Lockheed Martin 1999 Annual Report Download - page 53

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999
a responsible party under the Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA).
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 reasonably estimated at
this time. In addition to the amounts with respect to the
Redlands and Burbank properties and the city of Glendale
described above, a liability of approximately $200 million
for the other cases in which an estimate of financial expo-
sure can be determined has been recorded.
Under an agreement with the U.S. Government in 1990,
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 insur-
ance 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 expendi-
tures 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, it is
management’s opinion that the treatment of these environ-
mental costs is appropriate and consistent with the terms
of such agreement. On October 4, 1999, the Corporation
requested the issuance of a final decision regarding the
propriety of the Corporation’s U.S. Government accounting
practices for the treatment of environmental costs. A final
decision is expected to be issued by March 31, 2000.
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
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 management 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 pro-
vide for a more equitable sharing of the risks associated
with the Pit 9 project. The Corporation has been unsuccess-
ful in reaching any agreements with the DOE on cost recov-
ery or other contract restructuring matters.
On June 1, 1998, the DOE, through Lockheed Martin
Idaho Technologies Company (LMITCO), its management
contractor, terminated the Pit 9 contract for default. On that
same date, the Corporation filed a lawsuit against the DOE
in the U.S. Court of Federal Claims in Washington, D.C.,
challenging and seeking to overturn the default termination.
In addition, on July 21, 1998, the Corporation withdrew
the REA previously submitted to the DOE and replaced it
with a certified REA. The certified REA is similar in sub-
stance to the REA previously submitted, but its certification,
based upon more detailed factual and contractual analysis,
raises its status to that of a formal claim. On August 11,
1998, LMITCO, at the DOE’s direction, filed suit against
the Corporation in U.S. District Court in Boise, Idaho,