Joint ventures and other investments
All investments are recorded in other assets. As of December 31, 2003 and
2002, other assets included $98 and $124 attributable to investments
in joint ventures. We also held other non-marketable securities of $63
and $103 at December 31, 2003 and 2002.
The principal joint venture arrangements are United Space Alliance; HRL Laboratories, LLC; APB Winglets Company, LLC; BATA Leasing, LLC (BATA); and Sea Launch. We have a 50% partnership with Lockheed Martin in United Space Alliance, which is responsible for all ground processing of the Space Shuttle fleet and for space-related operations with the USAF. United Space Alliance also performs modifications, testing and checkout operations that are required to ready the Space Shuttle for launch. We are entitled to 33% of the earnings from HRL Laboratories, LLC, which conducts applied research inthe electronics and information sciences; and creates new products and services for space, telecommunications, defense and automotive applications. We have a 45% ownership of APB Winglets Company, LLC, which was established for the purposes of designing, developing, manufacturing, installing, certifying, retrofitting, marketing, selling, and providing aftersales support with respect to winglets for retrofit aircraft.
We have a 50% partnership with ATA in BATA, which was established to acquire aircraft and market and lease the aircraft to third-parties. As of December 31, 2002, the carrying value was $19. During 2003, we finalized an amendment to the partnership, which gave us majority control in the management of the business and affairs of BATA. As a result, BATA is now consolidated in our financial statements.
The Sea Launch venture, in which we are a 40% partner with RSC Energia (25%) of Russia, Kvaerner ASA (20%) of Norway, and KB Yuzhnoye/PO Yuzhmash (15%) of Ukraine, provides ocean-based launch services to commercial satellite customers. The venture had three successful launches in 2003. Our investment in this venture as of December 31, 2003 and 2002, is reported at zero, which reflects the recognition of losses reported by Sea Launch in prior years. The venture incurred losses in 2003, 2002 and 2001, due to the relatively low volume of launches, reflecting a depressed commercial satellite market. We have financial exposure with respect to the venture, which relates to guarantees by us provided to certain Sea Launch creditors, performance guarantees provided by us to a Sea Launch customer and financial exposure related to advances and other assets reflected in the consolidated financial statements.
During 2003, we recorded a charge of $55 related to Resource 21, a partnership entered into with another party several years ago to develop commercial remote sensing and ground monitoring. The charge resulted from a decision by NASA to not award an imagery contract to Resource 21. During 2003, we also recorded adjustments to equity investments in Ellipso, SkyBridge and Teledesic resulting in the net write down of $27.
During 2002, a $100 impairment charge was recorded to write off a cost-method investment in Teledesic, LLC, which stopped work on its satellite constellation and announced its intent to reduce staff. In addition, we recorded a $48 impairment charge related to our BATA Leasing, LLC, joint venture investment. This charge was our share of the adjustment to estimated fair market value for the joint venture’s 727 aircraft.
Investments in debt and equity securities
Investments consisted of the following at December 31:
Included in held-to-maturity investments carried at amortized cost as of December 31, 2003 and 2002, were $412 and $455 of Enhanced Equipment Trust Certificates (EETCs). EETCs are secured by aircraft on lease to commercial airlines. EETCs provide investors with tranched rights to cash flows from a financial instrument, as well as a collateral position in the related asset. While the underlying classes of equipment notes vary by maturity and/or coupon depending upon tenor or level of subordination of the specific equipment notes and their corresponding claim on the aircraft, the basic function of an EETC remains to passively hold separate debt investments to enhance liquidity for investors, whom in turn pass this liquidity benefit directly to the airline in the form of lower coupon and/or greater debt capacity. BCC participates in several EETCs as an investor. Our EETC investments are related to customers we believe have less than investment-grade credit.
Due to the commercial aviation market downturn, these EETC investments have been in a continuous unrealized loss position for twelve months or longer. Despite the unrealized loss position of these securities, we have concluded that these investments are not other-than-temporarily impaired. This assessment was based on the strength of the underlying collateral to the securities, the duration of the maturity, and both internal and third-party credit reviews and analyses of the counterparties, principally major domestic airlines. Accordingly, we have concluded that it is probable that we will be able to collect all amounts due according to the contractual terms of these debt securities.
Also included in held-to-maturity investments carried at amortized cost as of December 31, 2003 and 2002, were $41 and $35 of investments in preferred stock that have been in a continuous unrealized loss position for approximately three years. Despite the unrealized loss position of these securities, we have concluded that these investments are not other-than-temporarily impaired. This assessment was based on the duration of the maturity, and both internal and third-party credit reviews and analyses of the counterparty, a major domestic airline. Accordingly, we have concluded that it is probable that we will be able to collect all amounts due according to the contractual terms of the debt securities.
During 2002, we recorded an impairment of $79 related to one of BCC’s long-held investments in equipment trust certificates (ETCs) secured by aircraft on lease to United, which is recorded in cost of products and services. This debt investment was classified as held-to-maturity and had declined in value for a period that was determined to be other-than-temporary.
Maturities of debt securities at December 31, 2003, were as follows:
As of December 31, 2003 and 2002, $14 and $13 of unrealized loss was recorded in accumulated other comprehensive income related to debt securities that were reclassified from availablefor- sale to held-to-maturity at their fair values. The unrealized loss will be amortized to earnings over the remaining life of each security.
During 2002, $40 ($25 net of tax) of unrealized loss was reclassified from accumulated other comprehensive income to other income due to other-than-temporary impairments of available- for-sale investments. There were no other-than-temporary impairments recognized in 2003.
Note 12 – Accounts Payable and Other Liabilities
Accounts payable and other liabilities at December 31 consisted of the following:
Accounts payable included $289 and $301 as of December 31, 2003 and 2002, attributable to checks written but not yet cleared by the bank.
The Other category in the table above contains $668 and $558 at December 31, 2003 and 2002, related to our wholly-owned captive insurance agencies, Astro Inc. and Astro Ltd. Also included in the Other category is $1,233 and $1,519 at December 31, 2003 and 2002, attributable to liabilities we have established for legal, environmental, and other contingencies we deem probable and estimable. The Other category included forward loss recognition related to launch and satellite contracts of $1,096 and $267 at December 31, 2003 and 2002.
As of December 31, 2003 and 2002, the Other category included $46 and $146 attributable to the special charges due to the events of September 11, 2001, described in Note 3. The Other category also included $111 as of December 31, 2003 related to vendor penalties as a result of our decision in 2003 to end production of the 757 program.
Note 13 – Deferred Lease Income
During 2003, we delivered four 767-model aircraft to a joint venture named TRM Aircraft Leasing Co. Ltd (TRM). TRM was established in the second quarter of 2003 in order to provide financing and arrange for a total of five 767-model aircraft to be leased to Japan Airlines. The leases are accounted for as operating leases each with a term of seven years. We have provided financing of approximately $34 related to the four aircraft delivered to date, which in combination with our partial ownership of TRM, has caused us to retain substantial risk of ownership in the aircraft. As a result, we recognize rental income over the term of the lease. As of December 31, 2003, the present value of the remaining deferred lease income was $318, discounted at a rate of 5.0%.
During 2001, we delivered four C-17 transport aircraft to the United Kingdom Royal Air Force (UKRAF), which were accounted for as operating leases. The lease term is seven years, at the end of which the UKRAF has the right to purchase the aircraft for a stipulated value, continue the lease for two additional years, or return the aircraft. Concurrent with the negotiation of this lease, we, along with UKRAF, arranged to assign the contractual lease payments to an independent financial institution. We received proceeds from the financial institution in consideration of the assignment of the future lease receivables from the UKRAF. The assignment of lease receivables is non-recourse to us. The initial proceeds represented the present value of the assigned total lease receivables discounted at a rate of 6.6%. As of December 31, 2003 and 2002, the balance of $457 and $542 represented the present value of the remaining deferred lease income.