6. Investments in Affiliates

Investments in affiliates consist of (in thousands):


	December 31,
	2014		2013
Telesat Holdings Inc.	$	74,329	$	60,157
XTAR, LLC		30,463		56,663
	$	104,792	$	116,820

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


	Year Ended December 31,
	2014		2013		2012
Telesat Holdings Inc.	$	24,698	$	47,251	$	40,814
XTAR, LLC		(26,200)		(5,854)		(6,474)
Other		—		(2,570)		—
	$	(1,502)	$	38,827	$	34,340

Equity in net (loss) income of affiliates for the year ended December 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.

Income from discontinued operations in our consolidated statements of operations reflects the effects of the following amounts related to SS/L’s transactions with our affiliates (in thousands):


	Year Ended December 31, 2012
Revenues	$	57,571
Elimination of Loral’s proportionate share of profits relating to affiliate transactions		(16,912)
Profits related to affiliate transactions not eliminated		9,513

Telesat

As of December 31, 2014 and 2013, 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 (See Note 16).

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 year ended December 31, 2014, Loral and Telesat settled several of the Telesat Indemnification tax disputes (see Note 16) 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.

On April 2, 2013, Telesat re-priced and amended the Telesat Credit Agreement. 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 year ended December 31, 2013 primarily represents the premium paid and the write-off of deferred financing costs related to this note redemption.

On March 28, 2012, Telesat entered into a new credit agreement (the ‘‘Telesat Credit Agreement’’) with a syndicate of banks which provided for the extension of credit under the senior credit facilities in the principal amount of up to approximately $2.55 billion, increasing Telesat’s debt by $490 million from the previous credit facilities. 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 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 year ended December 31, 2013, we reduced our equity in net income of Telesat by the excess special cash distribution of $7.4 million.

In connection with the cash distribution to Telesat’s shareholders, on March 28, 2012 the Board of Directors of Telesat authorized cash payments of CAD 48.6 million to certain employees of Telesat.

In March 2012, Telesat completed the refinancing of all of its issued and outstanding senior preferred shares, through issuance of a promissory note of CAD 146 million, which was equal to the outstanding liquidation value and accrued dividends on the senior preferred shares. The promissory note was redeemed in full by Telesat in October 2012

On May 14, 2012, Telesat issued, through a private placement, $700 million of 6% senior notes which mature on May 15, 2017. The 6% senior notes are subordinated to Telesat’s existing and future secured indebtedness, including obligations under its senior credit facilities, and are governed under the 6% senior notes indenture. The net proceeds of the offering, along with available cash on hand, were used to fund redemption or repurchase of all of Telesat’s 11% senior notes due November 1, 2015 issued under an indenture dated as of June 30, 2008 and to pay certain financing costs and redemption premiums.

On October 29, 2012, Telesat issued, through a private placement, an additional $200 million of 6% senior notes due 2017. Telesat has used the net proceeds from the debt offering to fund the repayment of certain indebtedness owed to its principal shareholders, including accrued and unpaid interest thereon and for general corporate purposes.

The following table presents summary financial data for Telesat in accordance with U.S. GAAP, for the years ended December 31, 2014, 2013 and 2012 and as of December 31, 2014 and 2013 (in thousands):


	Year Ended December 31,
	2014		2013		2012
Statement of Operations Data:
Revenues	$	837,440	$	867,914	$	846,148
Operating expenses		(161,944)		(185,179)		(242,705)
Depreciation, amortization and stock-based compensation		(231,849)		(245,764)		(249,134)
Loss on disposition of long lived asset		(276)		(1,677)		(778)
Operating income		443,371		435,294		353,531
Interest expense		(182,395)		(210,180)		(236,398)
Expense of refinancing		—		(19,655)		(80,104)
Foreign exchange (loss) gain		(232,275)		(191,569)		81,073
Gain (loss) on financial instruments		70,872		110,034		(25,755)
Other income		2,779		11,343		1,362
Income tax provision		(60,954)		(39,039)		(28,154)
Net income	$	41,398	$	96,228	$	65,555


	December 31,
	2014		2013
Balance Sheet Data:
Current assets	$	497,287	$	366,814
Total assets		4,552,613		4,929,838
Current liabilities		227,200		360,744
Long-term debt, including current portion		3,102,635		3,215,831
Total liabilities		3,921,887		4,280,902
Shareholders’ equity		630,726		648,936

Telesat had capital expenditures of $86.6 million, $77.7 million and $170.2 million for the years ended December 31, 2014, 2013 and 2012, 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. XTAR’s revenues declined by approximately 17% from 2013 to 2014, resulting in a reassessment of our revenue expectations for future years. As a result of this reassessment, our share of the future discounted cash flows of XTAR is expected to be less than the carrying value of our investment as of December 31, 2014. We have determined that this impairment is other-than-temporary and have included a non-cash charge of $18.7 million in equity in net (loss) income of affiliates for the year ended December 31, 2014.

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 2021. 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 December 31, 2014 were $29.2 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 16). 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 years ended December 31, 2014, 2013 and 2012 and as of December 31, 2014 and 2013 (in thousands):


	Year Ended December 31,
	2014		2013		2012
Statement of Operations Data:
Revenues	$	29,171	$	35,283	$	32,674
Operating expenses		(31,367)		(33,763)		(34,627)
Depreciation and amortization		(9,257)		(9,247)		(9,298)
Operating loss		(11,453)		(7,727)		(11,251)
Net loss		(13,835)		(10,895)		(14,651)


	December 31,
	2014		2013
Balance Sheet Data:
Current assets	$	4,992	$	6,970
Total assets		53,508		64,745
Current liabilities		28,585		22,443
Total liabilities		59,342		56,872
Members’ equity		(5,834)		7,873

Other

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 December 31, 2014 and 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.