Note 21: Contingent Liabilities, Guarantees and Commitments

(a) Environmental

There is a risk of environmental damage in chemical manufacturing operations. The company's environmental policies and practices are designed to ensure compliance with existing laws and regulations and to minimize the possibility of significant environmental damage. These laws and regulations require the company to make significant expenditures for remediation, capital improvements and the operation of environmental protection equipment. Future developments and even more stringent environmental regulations may require the company to make additional unforeseen environmental expenditures. The company's major competitors are confronted by substantially similar environmental risks and regulations.

The company is a party in various government enforcement and private actions associated with former waste disposal sites, many of which are on the U.S. Environmental Protection Agency's (EPA) Superfund priority list. The company is also involved in corrective actions at some of its manufacturing facilities. Accruals for expected future remediation costs are in accordance with the provisions of the American Institute of Certified Public Accountants' Statement of Position 96-1, "Environmental Remediation Liabilities," adopted in 1997, which requires an accrual to be recorded when it is probable a liability has been incurred and costs are reasonably estimable. The company considers a broad range of information when determining the amount of the accrual, including available facts about the waste site, existing and proposed remediation technology and the range of costs of applying those technologies, prior experience, government proposals for this or similar sites, the liability of other parties, the ability of other principally responsible parties to pay costs apportioned to them and current laws and regulations. These accruals are updated quarterly as additional technical and legal information becomes available. Major sites for which reserves have been provided are: the non-company-owned Lipari, Woodland and Kramer sites in New Jersey, and Whitmoyer in Pennsylvania and company-owned sites in Bristol and Philadelphia, Pennsylvania, and in Houston, Texas. In addition, the company has provided for future costs at approximately 80 other sites where it has been identified as potentially responsible for cleanup costs and, in some cases, damages for alleged personal injury or property damage.

The amounts charged to earnings before tax for environmental remediation, net of insurance recoveries, were $27 million and $45 million in 1996 and 1995, respectively. Remediation related settlements with insurance carriers, a $20 million charge resulting from an unfavorable arbitration decision relating to the Woodlands sites, and other waste remediation expenses resulted in a net gain of $13 million in 1997. The charge in 1995 included $26 million for additional potential liability related to the cleanup of the Whitmoyer waste site as a result of an adverse court ruling in that year. The company appealed that ruling and, during 1996, the United States Court of Appeals for the Third Circuit ruled in the company's favor by reversing the 1995 judgment of the Federal District Court regarding indemnification of SmithKline Beecham (SKB) for cleanup of the Whitmoyer site. Rohm and Haas and SKB have agreed to an interim cost sharing arrangement; however, the company will not make any adjustment to its environmental remediation reserves until a final, court-approved arrangement is negotiated.

The reserves for remediation were $147 million and $139 million at December 31, 1997, and 1996, respectively, and are recorded as "other liabilities" (current and long-term). The company is in the midst of lawsuits over insurance coverage for environmental liabilities. It is the company's practice to reflect environmental insurance recoveries in the results of operations for the quarter in which the litigation is resolved through settlement or other appropriate legal process. Resolutions typically resolve coverage for both past and future environmental spending. Insurance recoveries receivable, included in accounts receivable, net, were $19 million at December 31, 1997 and $48 million at December 31, 1996 resulting from collections of $88 million during 1997 and new settlements of $59 million.

In addition to accrued environmental liabilities, the company has reasonably possible loss contingencies related to environmental matters of approximately $65 million at December 31, 1997 and 1996. Further, the company has identified other sites, including its larger manufacturing facilities in the United States, where additional future environmental remediation may be required, but these loss contingencies are not reasonably estimable at this time. These matters involve significant unresolved issues, including the number of parties found liable at each site and their ability to pay, the outcome of negotiations with regulatory authorities, the alternative methods of remediation and the range of cost associated with those alternatives. The company believes that these matters, when ultimately resolved, which may be over an extended period of time, will not have a material adverse effect on the consolidated financial position or consolidated cash flows of the company, but could have a material adverse effect on consolidated results of operations in any given year because of the company's obligation to record the full projected cost of a project when such costs are probable and reasonably estimable.

In 1995, a lawsuit was filed against the company and other defendants, seeking class action certification for property damage, personal injury and medical monitoring allegedly related to contamination of the Lipari landfill, nearby streams and Lake Alcyon in Pitman, New Jersey. In 1996 and 1997, the plaintiffs withdrew the property damage and personal injury claims. The company believes it has substantial defenses to this lawsuit; financial impact, if any, is indeterminable at this time.

Capital spending for new environmental protection equipment was $18 million in 1997. Spending for 1998 and 1999 is expected to be approximately $28 million and $21 million, respectively. Capital expenditures in this category include projects whose primary purpose is pollution control and safety, as well as environmental aspects of projects which are intended primarily to improve operations or increase plant efficiency.

The company expects future capital spending for environmental protection equipment to be consistent with prior-year spending patterns. Capital spending does not include the cost of environmental remediation of waste disposal sites.

Cash expenditures for waste disposal site remediation were $37 million in 1997, $58 million in 1996 and $51 million in 1995. The expenditures for remediation are charged against accrued remediation reserves. The cost of operating and maintaining environmental facilities was $95 million, $104 million and $96 million in 1997, 1996 and 1995, respectively, and was charged against current-year earnings.

(b) Other

The company and its subsidiaries are parties to litigation arising out of the ordinary conduct of its business. The company is also a subject of an investigation by U.S. Customs into the labeling of some products imported into the U.S. from some of the company's non-U.S. locations. Recognizing the amounts reserved for such items and the uncertainty of the ultimate outcomes, it is the company's opinion that the resolution of all pending lawsuits, investigations and claims will not have a material adverse effect, individually or in the aggregate, upon the results of operations and the consolidated financial position of the company.

In the ordinary course of business, the company has entered into certain purchase commitments, has guaranteed certain loans (with recourse to the issuer), and has made certain financial guarantees, primarily for the benefit of its non-U.S. and unconsolidated subsidiaries and affiliates. It is believed that these commitments and any liabilities which may result from these guarantees will not have a material adverse effect upon the consolidated financial position of the company.

At December 31, 1997, construction commitments totaled approximately $24 million.

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