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New York, Tobacco Cos. Settle MSA Disputes

ALBANY, N.Y. — Philip Morris USA Inc., R.J. Reynolds Tobacco Co. and other cigarette manufacturers have reached a settlement with the state of New York of the longstanding nonparticipating manufacturer (NPM) adjustment disputes. New York adds to the 22 other states (as well as the District of Columbia and Puerto Rico) that have settled these disputes under the 1998 Master Settlement Agreement (MSA).

New York State Attorney General Eric Schneiderman announced the settlement agreement releasing $550 million that has been held in an escrow account during a decade-long dispute.

About half of New York’s funds will go to the state, one-quarter to New York City and one-quarter to counties outside the city.

Under the new settlement agreement between New York and the companies, 90% of the previously withheld funds will be released, and future payments will be made according to a set formula, with no disputed withholdings, no arbitration proceedings and no risk that New York will lose one or more of its entire annual MSA payments.

The agreement settles all issues concerning past annual payments under the MSA by requiring the companies to release 90% of the escrowed funds, or approximately $550 million. The state, city and counties will receive their portions of these funds as soon as the MSA’s independent auditor is able to make payment, which in no event would be later than April 2016.

The companies are also required to release New York from any claims to the balance of annual payments for those years, which they might otherwise be able to arbitrate with New York on an ongoing basis over the course of many years.

“Like the other settlements we reached with the other states, we believe this agreement makes sense,” said Denise F. Keane, executive vice president and general counsel, Altria Group Inc., Richmond, Va. “Resolving the NPM disputes allows us to move forward and work with the states on our shared goals and objectives under the [MSA].”

Under the deal announced today, the participating manufacturers will receive credits against their April 2016 MSA payments. Philip Morris USA’s credit is approximately $126 million, which it expects to record as a corresponding increase in its reported pre-tax earnings for third-quarter 2015. New York will receive approximately $718 million (plus accumulated earnings) from funds that the participating manufacturers had deposited in a disputed payments account.

The settlement resolves all NPM adjustment disputes from 2004 to 2014 with New York. It also includes a streamlined method of calculating reductions in MSA payments for NPM cigarettes sold in New York going forward.

Winston-Salem, N.C.-based R.J. Reynolds will receive credits, currently estimated to be approximately $285 million, plus interest, that will be applied to the company’s MSA payments over the next four years, for its claims relating to 2004 through 2014. Starting in 2017, the company will also receive credits based on a sliding scale keyed to the volume of non-state-excise-tax paid tribal sales in New York during the relevant market year.

“R.J. Reynolds is pleased to finally resolve this issue with the State of New York and now both sides can move beyond this decade-long series of disputes,” said Martin L. Holton III, executive vice president and general counsel for R.J. Reynolds. “This was a long and complicated process, but resolution of these types of issues is vital to protect the equity of our brands and to the overall success of the [MSA].”



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