5. Investments in Affiliates

Investments in affiliates consist of (in thousands):


	March 31,		December 31,
	2017		2016
Telesat	$	—	$	107,950

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


	Three Months Ended March 31,
	2017		2016
Telesat	$	139,714	$	46,494

Telesat

As of March 31, 2017 and December 31, 2016, we held a 62.7% economic interest 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 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.

In the first quarter of 2017, we received $242.7 million in cash from Telesat, representing our share of an approximately $400 million distribution from Telesat to its shareholders and stock option holders. The cash distribution we received from Telesat exceeded our initial investment and our share of cumulative equity in comprehensive income of Telesat, net of cash distributions received from Telesat in prior periods. In following the equity method of accounting, as of March 31, 2017, our investment balance in Telesat has been reduced to zero, and approximately $103.8 million of the cash distribution was recorded as equity in net income of Telesat. We will not record additional equity in net income of Telesat until our share of Telesat’s future comprehensive income exceeds $103.8 million.

During the three months ended March 31, 2016, we recognized our $57.9 million share of Telesat’s net loss and our $20.8 million share of Telesat’s other comprehensive income that we were unable to recognize as of December 31, 2015 as our share of Telesat’s cumulative losses, together with cash distributions we received from Telesat, exceeded our recorded cumulative equity in net income of Telesat and initial investment.

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

In connection therewith, 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 March 31, 2017, Telesat’s Total Leverage Ratio was 4.86:1.00. Telesat is, however, permitted to pay annual consulting fees of $5.0 million to Loral in cash (see Note 14).

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.

The following table presents summary financial data for Telesat in accordance with U.S. GAAP, for the three months ended March 31, 2017 and 2016 and as of March 31, 2017 and December 31, 2016 (in thousands):


	Three Months Ended March 31,
	2017		2016
Statement of Operations Data:
Revenues	$	177,111	$	170,501
Operating expenses		(41,672)		(32,569)
Depreciation, amortization and stock-based compensation		(48,497)		(47,013)
Loss on disposition of long lived asset		(18)		(1,817)
Operating income		86,924		89,102
Interest expense		(36,793)		(35,202)
Foreign exchange gain		17,851		135,907
Loss on financial instruments		(3,613)		(12,617)
Other income		145		854
Income tax provision		(9,838)		(11,020)
Net income	$	54,676	$	167,024


	March 31,		December 31,
	2017		2016
Balance Sheet Data:
Current assets	$	300,287	$	678,361
Total assets		3,822,364		4,194,006
Current liabilities		136,822		154,173
Long-term debt, including current portion		2,844,622		2,877,950
Total liabilities		3,552,133		3,597,056
Shareholders’ equity		270,231		596,950

Telesat had capital expenditures of $34.3 million and $69.2 million for the three months ended March 31, 2017 and 2016, 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. As of March 31, 2017 and December 31, 2016, the carrying value of our investment in XTAR was zero. Beginning January 1, 2016, we discontinued providing for our allocated share of XTAR’s net losses as our investment was reduced to zero and we have no commitment to provide further financial support to XTAR.

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.

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 the minimum capacity required to be leased by XTAR for 2017, 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 March 31, 2017 were $29.2 million. As of March 31, 2017 and December 31, 2016, XTAR has deferred payment of liabilities of $29.8 million and $28.8 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 14).

The following table presents summary financial data for XTAR for the three months ended March 31, 2017 and 2016 and as of March 31, 2017 and December 31, 2016 (in thousands):


	Three Months Ended March 31,
	2017		2016
Statement of Operations Data:
Revenues	$	3,697	$	5,878
Operating expenses		(3,981)		(8,255)
Depreciation and amortization		(1,658)		(2,192)
Operating loss		(1,942)		(4,569)
Net loss		(3,273)		(5,528)


	March 31,		December 31,
	2017		2016
Balance Sheet Data:
Current assets	$	5,713	$	6,364
Total assets		33,698		36,008
Current liabilities		55,321		53,795
Total liabilities		75,601		75,395
Members’ equity		(41,903)		(39,387)

Other

As of March 31, 2017 and December 31, 2016, 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.