10. Investments in Affiliates

Investments in affiliates consist of (in thousands):


	September 30, 2012		December 31, 2011
Telesat Holdings Inc.	$	—	$	377,244
XTAR, LLC		63,913		68,991

	$	63,913	$	446,235

Our investment in Telesat Holdco has been reduced to zero as of September 30, 2012, as discussed below.

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Telesat Holdings Inc.	$	43,654		$	(75,044	)	$	42,179		$	(963	)
XTAR, LLC		(2,068	)		(2,195	)		(5,077	)		(6,048	)
Other		—			(23	)		—			(65	)

	$	41,586		$	(77,262	)	$	37,102		$	(7,076	)

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Revenues	$	9,363		$	32,770		$	55,946		$	108,615
Elimination of Loral’s proportionate share of profits relating to affiliate transactions		(2,438	)		(4,136	)		(16,463	)		(11,329	)
Profits relating to affiliate transactions not eliminated		1,371			2,328			9,260			6,377

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 including $1.8 million in income from discontinued operations for the nine months ended September 30, 2011.

Equity in net income of affiliates for the nine months ended September 30, 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.

Telesat

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.

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, the Board of Directors of Telesat approved a special cash distribution to Telesat’s shareholders of CAD 656.5 million, including a distribution of CAD 420 million to Loral. The special distribution by Telesat to its shareholders was 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). The special cash distribution exceeds our cumulative equity in net income of Telesat and our investment. In following the equity method of accounting, our investment balance in Telesat has been reduced to zero, and, as of September 30, 2012, cumulative special cash distributions of approximately $31 million were recorded as equity in net income of Telesat. In accordance with the equity method of accounting, we will not record equity in net income of Telesat until our share of Telesat’s future net income exceeds $31 million.

Also in March 2012, Telesat completed the refinancing of all of its issued and outstanding senior preferred shares, which were replaced with 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 requires payment of at least 50% of the principal amount on March 28, 2014, with the balance, if any, to be repaid no later than March 28, 2016. Telesat will pay interest on the promissory note in the amount of 9.75% for the first two years and adjusting thereafter to reflect the then-current market rate (but no less than 11% per annum). 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 executives and certain employees of Telesat.

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 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 relating to Telesat’s debt and shareholder agreements. Under Telesat’s 12.5% note indenture, which is generally the most restrictive agreement, 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 terms of its 12.5% note indenture, Telesat is permitted to pay consulting fees to Loral only when Telesat’s ratio of consolidated total debt to consolidated EBITDA is less than 5.0 to 1.0. When the ratio is not less than 5.0 to 1.0, the consulting fee is paid through the issuance of promissory notes to Loral with an interest rate of 7% and a maturity date of October 31, 2018. Any prepayment of these promissory notes is subject to the restricted payments basket noted above. For the nine months ended September 30, 2012 and 2011, Loral received payments in cash from Telesat of $1.6 million and $3.2 million, respectively, for consulting fees and payments in promissory notes of $3.3 million and $1.6 million, respectively, for consulting fees and interest. On October 31, 2012, Telesat paid Loral $24.1 million to pay off the outstanding note with interest due. This payment was made under the restricted payment basket referred to above.

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 or loss of Telesat also reflects the elimination of our profit, to the extent of our economic interest, on satellites we are constructing for Telesat.

The following table presents summary financial data for Telesat in accordance with U.S. GAAP as of September 30, 2012 and December 31, 2011 and for the three and nine months ended September 30, 2012 and 2011 (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Statement of Operations Data:
Revenues	$	220,361		$	204,403		$	616,236		$	617,264
Operating expenses		(50,372	)		(47,174	)		(186,319	)		(140,990	)
Depreciation, amortization and stock-based compensation		(65,291	)		(63,131	)		(186,788	)		(188,090	)
Loss on disposition of long lived asset		(53	)		(99	)		(129	)		(863	)
Operating income		104,645			93,999			243,000			287,321
Interest expense		(59,020	)		(56,339	)		(172,302	)		(167,024	)
Expense of refinancing		(270	)		—			(79,673	)		—
Foreign exchange gains (losses)		94,424			(267,443	)		100,736			(168,875	)
(Losses) gains on financial instruments		(40,900	)		125,605			(41,555	)		84,711
Other income		179			258			1,144			1,848
Income tax provision		(14,333	)		(5,952	)		(18,652	)		(30,835	)
Net income (loss)		84,725			(109,872	)		32,698			7,146


	September 30, 2012		December 31, 2011
Balance Sheet Data:
Current assets	$	237,948	$	351,802
Total assets		5,387,975		5,347,174
Current liabilities		270,900		289,351
Long-term debt, including current portion		3,324,726		2,817,857
Promissory note		145,156		—
Total liabilities		4,811,425		4,045,619
Redeemable preferred stock		—		138,485
Shareholders’ equity		576,550		1,163,070

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^o 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 72 MHz X-band transponders on the Spainsat satellite located at 30^o 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 have performed an impairment test for our investment in XTAR as of September 30, 2012, using XTAR’s most recent forecast, and concluded that our investment in XTAR was not impaired. Any declines in XTAR’s projected revenues may result in a future impairment charge.

XTAR’s lease obligation to Hisdesat for the XTAR-LANT transponders requires payments by XTAR of $24 million in 2012, 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, 2012 were $17.9 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 20). The ability of XTAR to pay dividends and management fees in cash to Loral is governed by XTAR’s shareholder agreements.

The following table presents summary financial data for XTAR as of September 30, 2012 and December 31, 2011 and for the three and nine months ended September 30, 2012 and 2011 (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Statement of Operations Data:
Revenues	$	7,613		$	8,553		$	22,285		$	25,880
Operating expenses		(8,239	)		(8,925	)		(24,842	)		(26,054	)
Depreciation and amortization		(2,345	)		(2,405	)		(7,095	)		(7,213	)
Operating loss		(2,971	)		(2,777	)		(9,652	)		(7,387	)
Net loss		(3,804	)		(3,903	)		(12,047	)		(10,763	)


	September 30, 2012		December 31, 2011
Balance Sheet Data:
Current assets	$	5,978	$	10,558
Total assets		76,358		88,033
Current liabilities		45,500		45,704
Total liabilities		54,986		54,614
Members’ equity		21,372		33,419

Other

As of September 30, 2012 and December 31, 2011, 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.