income from discontinued operations	$	24,156
Elimination of Loral’s proportionate share of profits relating to affiliate transactions		(6,841)
Profits included in income from discontinued operations relating to affiliate transactions not eliminated		3,848

Equity in net income of affiliates for the three months ended March 31, 2012 included $4.6 million of profits previously eliminated on satellite sales from SS/L to affiliates that should have been recognized in prior periods as the satellites were depreciated. The Company has not revised previously reported amounts based on its belief that the effect of such adjustments is not material to the financial statements taken as a whole.

Telesat

As of December 31, 2012 and March 31, 2013, we held a 62.8% economic interest in Telesat. Our economic interest decreased from 64% to 62.8% in December 2012 when certain executives of Telesat exercised share appreciation rights related to a total of 5,311,568 stock options granted under Telesat’s share based compensation plan and received 2,249,747 non-voting participating preferred shares.

We use the equity method of accounting for our majority economic interest in Telesat because we own 33⅓% of the voting stock and do not exercise control by other means to satisfy the U.S. GAAP requirement for treatment as a consolidated subsidiary. We have also concluded that Telesat is not a variable interest entity for which we are the primary beneficiary. Loral’s equity in net income or loss of Telesat is based on our proportionate share of Telesat’s results in accordance with U.S. GAAP and in U.S. dollars. Our proportionate share of Telesat’s net income or loss is based on our economic interest as our holdings consist of common stock and non-voting participating preferred shares that have all the rights of common stock with respect to dividends, return of capital and surplus distributions, but have no voting rights.

On March 28, 2012, Telesat entered into a new credit agreement (the ‘‘Telesat Credit Agreement’’) with a syndicate of banks. Simultaneously with entering into the Telesat Credit Agreement, Telesat terminated and paid all outstanding amounts under its previous credit facilities and recorded an expense of refinancing of $22 million related to deferred financing costs on the previous credit facilities.

In connection with the closing of the Telesat Credit Agreement, the Board of Directors of Telesat approved special cash distributions to Telesat’s shareholders of CAD 656.5 million, including a distribution of CAD 420 million to Loral. The special distributions by Telesat to its shareholders were authorized to be paid in two tranches; the first tranche was paid by Telesat on March 28, 2012, with Loral receiving CAD 375 million ($376 million), and the second tranche was paid by Telesat on July 5, 2012, with Loral receiving CAD 45 million ($44 million).

As of March 31, 2013 and December 31, 2012, the special cash distributions received from Telesat exceeded our recorded cumulative equity in net income of Telesat and our initial investment by $14 million and $7 million, respectively. In following the equity method of accounting, our investment balance in Telesat was reduced to zero as of March 31, 2013 and December 31, 2012, and we will not record equity in net income of Telesat until our share of Telesat’s future net income exceeds $14 million.

On March 28, 2013, Telesat notified the trustee under the indenture dated as of June 30, 2008, of its election to redeem any and all of the 12.5% senior subordinated notes due November 1, 2017. The redemption took place on May 1, 2013 at a price of 106.25% of the principal amount of the senior subordinated notes. Expense of refinancing for the three months ended March 31, 2013 primarily represents the premium paid and the write-off of deferred financing costs related to this note redemption.

On April 2, 2013, Telesat re-priced and amended its existing credit agreement, dated March 28, 2012. The amendment converted CAD 34 million from Canadian to U.S. dollars and decreased the interest rates on Telesat’s Canadian and U.S. term loan B facilities by 0.50%. The amendment also decreased the interest rate floors on the debt to 1.00% and 0.75% for the Canadian term loan B facility and U.S. term loan B facility, respectively. The permitted leverage ratio to incur first lien debt is now 4.25:1.00 which represents a change from the prior 4.00:1.00 senior secured leverage ratio in the credit agreement.

The ability of Telesat to pay dividends or certain other restricted payments as well as consulting fees in cash to Loral is governed by applicable covenants relating to Telesat’s debt and shareholder agreements. Under Telesat’s 12.5% note indenture, which was generally the most restrictive agreement as of March 31, 2013, dividends or certain other restricted payments were allowed to be paid only if there was sufficient capacity under a restricted payment basket, which was based on a formula of cumulative consolidated EBITDA less 1.4 times cumulative consolidated interest expense. Under the terms of its note indenture, Telesat was permitted to pay consulting fees to Loral only when Telesat’s ratio of consolidated total debt to consolidated EBITDA was less than 5.0 to 1.0. When the ratio was not less than 5.0 to 1.0, the consulting fee was paid through the issuance of promissory notes to Loral with an interest rate of 7% and a maturity date of October 31, 2018. Any prepayment of these promissory notes was subject to the restricted payments basket noted above. Our general and administrative expenses for each of the three month periods ended March 31, 2013 and 2012 are net of income of $1.25 million related to the Consulting Agreement. For the three months ended March 31, 2013 and 2012, Loral received payments in cash from Telesat of nil and $1.6 million, respectively, and payments in promissory notes of $1.3 million and nil, respectively, for consulting fees and interest.

The following table presents summary financial data for Telesat in accordance with U.S. GAAP, as of March 31, 2013 and December 31, 2012 and for the three months ended March 31, 2013 and 2012 (in thousands):


	Three Months Ended March 31,
	2013		2012
Statement of Operations Data:
Revenues	$	217,468	$	196,023
Operating expenses		(50,158)		(83,740)
Depreciation, amortization and stock-based compensation		(57,818)		(60,488)
Gain (loss) on disposition of long lived asset		468		(58)
Operating income		109,960		51,737
Interest expense		(59,695)		(51,690)
Expense of refinancing		(19,964)		(21,862)
Foreign exchange (losses) gains		(70,340)		62,490
Gains (losses) on financial instruments		36,853		(26,425)
Other income		383		724
Income tax (provision) benefit		(7,842)		2,429
Net (loss) income		(10,645)		17,403


	March 31, 2013		December 31, 2012
Balance Sheet Data:
Current assets	$	356,099	$	289,614
Total assets		5,257,304		5,342,313
Current liabilities		494,297		237,739
Long-term debt, including current portion		3,492,368		3,519,872
Total liabilities		4,709,501		4,770,966
Shareholders’ equity		547,803		571,347

XTAR

We own 56% of XTAR, a joint venture between us and Hisdesat Servicios Estrategicos, S.A. (“Hisdesat”) of Spain. We account for our ownership interest in XTAR under the equity method of accounting because we do not control certain of its significant operating decisions.

XTAR owns and operates an X-band satellite, XTAR-EUR, located at 29° E.L., which is designed to provide X-band communications services exclusively to United States, Spanish and allied government users throughout the satellite’s coverage area, including Europe, the Middle East and Asia. XTAR also leases 7.2 72MHz X-band transponders on the Spainsat satellite located at 30° W.L., owned by Hisdesat. These transponders, designated as XTAR-LANT, provide capacity to XTAR for additional X-band services and greater coverage and flexibility.

We regularly evaluate our investment in XTAR to determine whether there has been a decline in fair value that is other-than-temporary. We have performed an impairment test for our investment in XTAR as of March 31, 2013, using XTAR’s most recent forecast, and concluded that our investment in XTAR was not impaired. Any declines in XTAR’s projected revenues may result in a future impairment charge.

XTAR’s lease obligation to Hisdesat for the XTAR-LANT transponders requires payments by XTAR of $25 million in 2013, with increases thereafter to a maximum of $28 million per year through the end of the useful life of the satellite which is estimated to be in 2022. Under this lease agreement, Hisdesat may also be entitled under certain circumstances to a share of the revenues generated on the XTAR-LANT transponders. In March 2009, XTAR entered into an agreement with Hisdesat pursuant to which the past due balance on XTAR-LANT transponders of $32.3 million as of December 31, 2008, together with a deferral of $6.7 million in payments due in 2009, will be payable to Hisdesat over 12 years through annual payments of $5 million (the “Catch Up Payments”). XTAR has a right to prepay, at any time, all unpaid Catch Up Payments discounted at 9%. Cumulative amounts paid to Hisdesat for Catch-Up Payments through March 31, 2013 were $20.0 million. XTAR has also agreed that XTAR’s excess cash balance (as defined) will be applied towards making limited payments on future lease obligations, as well as payments of other amounts owed to Hisdesat, Telesat and Loral for services provided by them to XTAR (see Note 17). The ability of XTAR to pay dividends and management fees in cash to Loral is governed by XTAR’s operating agreement.

The following table presents summary financial data for XTAR as of March 31, 2013 and December 31, 2012 and for the three months ended March 31, 2013 and 2012 (in thousands):


	Three Months Ended March 31,
	2013		2012
Statement of Operations Data:
Revenues	$	8,125	$	7,851
Operating expenses		(8,369)		(8,324)
Depreciation and amortization		(2,310)		(2,405)
Operating loss		(2,554)		(2,878)
Net loss		(3,259)		(3,671)


	March 31, 2013		December 31, 2012
Balance Sheet Data:
Current assets	$	9,341	$	7,838
Total assets		73,998		74,721
Current liabilities		48,738		46,296
Total liabilities		58,489		55,953
Members’ equity		15,509		18,768

Other

In connection with the sale in 2008 by Loral and certain of its subsidiaries and DASA Globalstar LLC to Globalstar Inc. of their respective interests in Globalstar do Brasil S.A. (“GdB”), the Globalstar Brazilian service provider, Loral agreed to indemnify Globalstar Inc. and GdB for certain GdB pre-closing liabilities, primarily related to Brazilian taxes. As a result of an April 2013 adverse court decision in Brazil relating to a potential tax liability, an adverse outcome for which was previously believed to be remote, Loral recorded a loss contingency of $4.8 million in the first quarter of 2013 for such liability.

As of March 31, 2013 and December 31, 2012, the Company held various indirect ownership interests in two foreign companies that currently serve as exclusive service providers for Globalstar service in Mexico and Russia. The Company accounts for these ownership interests using the equity method of accounting. Loral has written-off its investments in these companies, and, because we have no future funding requirements relating to these investments, there is no requirement for us to provide for our allocated share of these companies’ net losses.