6. Investments in Affiliates

Investments in affiliates consist of (in thousands):


	December 31,
	2016		2015
Telesat	$	107,950	$	—
XTAR		—		—
	$	107,950	$	—

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


	Year Ended December 31,
	2016		2015		2014
Telesat	$	84,078	$	(74,329)	$	24,698
XTAR		—		(30,463)		(26,200)
	$	84,078	$	(104,792)	$	(1,502)

Telesat

As of December 31, 2016 and 2015, we held a 62.7% and 62.8% economic interest, respectively, and a 32.7% voting interest in Telesat. Our economic interest decreased from 62.8% to 62.7% in March 2016 when certain Telesat employees exercised share appreciation rights related to a total of 178,642 stock options granted under Telesat’s share-based compensation plan and received 129,400 non-voting participating preferred shares. Also in March 2016, a total of 1,253,477 vested stock options were repurchased by Telesat at fair value from Telesat management personnel and other employees for total cash consideration of CAD 24.7 million, of which CAD 18.7 million was paid to management personnel.

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.

As of December 31, 2015, we had an unrecorded equity loss in Telesat of $57.9 million, the amount by which our share of Telesat’s losses together with cash distributions we received from Telesat exceeded our recorded cumulative equity in net income of Telesat and our initial investment. Accordingly, in following the equity method of accounting, our investment balance in Telesat was reduced to zero as of December 31, 2015. In addition, our equity in Telesat’s other comprehensive income that we could not record as of December 31, 2015 was $20.8 million. We recognized this $57.9 million equity loss and our $20.8 million share in the equity of Telesat’s other comprehensive income in 2016 as a result of the recognition of the suspended loss.

During the year ended December 31, 2016, we recorded an increase in equity in net income of affiliates of $3.0 million ($1.9 million, net of tax) that should have been recognized in prior years. As a result, net income per share (basic and diluted) increased $0.06 per share. During the year ended December 31, 2015, we recorded an increase to our equity in net loss of affiliates of $3.5 million ($2.2 million, net of tax) and an increase in other comprehensive income of $5.3 million that should have been recognized in prior years. As a result, net loss per share (basic and diluted) increased $0.07 per share. The 2016 non-cash adjustment relates primarily to an error in mark-to-market accounting for embedded foreign exchange derivatives in a Telesat customer contract. Changes in fair value of these embedded derivatives are required to be recognized under U.S. GAAP, but not under International Financial Reporting Standards, the basis of accounting used by Telesat. The 2015 non-cash adjustment consisted primarily of foreign exchange gains and losses. The Company has not revised previous financial statements for these adjustments based on its belief that the effect of such adjustments is not material to the financial statements taken as a whole.

On November 17, 2016, Telesat entered into amended senior secured credit facilities which provide for term loan borrowings of $2.43 billion which mature on November 17, 2023 and revolving credit borrowings of up to $200 million (or Canadian dollar equivalent) which mature on November 17, 2021. Telesat also issued, through a private placement, $500 million of 8.875% senior notes which mature on November 17, 2024.

On November 17, 2016, Telesat repaid all outstanding amounts under its former senior secured credit facilities and its 6.0% senior notes.

On February 1, 2017, Telesat amended the senior secured credit facilities to effectively reprice the then outstanding term loan borrowings of $2.424 billion.

The ability of Telesat to pay dividends or certain other restricted payments in cash to Loral is governed by applicable covenants in Telesat’s debt and shareholder agreements. Telesat’s credit agreement governing its senior secured credit facilities limits, among other items, Telesat’s ability to incur debt and make dividend payments if the total leverage ratio (“Total Leverage Ratio”) is above 4.50:1.00, with certain exceptions. As of December 31, 2016, Telesat’s Total Leverage Ratio was 4.92:1.00. Telesat is permitted to pay annual consulting fees of $5 million to Loral in cash (see Note 15) and is permitted to make cash distributions of approximately $400 million to its shareholders and option holders, of which Loral received cash of $242.7 million in the first quarter of 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 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 SSL 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 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 years ended December 31, 2016, 2015 and 2014 and as of December 31, 2016 and 2015 (in thousands):


	Year Ended December 31,
	2016		2015		2014
Statement of Operations Data:
Revenues	$	703,131	$	751,684	$	837,440
Operating expenses		(139,141)		(140,706)		(161,944)
Depreciation, amortization and stock-based compensation		(195,781)		(190,985)		(231,849)
Loss on disposition of long lived assets		(1,937)		(24)		(276)
Operating income		366,272		419,969		443,371
Interest expense		(145,288)		(138,783)		(182,395)
Loss on refinancing		(12,246)		—		—
Foreign exchange gain (loss)		68,719		(426,980)		(232,275)
Gain on financial instruments		974		7,810		70,872
Other income		4,590		3,672		2,779
Income tax provision		(58,772)		(74,447)		(60,954)
Net income (loss)	$	224,249	$	(208,759)	$	41,398


	December 31,
	2016		2015
Balance Sheet Data:
Current assets	$	678,361	$	568,106
Total assets		4,194,006		4,009,352
Current liabilities		154,173		187,488
Long-term debt, including current portion		2,877,950		2,968,776
Total liabilities		3,597,056		3,635,918
Shareholders’ equity		596,950		373,434

Telesat had capital expenditures of $203.8 million, $152.5 million and $86.6 million for the years ended December 31, 2016, 2015 and 2014, 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. We have also concluded that XTAR is not a variable interest entity for which we are the primary beneficiary.

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.

As of December 31, 2016 and 2015, the carrying value of our investment in XTAR was zero as a result of the decline in its fair value that was determined to be other-than-temporary. The value of our investment in XTAR was determined based on the income approach by discounting projected annual cash flows to their present value using a rate of return appropriate for the risk of achieving the projected cash flows. We recorded non-cash impairment charges of $21.2 million and $18.7 million for the years ended December 31, 2015 and 2014, respectively, related to our investment in XTAR. The impairment charge recorded in 2014 was primarily due to a decline in XTAR’s revenues by approximately 17% from 2013 to 2014 resulting in a reassessment of our revenue expectations for future years. In the third quarter of 2015, we recorded an impairment charge of $8 million primarily as a result of an increase in the discount rate used to value our investment in XTAR. We recorded an additional impairment charge of $13.2 million in the fourth quarter of 2015 primarily due to the reassessment of our revenue expectations for future years dictated by a decline in XTAR’s revenues by approximately 11% from 2014 to 2015. Beginning January 1, 2016, we discontinued providing for our allocated share of XTAR’s net losses as our investment has been reduced to zero and we have no commitment to provide further financial support to XTAR.

XTAR’s lease obligation to Hisdesat for the XTAR-LANT transponders (the “Transponder Service”) requires payment by XTAR up to a maximum amount of $28 million per year through the end of the useful life of the satellite which is estimated to be in 2021. Under the lease agreement (the “Spainsat Lease Agreement”), Hisdesat may also be entitled under certain circumstances to a share of the revenues generated on the Transponder Service. In September 2016, XTAR and Hisdesat amended the Spainsat Lease Agreement to, among other things, reduce for 2016 and 2017 the minimum capacity required to be leased by XTAR, and accordingly lease payments by XTAR for 2016 and 2017 were reduced from $26 million to $18.2 million. The 2016 reduction was retroactive to January 1, 2016. In January 2017, XTAR and Hisdesat again amended the Spainsat Lease Agreement to, among other things, reduce for 2017 the minimum capacity required to be leased by XTAR, and accordingly lease payments by XTAR for 2017 were reduced to $9.5 million. 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, is 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, 2016 were $29.2 million. As of December 31, 2016 and 2015, XTAR has deferred payment of liabilities of $28.8 million and $17.7 million, respectively, for its lease obligation and Catch-Up Payments to Hisdesat. 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. The ability of XTAR to pay dividends and management fees in cash to Loral is governed by XTAR’s operating agreement (see Note 15).

The following table presents summary financial data for XTAR for the years ended December 31, 2016, 2015 and 2014 and as of December 31, 2016 and 2015 (in thousands):


	Year Ended December 31,
	2016		2015		2014
Statement of Operations Data:
Revenues	$	18,550	$	25,852	$	29,171
Operating expenses		(24,123)		(31,933)		(31,367)
Depreciation and amortization		(8,589)		(8,874)		(9,257)
Operating loss		(14,162)		(14,955)		(11,453)
Net loss		(18,296)		(18,722)		(13,835)


	December 31,
	2016		2015
Balance Sheet Data:
Current assets	$	6,364	$	7,533
Total assets		36,008		44,793
Current liabilities		53,795		41,712
Total liabilities		75,395		68,126
Members’ equity		(39,387)		(23,333)

Other

As of December 31, 2016 and 2015, 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.