7. Investments in Affiliates

Investments in affiliates consist of (in thousands):

		September 30,		September 30,
	December 31,
	2011		2010
Telesat Holdings Inc.	$	377,244	$	295,797
XTAR, LLC		68,991		65,293
Other		—		1,466

	$	446,235	$	362,556

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

		September 30,			September 30,			September 30,
	Year Ended December 31,
	2011			2010			2009
Telesat Holdings Inc.	$	114,476		$	92,798		$	213,241
XTAR, LLC		(6,681	)		(6,991	)		(2,743	)
Other		(1,466	)		(182	)		(200	)

	$	106,329		$	85,625		$	210,298

Equity in net income of affiliates for the year ended December 31, 2011 includes a charge of $1.5 million to reduce the carrying value of our investment in an affiliate to zero based on our determination that the investment has been impaired and the impairment is other than temporary.

The consolidated statements of operations reflect the effects of the following amounts related to transactions with or investments in affiliates (in thousands):

		September 30,			September 30,			September 30,
	Year Ended December 31,
	2011			2010			2009
Revenues	$	139,960		$	137,244		$	92,144
Elimination of Loral's proportionate share of profits relating to affiliate transactions		(18,498	)		(14,734	)		(10,071	)
Profits relating to affiliate transactions not eliminated		10,411			8,294			5,671

The above amounts related to transactions with affiliates exclude the effect of Loral's sale to Telesat in April 2011 of its portion of the payload on the ViaSat-1 satellite and related net assets. As a result of this sale to Telesat, Loral received a $13 million sale premium and reversed $5 million of cumulative intercompany profit eliminations that were recorded when the satellite was being built for Loral. This combined benefit was reduced by the $11 million elimination of the portion of the benefit applicable to Loral's 64% interest in Telesat, which has been reflected as a reduction of our investment in Telesat, and the remaining $7 million has been reflected as a gain on our consolidated statement of operations for the year ended December 31, 2011.

We use the equity method of accounting for our majority economic interest in Telesat because we own 33¹/3% 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. 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 64% 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 and consulting fees in cash to Loral is governed by applicable covenants relating to Telesat's debt and shareholder agreements. Telesat is permitted to pay cash dividends of $75 million plus 50% of cumulative consolidated net income to its shareholders and consulting fees to Loral only when Telesat's ratio of consolidated total debt to consolidated EBITDA is less than 5.0 to 1.0. For the year ended December 31, 2011, Loral has received cash payments from Telesat for consulting fees and interest thereon of $3.2 million. Loral did not receive any cash payments from Telesat for consulting fees and interest for the years ended December 31, 2010 and 2009. Through December 31, 2011, Loral has received no dividend payments from Telesat.

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 income or losses of Telesat. Our equity in the net income of Telesat also reflects the elimination of our profit, to the extent of our economic interest, on satellites we are constructing for Telesat.

Telesat

We hold equity interests in Telesat Holdco representing 64% of the economic interests and 33¹/₃% of the voting interests. Our Canadian partner, Public Sector Pension Investment Board ("PSP"), holds 36% of the economic interests and 66²/₃% of the voting interests in Telesat Holdco (except with respect to the election of directors as to which it holds a 30% voting interest).

The following table presents summary financial data for Telesat in accordance with U.S. GAAP, as of December 31, 2011 and 2010 and for the years ended December 31, 2011, 2010 and 2009 (in thousands):

		September 30,			September 30,			September 30,
	Year Ended December 31,
	2011			2010			2009
Statement of Operations Data:
Revenues	$	817,269		$	797,283		$	691,566
Operating expenses		(188,119	)		(190,632	)		(203,417	)
Depreciation, amortization and stock-based compensation		(248,012	)		(249,318	)		(230,176	)
Gain on insurance proceeds		136,507			—			—
Impairment of intangible assets		(1,112	)		—			—
(Loss) gain on disposition of long-lived assets		(1,499	)		3,714			29,311
Operating income		515,034			361,047			287,284
Interest expense		(220,598	)		(234,556	)		(227,986	)
Foreign exchange (losses) gains		(80,991	)		159,191			439,160
Gains (losses) on financial instruments		50,731			(76,937	)		(148,954	)
Other income (expense)		1,964			619			(764	)
Income tax expense		(65,271	)		(41,177	)		(2,185	)
Net income		200,869			168,187			346,555

		September 30,		September 30,
	Year Ended December 31,
	2011		2010
Balance Sheet Data:
Current assets	$	351,802	$	291,367
Total assets		5,347,174		5,309,441
Current liabilities		289,351		294,485
Long-term debt, including current portion		2,817,857		2,928,916
Total liabilities		4,045,619		4,145,336
Redeemable preferred stock		138,485		141,718
Shareholders' equity		1,163,070		1,022,387

Following the launch in May 2011 of Telstar 14R/Estrela do Sul 2, an SS/L-built satellite, the satellite's north solar array failed to fully deploy. The north solar array anomaly has diminished the amount of power available for the satellite's transponders and has reduced the life expectancy of the satellite. As a result, during the third quarter of 2011, Telesat carried out an impairment test for the satellite. Based on Telesat management's best estimates and assumptions, there was no impairment in Telstar 14R/Estrela do Sul 2 and as a result no adjustment to the carrying value of the asset was required. In December 2011, Telesat received insurance proceeds of $132.7 million from its insurers with respect to the claim Telesat filed for the failed solar array deployment.

Gain on disposition of long-lived assets in 2009 results from the transfer of Telesat's leasehold interests in the Telstar 10 satellite and related contracts to APT Satellite for a total consideration of approximately $69 million.

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 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. During November 2011 and January 2012, XTAR reduced its revenue forecast for 2012 and subsequent years. We have performed an impairment test for our investment in XTAR as of December 31, 2011, using the January 2012 forecast, and concluded that our investment in XTAR was not impaired. Any further declines in XTAR's projected revenues may result in a future impairment charge.

In January 2005, Hisdesat provided XTAR with a convertible loan in the principal amount of $10.8 million due February 2011, for which Hisdesat received enhanced governance rights in XTAR. The loan was subsequently extended to December 31, 2011. In November 2011, Loral and Hisdesat made capital contributions to XTAR in proportion to their respective ownership interests, and the proceeds were used to repay the loan balance of $18.5 million, which included the principal amount and accrued interest. Loral's capital contribution was $10.4 million.

XTAR's lease obligation to Hisdesat for the XTAR-LANT transponders was $24 million in 2011, 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. Interest on XTAR's outstanding lease obligations to Hisdesat is paid through the issuance of a class of non-voting membership interests in XTAR, which enjoy priority rights with respect to dividends and distributions over the ordinary membership interests currently held by us and Hisdesat. 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, 2011 were $14.2 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 17). The ability of XTAR to pay dividends and management fees in cash to Loral is governed by XTAR's shareholder agreements.

XTAR-EUR was launched on Arianespace, S.A.'s ("Arianespace") Ariane ECA launch vehicle in 2005. The price for this launch had two components — the first, consisting of a $15.8 million 10% interest paid-in-kind loan provided by Arianespace, was repaid in full by XTAR on July 6, 2007. The second component of the launch price consisted of a revenue-based fee to be paid to Arianespace over XTAR-EUR's 15 year in-orbit operations. This fee, also referred to as an incentive fee, equaled 3.5% of XTAR's annual operating revenues, subject to a maximum threshold. On February 29, 2008, XTAR paid Arianespace $1.5 million representing the incentive fee through December 31, 2007. On January 27, 2009, Arianespace agreed to eliminate the remaining incentive fee in exchange for $8.0 million payable in three installments. As of December 31, 2009, XTAR had paid all three installments and has no further obligations under the launch services agreement with Arianespace. As a result, XTAR's net loss for the year ended December 31, 2009 included a gain of $11.7 million related to the extinguishment of this liability.

To enable XTAR to make these settlement payments to Arianespace, XTAR issued a capital call to its LLC members. The capital call required Loral to increase its investment in XTAR by approximately $4.5 million in the first quarter of 2009, representing Loral's 56% share of the $8 million capital call.

The following table presents summary financial data for XTAR as of December 31, 2011 and 2010 and for each of the three years in the period ended December 31, 2011 (in thousands):

Statement of Operations Data:

		September 30,			September 30,			September 30,
	Year Ended December 31,
	2011			2010			2009
Revenues	$	37,055		$	37,907		$	32,038
Operating expenses		(34,734	)		(35,724	)		(34,594	)
Depreciation and amortization		(9,617	)		(9,618	)		(9,618	)
Operating loss		(7,296	)		(7,435	)		(12,174	)
Gain on settlement of Arianespace incentive cap		—			—			11,668
Net loss		(11,882	)		(12,435	)		(4,849	)

		September 30,		September 30,
	December 31,
	2011		2010
Balance Sheet Data:
Current assets	$	10,558	$	9,290
Total assets		88,033		96,383
Current liabilities		45,704		61,839
Total liabilities		54,614		69,616
Members' equity		33,419		26,767

Other

As of December 31, 2011 and 2010, 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.