Equity Method Investments and Variable Interest Entities

We conduct some of our operations through joint ventures which operate through partnership, corporation, undivided interest and other business forms and are principally accounted for using the equity method of accounting. Additionally, the majority of our joint ventures are VIEs.

The following table presents a rollforward of our equity in and advances to unconsolidated affiliates:



	September 30,			December 31,
Dollars in millions	2016			2015
Beginning balance	$	281		$	151
Equity in earnings of unconsolidated affiliates	81			149
Distribution of earnings of unconsolidated affiliates (a)	(43		)	(92		)
Advances (receipts)	3			(10		)
Investments (b)	5			80
Foreign currency translation adjustments	(1		)	(9		)
Other	(7		)	1
Balance before reclassification	$	319		$	270
Reclassification of excess distributions (a)	12			16
Recognition of excess distributions (a)	(4		)	(5		)
Ending balance	$	327		$	281


(a)	We received cash dividends in excess of the carrying value of one of our investments. We have no obligation to return any portion of the cash dividends received. We recorded the excess dividend amount as "deferred income from unconsolidated affiliates" on our condensed consolidated balance sheets and recognize these dividends as earnings are generated by the investment.


(b)	In 2015, investments included a $58 million investment in the Brown & Root Industrial Services joint venture, a $24 million investment in EPIC Piping LLC ("EPIC") joint venture, and the disposition of a joint venture included in the sale of the Building Group.

Equity Method Investments

New Investments

U.K. Military Flying Training System ("UKMFTS") project. In February 2016, Affinity Flying Training Services Ltd. ("Affinity"), a joint venture between KBR and Elbit Systems, was awarded a service contract by a third party to procure, operate and maintain aircraft, and aircraft-related assets over an 18-year contract period, in support of the UKMFTS project. KBR owns a 50% interest in Affinity. In addition, KBR owns a 50% interest in the two joint ventures, Affinity Capital Works and Affinity Flying Services, which provide procurement, operations and management support services under subcontracts with Affinity. The remaining 50% interest in these entities is held by Elbit Systems. KBR has provided its proportionate share of certain limited financial and performance guarantees in support of the partners' contractual obligations. The three project-related entities are VIEs; however, KBR is not the primary beneficiary of any of these entities. We account for KBR's interests in each entity using the equity method of accounting within our GS business segment. The project is funded through KBR and Elbit Systems provided equity, subordinated debt and non-recourse third party commercial bank debt. During the first quarter of 2016, under the terms of the subordinated debt agreement between the partners and Affinity, we advanced our proportionate share, or $14 million, to meet initial working capital needs of the venture. We expect repayment on the advance and the associated interest over the term of the project. The amount is included in the "equity in and advances" balance on our condensed consolidated balance sheets as of September 30, 2016 and in "(Advances to) payments from unconsolidated affiliates, net" in our condensed consolidated statement of cash flows for the nine months ended September 30, 2016.

Unconsolidated Variable Interest Entities

Generally, our maximum exposure to loss is limited to our equity investment in the joint venture and any amounts payable to us for services we provided to the joint venture reduced for any unearned revenues on the projects. On the Affinity joint venture, our maximum exposure to loss is limited to our proportionate share of any amounts required to fund future losses incurred by those entities under their respective contracts with the project company. On the Aspire Defence project, in addition to the maximum exposure to loss indicated in the table below, we have exposure to any losses incurred by the construction or operating joint ventures under their respective subcontract arrangements with the project company. Our exposure is, however, limited to our equity participation in these entities. The Ichthys LNG joint venture executes a project that has a lump sum component; in addition to the maximum exposure to loss indicated in the table below, we have an exposure to losses to the extent of our ownership percentage in the joint venture if the project exceeds the lump sum component. Our maximum exposure to loss on the EBIC Ammonia plant reflects our 65% ownership of the development corporation which owns 25% of the company that consolidates the ammonia plant. We continue to monitor our investment in this joint venture as the profitability of its operations has been impacted by the challenges related to the availability of natural gas feedstock in Egypt.

The following summarizes the total assets and total liabilities as reflected in our condensed consolidated balance sheets as well as our maximum exposure to losses related to our unconsolidated VIEs in which we have a significant variable interest but are not the primary beneficiary.



	September 30, 2016
Dollars in millions	Total assets		Total liabilities		Maximum exposure to loss
Affinity project	$	12	$	3	$	12
Aspire Defence project	$	14	$	116	$	14
Ichthys LNG project	$	125	$	46	$	125
U.K. Road projects	$	31	$	10	$	31
EBIC Ammonia plant (65% interest)	$	34	$	2	$	21



	December 31, 2015
Dollars in millions	Total assets		Total liabilities		Maximum exposure to loss
Aspire Defence project	$	17	$	121	$	17
Ichthys LNG project	$	87	$	63	$	87
U.K. Road projects	$	34	$	11	$	34
EBIC Ammonia plant (65% interest)	$	36	$	2	$	22

Related Party Transactions

We often provide engineering, construction management and other subcontractor services to our joint ventures and our revenues include amounts related to these services. For the nine months ended September 30, 2016 and 2015, our revenues included $179 million and $223 million, respectively, related to the services we provided to our joint ventures, primarily within our E&C business segment. Under the terms of our transition services agreement ("TSA") with Brown & Root Industrial Services joint venture, we collect cash from customers and make payments to vendors and employees on behalf of the joint venture. For the nine months ended September 30, 2016, we incurred approximately $13 million of reimbursable costs under the TSA. In addition, in 2015, we entered into an alliance agreement with our EPIC joint venture to provide certain pipe fabrication services to KBR. For the nine months ended September 30, 2016, EPIC performed $22 million of services to KBR under the agreement.

Amounts included in our condensed consolidated balance sheets related to services we provided to our unconsolidated joint ventures as of September 30, 2016 and December 31, 2015 are as follows:



	September 30,		December 31,
Dollars in millions	2016		2015
Accounts receivable, net of allowance for doubtful accounts (a)	$	30	$	7
Costs and estimated earnings in excess of billings on uncompleted contracts (b)	$	1	$	5
Billings in excess of costs and estimated earnings on uncompleted contracts (b)	$	51	$	55
Accounts payable (c)	$	—	$	9


(a)	Includes a $19 million net receivable from the Brown & Root Industrial Services joint venture at September 30, 2016.


(b)	Reflects CIE and BIE primarily related to joint ventures within our E&C business segment as discussed above.


(c)	Reflects a $9 million net payable to the Brown & Root Industrial Services joint venture at December 31, 2015.

Consolidated Variable Interest Entities

We consolidate VIEs if we determine we are the primary beneficiary of the project entity because we control the activities that most significantly impact the economic performance of the entity. The following is a summary of the significant VIEs where we are the primary beneficiary:



Dollars in millions	September 30, 2016
Dollars in millions	Total assets		Total liabilities
Gorgon LNG project	$	29	$	62
Escravos Gas-to-Liquids project	$	16	$	27
Fasttrax Limited project	$	62	$	57



Dollars in millions	December 31, 2015
Dollars in millions	Total assets		Total liabilities
Gorgon LNG project	$	117	$	145
Escravos Gas-to-Liquids project	$	16	$	33
Fasttrax Limited project	$	74	$	70