5. Investments in Affiliates

Investments in affiliates consist of (in thousands):


	March 31,		December 31,
	2014		2013
Telesat Holdings Inc.	$	55,636	$	60,157
XTAR, LLC		55,178		56,663
	$	110,814	$	116,820

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


	Three Months Ended March 31,
	2014		2013
Telesat Holdings Inc.	$	(684)	$	(718)
XTAR, LLC		(1,485)		(1,763)
Other		—		(4,800)
	$	(2,169)	$	(7,281)

Telesat

As of December 31, 2013 and March 31, 2014, we held a 62.8% economic interest and a 32.7% voting interest in Telesat. 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.

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 months ended March 31, 2014 and 2013. For the three months ended March 31, 2014 and 2013, Loral received payments in cash from Telesat of $1.2 million, net of withholding tax, and nil, respectively, and payments in promissory notes of nil and $1.27 million, respectively, for consulting fees and interest. The payments received by Loral from Telesat for the three months ended March 31, 2013 were not allowed to be paid in cash because Telesat did not meet the leverage ratio required for cash payment under the indenture for its 12.5% senior subordinated notes due November 1, 2017. These notes were redeemed in May 2013 (see Note 15).

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 net income or loss of Telesat also reflects amortization of profits eliminated, to the extent of our economic interest in Telesat, on satellites we constructed for Telesat while we owned SS/L and on Loral’s sale to Telesat in April 2011 of its portion of the payload on the ViaSat-1 satellite and related assets.

In connection with the acquisition of our ownership interest in Telesat in 2007, Loral retained the benefit of tax recoveries related to transferred assets and indemnified Telesat (“Telesat Indemnification”) for certain liabilities including Loral Skynet’s tax liabilities arising prior to January 1, 2007. During the three months ended March 31, 2014, Loral and Telesat settled several of the Telesat Indemnification tax disputes (see Note 15) resulting in a net tax recovery of $5.4 million which is included in other current assets on our balance sheet as of March 31, 2014. Our investment in Telesat was reduced by $5.0 million as a result of this recovery.

The following table presents summary financial data for Telesat in accordance with U.S. GAAP, as of March 31, 2014 and December 31, 2013 and for the three months ended March 31, 2014 and 2013 (in thousands):


	Three Months Ended March 31,
	2014		2013
Statement of Operations Data:
Revenues	$	220,599	$	217,468
Operating expenses		(40,330)		(50,158)
Depreciation, amortization and stock-based compensation		(58,481)		(57,818)
(Loss) gain on disposition of long lived asset		(59)		468
Operating income		121,729		109,960
Interest expense		(47,515)		(59,695)
Expense of refinancing		—		(19,964)
Foreign exchange losses		(101,749)		(70,340)
Gains on financial instruments		47,350		36,853
Other income		739		383
Income tax provision		(21,149)		(7,842)
Net loss	$	(595)	$	(10,645)


	March 31,		December 31,
	2014		2013
Balance Sheet Data:
Current assets	$	416,245	$	366,814
Total assets		4,756,122		4,929,838
Current liabilities		288,867		360,744
Long-term debt, including current portion		3,176,815		3,215,831
Total liabilities		4,129,276		4,280,902
Shareholders’ equity		626,846		648,936

Telesat had capital expenditures of $11.4 million and $30.7 million for the three months ended March 31, 2014 and 2013, respectively.

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 performed an impairment test for our investment in XTAR as of March 31, 2014, using XTAR’s most recent forecast, and concluded that our investment in XTAR was not impaired.

XTAR’s lease obligation to Hisdesat for the XTAR-LANT transponders requires payments by XTAR of $25 million in 2014, 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, 2014 were $25.4 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 15). 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, 2014 and December 31, 2013 and for the three months ended March 31, 2014 and 2013 (in thousands):


	Three Months Ended March 31,
	2014		2013
Statement of Operations Data:
Revenues	$	8,046	$	8,125
Operating expenses		(7,807)		(8,369)
Depreciation and amortization		(2,315)		(2,310)
Operating loss		(2,076)		(2,554)
Net loss		(2,762)		(3,259)


	March 31,		December 31,
	2014		2013
Balance Sheet Data:
Current assets	$	5,929	$	6,970
Total assets		61,388		64,745
Current liabilities		22,737		22,443
Total liabilities		56,277		56,872
Members’ equity		5,111		7,873

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 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. A payment of $3.7 million related to this loss contingency was made in the second quarter of 2013, and, in the third quarter of 2013, this loss was adjusted to $3.7 million, primarily due to a favorable court decision.

As of March 31, 2014 and December 31, 2013, 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.