5. Investments in Affiliates

Investments in affiliates consist of (in thousands):


	September 30,		December 31,
	2014		2013
Telesat Holdings Inc.	$	107,235	$	60,157
XTAR, LLC		51,348		56,663
	$	158,583	$	116,820

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Telesat Holdings Inc.	$	(17,240)	$	34,242	$	48,226	$	34,242
XTAR, LLC		(2,043)		(1,569)		(5,315)		(5,068)
Other		—		685		—		(2,965)
	$	(19,283)	$	33,358	$	42,911	$	26,209

Telesat

As of December 31, 2013 and September 30, 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.

Our statements of operations and comprehensive (loss) income for the three and nine months ended September 30, 2014 included equity in net (loss) income of affiliates of $(1.5) million and $0.3 million, respectively, and other comprehensive income of $1.5 million and $0.4 million, respectively, that should have been recognized in prior periods. These adjustments, which related to our investment in Telesat, consisted primarily of foreign exchange gains and losses. 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.

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 consulting fees of $1.25 million for each of the three month periods ended September 30, 2014 and 2013 and $3.8 million for each of the nine month periods ended September 30, 2014 and 2013. For the nine months ended September 30, 2014 and 2013, Loral received payments in cash from Telesat, net of withholding taxes, of $3.6 million and $5.0 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 in cash previously 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.

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 nine months ended September 30, 2014, Loral and Telesat settled several of the Telesat Indemnification tax disputes (see Note 15) resulting in a net cash recovery of $5.4 million which was received from Telesat in April 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, for the three and nine months ended September 30, 2014 and 2013 and as of September 30, 2014 and December 31, 2013 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Statement of Operations Data:
Revenues	$	210,163	$	226,907	$	636,552	$	654,413
Operating expenses		(42,827)		(45,736)		(122,402)		(140,068)
Depreciation, amortization and stock-based compensation		(58,955)		(62,946)		(175,713)		(183,609)
Loss on disposition of long lived asset		(164)		(15)		(226)		(1,557)
Operating income		108,217		118,210		338,211		329,179
Interest expense		(47,573)		(49,831)		(142,589)		(160,603)
Expense of refinancing		—		—		—		(19,763)
Foreign exchange (loss) gain		(96,093)		58,171		(105,177)		(110,558)
Gain (loss) on financial instruments		15,146		(25,471)		31,517		71,137
Other income		841		420		3,007		11,055
Income tax provision		(7,484)		(18,485)		(46,640)		(45,478)
Net (loss) income	$	(26,946)	$	83,014	$	78,329	$	74,969


	September 30,		December 31,
	2014		2013
Balance Sheet Data:
Current assets	$	525,438	$	366,814
Total assets		4,752,333		4,929,838
Current liabilities		283,333		360,744
Long-term debt, including current portion		3,137,225		3,215,831
Total liabilities		4,049,040		4,280,902
Shareholders’ equity		703,293		648,936

Telesat had capital expenditures of $59.8 million and $48.3 million for the nine months ended September 30, 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 September 30, 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 September 30, 2014 were $27.9 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 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 for the three and nine months ended September 30, 2014 and 2013 and as of September 30, 2014 and December 31, 2013 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Statement of Operations Data:
Revenues	$	6,642	$	8,406	$	22,363	$	24,856
Operating expenses		(7,717)		(8,188)		(23,530)		(25,050)
Depreciation and amortization		(2,314)		(2,310)		(6,943)		(6,930)
Operating loss		(3,389)		(2,092)		(8,110)		(7,124)
Net loss		(3,758)		(2,913)		(9,822)		(9,382)


	September 30,		December 31,
	2014		2013
Balance Sheet Data:
Current assets	$	3,858	$	6,970
Total assets		54,688		64,745
Current liabilities		24,924		22,443
Total liabilities		56,637		56,872
Members’ equity		(1,949)		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.

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 (loss) income of affiliates.

As of September 30, 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.