Tobacco Cos. Forge Deal Over MSA Disputes

Reach agreement with 19 states; includes $4 billion release to states, manufacturer credits

RICHMOND, Va. -- Philip Morris USA Inc., R.J. Reynolds Tobacco Co. and Lorillard Inc. have reached an agreement with 19 states to resolve longstanding disputes related to the Non-Participating Manufacturer (NPM) adjustment provisions of the Master Settlement Agreement (MSA).

Leading cigarette companies entered into the MSA with 46 states in 1998 to resolve the states' health care cost recovery litigation against the manufacturers. The MSA imposed significant restrictions on how cigarettes are advertised, marketed and sold in the United States and required participating manufacturers to make annual payments to the states in perpetuity. So far, states participating in the MSA have received more than $85 billion.

The states that have agreed to join under the current agreement are Alabama, Arizona, Arkansas, California, Georgia, Kansas, Louisiana, Michigan, Nebraska, Nevada, New Hampshire, New Jersey, North Carolina, Tennessee, Virginia, West Virginia and Wyoming, as well as the District of Columbia and Puerto Rico.

The companies said that they are prepared to continue the current arbitration with states that did not join the agreement.

The agreement includes a release to the joining states of their portion of more than $4 billion from disputed payment accounts. In return, the manufacturers will receive credits against the joining states' portion of future MSA payments. For the joining states, the settlement is net cash positive and also removes the risk of substantial reductions of MSA revenues for the years in dispute, 2003-2012.

Based on current assumptions, PM USA will receive approximately 28% of the credits to the companies that were original participants in the MSA. This percentage mirrors the maximum percentage of NPM adjustments that would be allocated to PM USA if the disputes were arbitrated to conclusion, as the MSA allocates a greater share of recovery to those original participating manufacturers that lost relative market share during the relevant period.

PM USA's credit is estimated to total approximately $450 million, based on the current roster of states. The agreement is also subject to approval by an arbitration panel.

The agreement also puts into place revised and streamlined NPM adjustments for future years.

The NPM adjustment disputes relate to the state escrow statutes, under which non-participating cigarette manufacturers are required to make escrow payments for volume sold in each MSA state. The MSA allows participating manufacturers to receive downward adjustments in MSA payments if the MSA is a significant factor in market share loss for the participating manufacturers. States that demonstrate that they diligently enforced state escrow statutes during a disputed year can avoid the downward payment adjustment for that year.

"This agreement resolves disputes with a large group of states on financial terms that are fair to the parties and in a way that we believe will lead to a better method for resolving these issues in the future," said Denise Keane, Altria Group's executive vice president and general counsel, speaking on behalf of Richmond, Va.-based PM USA. "The agreement includes a mechanism that under certain conditions allows additional states to join, and we hope other states take advantage of that option."

Based on the 19 jurisdictions that have joined the agreement thus far, R.J. Reynolds will receive credits, currently estimated to be more than $1 billion, that will be applied to the company's MSA payments over the next five years, for its claims relating to 2003 through 2012.

The agreement includes a mechanism that allows additional states to join under certain conditions. If additional states join the settlement, the amount R.J. Reynolds and the other Participating Manufacturers will recover under the settlement will increase, and the cost of the settlement to participating states could decrease.

"This settlement is a win-win proposition for both the joining states and R.J. Reynolds, and we hope that additional states will choose to participate," said Martin L. Holton III, executive vice president and general counsel for Winston-Salem, N.C.-based R.J. Reynolds. "The company is able to receive significant value for injury its brands have suffered in the marketplace at the hands of manufacturers who are not subject to the obligations of the MSA. At the same time, the settlement will make available a significant amount of money for each state that joins the agreement. Perhaps most importantly, both sides can now move beyond this decade-long series of financial disputes that have distracted attention and consumed many resources for far too long."

Lorillard expects to receive credits over the next five years of at least $198 million on its outstanding claims, with the majority of the credits occurring in April 2013 and the remainder over the following four years.

"We are very pleased to have settled this longstanding dispute with the signatory states and believe that it is an equitable resolution for all parties involved," said Ronald S. Milstein, executive vice president and general counsel of Greensboro, N.C.-based Lorillard. "Importantly, today's announcement also puts into place a new method to better determine future adjustments--providing greater clarity for the states and Lorillard."