8-KMaterial AgreementsOther EventsExhibits & Filings

ALTRIA GROUP, INC. 8-K Report, Material Agreement (Dec 18, 2012)

Filed December 18, 2012For Securities:MO

Summary

Altria Group, Inc. (MO), through its subsidiary Philip Morris USA Inc. (PM USA), has entered into a significant settlement agreement (Term Sheet) with 17 U.S. states, the District of Columbia, and Puerto Rico, regarding the Non-Participating Manufacturer (NPM) Adjustment for the years 2003-2012. This agreement aims to resolve ongoing arbitration concerning the Master Settlement Agreement (MSA) payments. The settlement is expected to provide PM USA with an estimated reduction of approximately $450 million in its future MSA payment obligations, primarily through a credit against its April 2013 payment. This settlement not only addresses past disputes but also revises and streamlines the NPM Adjustment provision for future years with the signatory states in a manner favorable to PM USA. The agreement also involves the release of over $4 billion from the Disputed Payment Account (DPA) to the signatory states, with PM USA authorizing the release of its approximately $190 million contribution to the DPA. While this Term Sheet is a positive step towards resolving financial uncertainties related to MSA payments, it is subject to approval by an arbitration panel and potential objections from non-signatory states. Investors should monitor the finalization of this approval process and its impact on Altria's financial performance.

Key Highlights

  • 1PM USA has reached a settlement with 17 MSA States, D.C., and Puerto Rico regarding the 2003-2012 NPM Adjustments.
  • 2The settlement is expected to reduce PM USA's future MSA payment obligations by an estimated $450 million.
  • 3The majority of PM USA's reduction will be received as a credit against its April 2013 MSA payment.
  • 4PM USA will authorize the release of its approximately $190 million contribution to the Disputed Payment Account (DPA) to signatory states.
  • 5The agreement revises and streamlines the NPM Adjustment formula for future years with signatory states in a manner favorable to PM USA.
  • 6The settlement is subject to approval by the arbitration panel and may face objections from non-signatory states.
  • 7The settlement aims to resolve ongoing arbitration related to the 1998 Master Settlement Agreement.

Frequently Asked Questions

The Non-Participating Manufacturer (NPM) Adjustment is a provision within the Master Settlement Agreement (MSA) that allows for downward adjustments to tobacco manufacturers' annual payments if their collective market share declines relative to manufacturers not party to the MSA. The original participating manufacturers, including Altria's subsidiary PM USA, are allocated portions of any downward adjustment based on their relative market share loss. Disputes over these adjustments have led to significant financial uncertainty for these companies.

The settlement is estimated to reduce PM USA's future MSA payment obligations by approximately $450 million. This reduction is expected to be recognized primarily as a credit against PM USA's April 2013 MSA payment, positively impacting Altria's cash flow and reported earnings.

Yes, the Term Sheet is subject to certain conditions. It requires approval from the arbitration panel overseeing the NPM Adjustment dispute. Additionally, non-signatory states may attempt to object to the settlement or block its proceeding. There is no assurance that the settlement will be fully approved and implemented without challenges.

The Term Sheet includes provisions to revise and streamline the NPM Adjustment formula for signatory states for years after 2012. This revised formula is designed to be more favorable to PM USA compared to the existing structure, although the exact extent of this benefit will depend on future market share dynamics among the original participating manufacturers.