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KBR Separation
6 Months Ended
Jun. 30, 2014
Discontinued Operations and Disposal Groups [Abstract]  
KBR Separation
KBR Separation
During 2007, we completed the separation of KBR, Inc. (KBR) from us by exchanging KBR common stock owned by us for our common stock. We entered into various agreements relating to the separation of KBR, including, among others, a Master Separation Agreement (MSA) and a Tax Sharing Agreement (TSA). We recorded a liability at that time reflecting the estimated fair value of the indemnities provided to KBR. Since the separation, we have recorded adjustments to reflect changes to our estimation of our remaining obligation. All such adjustments were recorded in “Income (loss) from discontinued operations, net of income tax (provision) benefit.” During the first quarter of 2013, we paid $219 million to satisfy our obligation under a guarantee related to the Barracuda-Caratinga matter, a legacy KBR project. There were no amounts accrued for indemnities provided to KBR at June 30, 2014.
Tax Sharing Agreement
The TSA provides for the calculation and allocation of United States and certain other jurisdiction tax liabilities between KBR and us for the periods 2001 through the date of separation. The TSA is complex, and finalization of amounts owed between KBR and us under the TSA can occur only after income tax audits are completed by the taxing authorities and both parties have had time to analyze the results.
During the second quarter of 2012, we sent a notice under the TSA to KBR requesting the appointment of an arbitrator in accordance with the terms of the TSA. This request asked the arbitrator to find that KBR owed us a certain amount pursuant to the TSA. KBR denied that it owed us any amount and asserted instead that we owed KBR a certain amount under the TSA. KBR also asserted that it believes the MSA controls its defenses to our TSA claim and demanded arbitration of those defenses under the MSA. In July 2012, we filed suit in the District Court of Harris County, Texas, seeking to compel KBR to arbitrate the entire dispute in accordance with the provisions of the TSA, rather than the MSA. KBR filed a cross-motion seeking to compel arbitration of its defenses under the MSA. In September 2012, the court denied our motion and granted KBR's motion to compel arbitration under the MSA. We continue to believe that the TSA was intended to govern the entire matter and have appealed. The appeal is pending before the court of appeals.
In May 2013, KBR's defenses were arbitrated before a panel appointed pursuant to the MSA. In June 2013, the panel issued its decision, finding it had jurisdiction to hear the dispute and that a portion of our claims made under the TSA were barred by the time limitation provision in the MSA. In September 2013, we filed a motion and an application to vacate the panel's decision with the District Court of Harris County, Texas. The court has not ruled on the motion or application.
The MSA panel also ordered the parties to return to the TSA arbitrator for determination of the parties' remaining claims under the TSA. On October 9, 2013, the TSA arbitrator issued a report regarding the claims made by each party. The report found that KBR owes us a net amount of approximately $105 million, plus interest, with each party bearing its own costs related to the matter.
On October 21, 2013, KBR submitted a request for clarification and reconsideration of the TSA arbitrator's report. In December 2013, the TSA arbitrator issued a supplemental report that reaffirmed the award.
In January 2014, KBR filed a motion with the MSA panel to enforce the panel's June 2013 decision. KBR's motion claimed, among other things, that certain of our claims submitted to the TSA arbitrator were time-barred under the MSA and that the TSA arbitrator misinterpreted the TSA. In February 2014, we filed a response to KBR's motion with the MSA panel. In March 2014, the MSA panel denied KBR's motion.
On February 3, 2014, we also filed an application to confirm the TSA arbitrator's award with the District Court of Harris County, Texas. On February 24, 2014, KBR filed its response and a cross-motion to vacate the TSA arbitrator's award. A hearing on our application and KBR's response was held in April 2014. The district court has taken the matters under advisement, but has indicated that it will not rule on them until the court of appeals has ruled on our appeal of the district court's September 2012 decision to grant KBR's motion to compel arbitration under the MSA.
Due to the uncertainty surrounding the ultimate determination of the parties' claims under the TSA, no material anticipated recovery amounts or liabilities related to this matter have been recognized in the condensed consolidated financial statements as of June 30, 2014.