Lockheed Martin 1998 Annual Report Download - page 44

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998
Future minimum lease commitments at December 31, 1998 for
all operating leases that have a remaining term of more than one
year were approximately $1,148 million ($264 million in 1999,
$203 million in 2000, $174 million in 2001, $142 million in 2002,
$121 million in 2003, and $244 million in later years). Certain
major plant facilities and equipment are furnished by the U.S.
Government under short-term or cancelable arrangements.
Note 16—Commitments and Contingencies
The Corporation or its subsidiaries are parties to or have property
subject to litigation and other proceedings, including matters arising
under provisions relating to the protection of the environment. In
the opinion of management and in-house counsel, the probability is
remote that the outcome of these matters will have a material adverse
effect on the Corporation’s consolidated results of operations or
financial position. These matters include the following items:
Environmental matters—The Corporation entered into a consent
decree with the U.S. Environmental Protection Agency (EPA) in
1991 relating to certain property in Burbank, California, which
obligated the Corporation to design and construct facilities to
monitor, extract and treat groundwater, and to operate and maintain
such facilities for approximately eight years. The Corporation
entered into a follow-on consent decree in 1998 which obligates the
Corporation to fund the continued operation and maintenance of
these facilities through the year 2018. The Corporation has also
been operating under a cleanup and abatement order from the
California Regional Water Quality Control Board (the Regional
Board) affecting its facilities in Burbank, California. This order
requires site assessment and action to abate groundwater contami-
nation by a combination of groundwater and soil cleanup and treat-
ment. The Corporation estimates that total expenditures required
over the remaining terms of the consent decrees and the Regional
Board order will be approximately $110 million.
The Corporation is responding to three administrative orders
issued by the Regional Board in connection with the Corporation’s
former Lockheed Propulsion Company facilities in Redlands,
California. Under the orders, the Corporation is investigating the
impact and potential remediation of regional groundwater con-
tamination by perchlorates and chlorinated solvents. The Regional
Board has approved the Corporation’s plan to maintain public water
supplies with respect to chlorinated solvents during this work, and
the Corporation is negotiating with local water purveyors to imple-
ment this plan, as well as to address water supply concerns relative
to perchlorate contamination. The Corporation estimates that expen-
ditures required to implement work currently approved will be
approximately $110 million. The Corporation is also coordinating
with the U.S. Air Force, which is conducting preliminary studies of
the potential health effects of exposure to perchlorates in connec-
tion with several sites across the country, including the Redlands
site. The results of these studies indicate that current efforts with
water purveyors regarding perchlorate issues are appropriate; how-
ever, the Corporation currently cannot project the extent of its
ultimate clean-up obligation with respect to perchlorates, if any.
The Corporation is involved in other proceedings and potential
proceedings relating to environmental matters, including disposal of
hazardous wastes and soil and water contamination. The extent of
the Corporation’s financial exposure cannot in all cases be reason-
ably estimated at this time. In addition to the amounts with respect
to the Burbank and Redlands properties described above, a liability
of approximately $240 million for the other cases in which an esti-
mate of financial exposure can be determined has been recorded.
Under an agreement with the U.S. Government, the Burbank
groundwater treatment and soil remediation expenditures referenced
above are being allocated to the Corporation’s operations as general
and administrative costs and, under existing government regulations,
these and other environmental expenditures related to U.S. Govern-
ment business, after deducting any recoveries from insurance or
other potentially responsible parties, are allowable in establishing
the prices of the Corporation’s products and services. As a result,
a substantial portion of the expenditures are being reflected in the
Corporation’s sales and cost of sales pursuant to U.S. Government
agreement or regulation. Although the Defense Contract Audit
Agency has questioned certain elements of the Corporation’s prac-
tices with respect to the aforementioned agreement, no formal
action has been initiated, and it is management’s opinion that the
treatment of these environmental costs is appropriate and consistent
with the terms of such agreement. The Corporation has recorded
an asset for the portion of environmental costs that are probable
of future recovery in pricing of the Corporation’s products and
services for U.S. Government business. The portion that is expected
to be allocated to commercial business has been reflected in cost
of sales. The recorded amounts do not reflect the possible future
recovery of portions of the environmental costs through insurance
policy coverage or from other potentially responsible parties, which
the Corporation is pursuing as required by agreement and U.S.
Government regulation. Any such recoveries, when received, would
reduce the Corporation’s liability as well as the allocated amounts
to be included in the Corporation’s U.S. Government sales and
cost of sales.
Waste remediation contract—In 1994, the Corporation was
awarded a $180 million fixed price contract by the U.S. Department
of Energy (DOE) for the Phase II design, construction and limited
test of remediation facilities, and the Phase III full remediation of
waste found in Pit 9, located on the Idaho National Engineering and
Environmental Laboratory reservation. The Corporation incurred
significant unanticipated costs and scheduling issues due to complex
technical and contractual matters which threatened the viability of
the overall Pit 9 program. Based on an investigation by manage-
ment to identify and quantify the overall effect of these matters, the
Corporation submitted a request for equitable adjustment (REA)
to the DOE on March 31, 1997 that sought, among other things,
the recovery of a portion of unanticipated costs incurred by the
Corporation and the restructuring of the contract to provide for a
more equitable sharing of the risks associated with the Pit 9 project.
The Corporation has been unsuccessful in reaching any agreements
with the DOE on cost recovery or other contract restructuring mat-
ters. Starting in May 1997, the Corporation reduced work activities
at the Pit 9 site while awaiting technical direction from the DOE.