7. Investments in Affiliates

Investments in affiliates consist of (in thousands):


	September 30, 2013		December 31, 2012
Telesat Holdings Inc.	$	34,116	$	—
XTAR, LLC		57,449		62,517
	$	91,565	$	62,517

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

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Telesat Holdings Inc.	$	34,242	$	43,654	$	34,242	$	42,179
XTAR, LLC		(1,569)		(2,068)		(5,068)		(5,077)
Other		685		—		(2,965)		—
	$	33,358	$	41,586	$	26,209	$	37,102

The condensed consolidated statements of operations for the three and nine months ended September 30, 2012 reflect the effects of the following amounts related to SS/L’s transactions with our affiliates (in thousands):


	Three Months Ended September 30, 2012		Nine Months Ended September 30, 2012
Revenues included in income from discontinued operations	$	9,363	$	55,946
Elimination of Loral’s proportionate share of profits relating to affiliate transactions		(2,438)		(16,463)
Profits included in income from discontinued operations relating to affiliate transactions not eliminated		1,371		9,260

Equity in net income of affiliates for the nine months ended September 30, 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 September 30, 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 32.7% 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.

In connection with the closing of a new credit agreement (the “Telesat Credit Agreement”) in March 2012, 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 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 $7.4 million. In following the equity method of accounting, our investment balance in Telesat was reduced to zero as of December 31, 2012. For the three and nine months ended September 30, 2013, we reduced our equity in net income of Telesat by the excess special cash distribution of $7.4 million.

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.

On May 1, 2013, Telesat redeemed its 12.5% senior subordinated notes due November 1, 2017 at a price of 106.25% of the principal amount of the senior subordinated notes. Expense of refinancing for the nine months ended September 30, 2013 primarily represents the premium paid and the write-off of deferred financing costs related to this note redemption.

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 in Telesat’s debt and shareholder agreements. Under Telesat’s credit agreement and the indenture for Telesat’s 6% senior notes, dividends or certain other restricted payments may be paid only if there is a sufficient capacity under a restricted payment basket, which is based on a formula of cumulative consolidated EBITDA less 1.4 times cumulative consolidated interest expense. Under the 6% senior note indenture and credit agreement, Telesat is generally permitted to pay consulting fees to Loral in cash. Our general and administrative expenses are net of income related to the Consulting Agreement of $1.25 million for each of the three month periods ended September 30, 2013 and 2012 and $3.8 million for each of the nine months period ended September 30, 2013 and 2012. For the nine months ended September 30, 2013 and 2012, Loral received payments in cash from Telesat of $5.1 million and $1.6 million, respectively, for consulting fees and interest. The payments received by Loral from Telesat for the nine months ended September 30, 2013 included redemption of $1.3 million of notes receivable. These amounts were not allowed to be paid as of December 31, 2012 because Telesat did not meet the leverage ratio required for payment under the indenture for its 12.5% senior subordinated notes due November 1, 2017.

The contribution of Loral Skynet, a wholly owned subsidiary of Loral prior to its contribution to Telesat in 2007, was recorded by Loral at the historical book value of our retained interest combined with the gain recognized on the contribution. However, the contribution was recorded by Telesat at fair value. Accordingly, the amortization of Telesat fair value adjustments applicable to the Loral Skynet assets and liabilities is proportionately eliminated in determining our share of the net income or losses of Telesat. Our equity in the net income or loss of Telesat also reflects the elimination of our profit, to the extent of our economic interest, on satellites we constructed for Telesat while we owned SS/L.

The following table presents summary financial data for Telesat in accordance with U.S. GAAP, as of September 30, 2013 and December 31, 2012 and for the three and nine months ended September 30, 2013 and 2012 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Statement of Operations Data:
Revenues	$	226,907	$	220,361	$	654,413	$	616,236
Operating expenses		(45,736)		(50,372)		(140,068)		(186,319)
Depreciation, amortization and stock-based compensation		(62,946)		(65,291)		(183,609)		(186,788)
Loss on disposition of long lived asset		(15)		(53)		(1,557)		(129)
Operating income		118,210		104,645		329,179		243,000
Interest expense		(49,831)		(59,020)		(160,603)		(172,302)
Expense of refinancing		—		(270)		(19,763)		(79,673)
Foreign exchange gains (losses)		58,171		94,424		(110,558)		100,736
(Losses) gains on financial instruments		(25,471)		(40,900)		71,137		(41,555)
Other income		420		179		11,055		1,144
Income tax provision		(18,485)		(14,333)		(45,478)		(18,652)
Net income		83,014		84,725		74,969		32,698


	September 30, 2013		December 31, 2012
Balance Sheet Data:
Current assets	$	324,416	$	289,614
Total assets		5,060,765		5,342,313
Current liabilities		308,258		237,739
Long-term debt, including current portion		3,244,624		3,519,872
Total liabilities		4,436,822		4,770,966
Shareholders’ equity		623,943		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 September 30, 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 September 30, 2013 were $22.9 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 September 30, 2013 and December 31, 2012 and for the three and nine months ended September 30, 2013 and 2012 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Statement of Operations Data:
Revenues	$	8,406	$	7,613	$	24,856	$	22,285
Operating expenses		(8,188)		(8,239)		(25,050)		(24,842)
Depreciation and amortization		(2,310)		(2,345)		(6,930)		(7,095)
Operating loss		(2,092)		(2,971)		(7,124)		(9,652)
Net loss		(2,913)		(3,804)		(9,382)		(12,047)


	September 30, 2013		December 31, 2012
Balance Sheet Data:
Current assets	$	5,317	$	7,838
Total assets		65,354		74,721
Current liabilities		20,797		18,894
Total liabilities		55,967		55,953
Members’ equity		9,387		18,768

In the notes to condensed consolidated financial statements for periods prior to June 30, 2013, XTAR’s liability to Hisdesat of $27.4 million for Catch Up Payments as of December 31, 2012 was included in current liabilities. In the XTAR summary financial data above, the liability for Catch Up payments was reflected as a long-term liability because the amount is payable over 12 years. This change had no effect on the Loral condensed consolidated financial statements.

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 and made a payment of $3.7 million against that liability in the second quarter of 2013. During the third quarter of 2013, we reversed $0.9 million of the remaining liability for this matter, primarily due to a favorable court decision.

During the second quarter of 2013 the Company received net cash proceeds of $1.1 million related to the sale of its ownership interests in an affiliate with no carrying value. The gain on sale is included in equity in net income of affiliates.

As of September 30, 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.